Supply and Demand

Beached Container Ship credit EPA Stephen Morrison

This is the underlying living force of economics. Like a respiring living organism, it is the self-correcting dynamic that makes the free market a workable paradigm with some degree of predicatability.

Our company is still a forlorn cluster of boarded up houses and not a terminal because the recession of 2008 reduced aggregate output and petroleum prices rose sharply. Without an abundant supply of goods to move, and the cost being high to move them, the demand for terminal services decreased and the project went dead in the water.

With price of oil rising, the price of moving goods for shipping lines, retailers and manufacturers alike is high and the demand diminishes as terminal customers look for less expensive ways to bring their goods to market.

To examine the dynamics of supply and demand, we must imagine our company is in operation. How would a large scale natural disaster, and a country's ability to get supplies in and goods to market be changed? We will look at the recent earthquake in Japan and its impact on container shipping supply and demand because it is recent, and the scope of it brings how supply and demand works into sharp focus. The earthquake, subsequent Tsunami, and on-going melt-down of nuclear reactors are commonly referred to as the “triple-whammy” of disasters. The fourth “whammy” is that before the plates moved, Japan’s public debt was 200% of the GDP, and its interest rates were at or near 0%.

Buyer behaviour influences demand at a particular price. The general public does not understand the relative hazards of the numbers measuring radiation and the dangers posed by different isotopes, so there is a great deal of uncertainty related to the nuclear power plant crisis unfolding in Japan. Japan’s export consumers’ distrust of the reports has resulted in a sharp drop in demand for anything Japanese (because it is better to be safe than sorry) except for the possible exception of car parts because there is nowhere else to get them.

Exported Japanese food products are seeing a shift to the left in the demand curve, a condition that results in both dropping price, followed by dropping production because farmers will not produce what they can neither grow safely, nor sell for a decent profit. With no demand there will be nothing to fill the ships on their return to North America which greatly reduces profits. Also, within Japan, the drop in the total number of consumers due to loss of life is the equivalent to the total population of both Richmond and Inverness counties. This results in an aggregate demand left-shift for virtually everything within that country which further suppresses production and keeps prices low. However, the fact that Japan is highly dependent on other countries for its goods and many shipping lines are avoiding the area due to possible radioactive contamination and reduced port capacity is resulting in shortages for many items and resulting in rationing and higher prices.

The increased total global demand for oil (over nuclear power) could likely cause a right-shift in the demand curve for petroleum, raising prices and transport costs for container ships. Because of the drop in output from 2008, the container ships have already been making profitless runs to Asia, and bringing back cheap goods (inferior products) to recession-bitten consumers in North America. The costs are passed to consumers, who might learn that turning to local local sources to supply their needs might result in better value than depending on other countries for cheaply made but expensive necessities.

In the classic “invisible-hand” shift the other direction, the devastation in Japan will probably result in an increased need for construction materials and a switch in that the ships will now go west full…but probably coming back empty as the natural disaster has drastically cut production. How long the Japanese can keep paying for the goods without having the income from production is anyone's guess. It is true that the need for rebuilding will create an abundance of job opportunities with a shortage of workers which will cause wages to rise and stimulate the economy within Japan. The rapid recovery of Kobe after the earthquake of 1995 is a good example of this.
Containers in Sendai credit Itsuo Inoye

The compromised ability of Japan to supply goods such as energy efficient cars and parts to North America, combined with low interest rates in Canada may create investment opportunities for North America to start making energy efficient cars to rival the Japanese cartel and challenge their superiority while reducing the need to transport cars from overseas. Thousands of gas efficient cars instantly became scrap metal during the tsunami and factories where shut down. In Miyagi prefecture alone, 146,000 cars were either damaged or destroyed (Japan Today, 2011). Already, parts for most Japanese cars have become unavailable or extremely expensive in North America. While the physical damage is a short term thing, the nuclear issue could result in long-term power shortages which could impair Japanese production for some time.

To consumers, this drop in supply in relation to the pre-existing high demand in North America causes market equilibrium prices to shift sharply upwards, and creates shortages which will keep prices high. If cars begin to be produced in new markets, the container ships will begin to look at new routes to maximize their profits and not be caught in the fallout. In a global market, events like this can shift balance supply and demand radically literally within minutes, and logisticians have to constantly be examining the profitability of the many trade routes and be flexible enough to make adjustments to make the trip worth the costs. How and where these goods are stored and how they get to markets is what will make-or-break Mahar-Melford Terminals.

These are just a few examples of how supply and demand is at work in the production and supply of goods and services.

Japan Today. (accessed 30 March, 2011).