The Shipping Industry: Investing Essentials

How the shipping industry works and what drives its growth.

Aug 20, 2014 at 2:43PM

The world economy relies on the movement of commodities and goods across oceans, in the air, and over railways and highways. The ceaseless flow of materials and products is often out of sight and far from our attention, but life would be vastly different for most of us without the necessities and conveniences made possible by the shipping industry.

What is the shipping industry?

The shipping industry facilitates domestic and global manufacturing and trade via transportation of commodities and finished products, while also providing for the delivery of goods directly to consumers. A wide variety of commercial transport methods can be found in the shipping industry, from bulk transport of commodities in railcars to highly specialized "intermodal" container shipping. Four major modes of transport exist in this industry: marine, air, rail, and freight (trucking). 

How big is the shipping industry?

Maerskship

Maersk Line is building the world's largest container vessel, which, when completed, will have a capacity of 18,000 containers. Image: Maersk.

The shipping industry is a subset of the $9 trillion global trade market for goods and services. According to the U.S. Department of Commerce, spending on the U.S. shipping industry, which encompasses the four major modes of shipping transport and associated logistics, totaled $1.3 trillion in 2012, comprising 8.5% of domestic gross national product. The industry is a substantial employer: the freight segment alone employs 3 million people in the U.S.

How does the shipping industry work?

To understand how this broad industry functions, it's useful to review each of the four methods of transport individually.

Marine
Marine shipping occurs on general cargo ships, container ships, bulk carriers, and tankers. General cargo ships, as their name implies, carry a variety of items, which are often loaded on pallets. Container ships carry stacks of uniform steel containers, each loaded with materials and goods. The container method is noted for its efficiency: According to the World Shipping Council, the cost to transport a kilogram of coffee from Thailand to the U.K. is just $0.15. Bulk shippers primarily convey commodities in large amounts, such as iron ore, coal, grain, and forest products. Finally, tankers carry crude oil, chemicals, and other liquid cargo, including noncrude petroleum products.

Air 
Commercial air cargo is flown from one destination to another for further transport to trade or consumer end points. Boeing estimates that 60% of air cargo is transported via dedicated air freighters, with the rest moving within the lower cargo holds (the "belly") of passenger aircraft. The air cargo sector of the shipping industry includes expedited delivery services such as FedExUPS, and DHL

Up

Intermodal transportation: containers on a Union Pacific line. Image: Union Pacific.

Rail
The rail sector transports cargo via regional and national rail networks. Commodities can be shipped in bulk on open railcars or within secured cars. The rail sector is also instrumental in intermodal transportation, in which specially designed containers are transferred from one mode of shipping to another, often without human intervention. For example, a container might come into port on a ship, then be transferred onto a nearby rail yard car by an automated port transfer system. Commercial rail is an unsung workhorse of U.S. trade: one-third of U.S. exports are transported by rail.

Freight
According to the American Trucking Association, an industry trade group, trucks transport approximately 70% of total freight tonnage in the U.S. annually. This sector facilitates movement of goods to and from ports, as well as enabling domestic commerce. Freight is divided into two major categories: full truckload, or FTL, and less than truckload, or LTL. FTL carriers cater to larger corporations that often deal in bulk goods, while LTL carriers enable small businesses to ship goods using a portion of a truck's capacity, thus paying only for the space needed.

What are the drivers of the shipping industry?

The growth in global manufacturing is one of the most important recent drivers of the shipping industry. Developing economies such as China and South Korea import commodities including iron, steel, and copper. With these and other materials, a wide range of products are manufactured for export, from appliances to phones to automobiles. The purchasing of manufacturing inputs and subsequent need to ship out finished goods by rising economies has propelled the shipping industry.

Consumer end-product demand, in particular the emergence of e-commerce, has also invigorated the industry. Amazon.com, Rakuten in Japan, and MercadoLibre in Latin America are examples of substantial online e-commerce concerns that provide a channel to connect consumer demand to exporters across the globe.

Technological innovation and fuel prices prominently influence shipping. The rail sector is analyzing efficiencies where these two factors intersect. Rail companies have reviewed proposed methods of engine modification to allow fueling by liquefied natural gas in addition to the current primary fuel, diesel. Increased natural gas production has lowered the costs of the fuel by 50%, with long-term implications for the rail sector's profits.

Finally, as the costs of aircraft, marine vessels, truck fleets, and rail maintenance can be enormous, the efficiency of financing affects the industry's growth and profitability. Low interest rate environments tend to favor growth, and as we move further away from the recession of 2009, an increased appetite for lending among banks and finance companies may also promote industry expansion.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, MercadoLibre, and United Parcel Service. The Motley Fool owns shares of Amazon.com and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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