Answer for July 2015 Q.5.(ii)FREIGHT RATES, SUPPLY AND DEMANDPut simply, freight rates are determined on the basis of negotiations between shipping companies and forwarding agents/cargo owners, reflecting the balance between ships and cargoes available in the market.If the supply of vessels is too great, freight rates are most often low, whilst they are high when there is a shortage of vessels in the market.The five most important factors generally affecting demand in the shipping market are:1.The global economy: generates the bulk of demand, either through imports of raw materials or trade in finished products.2.Raw materials available: some raw materials, especially agricultural products, are subject to seasonal fluctuations. In addition, raw materials trading is affected by overall demand and availability.3.Average haul: expresses the distance travelled by a ship before it reaches its final destination. For example, periodic closures of the Suez Canal have increased the average sea travel distance between the Arabian Gulf and Europe from 6,000 miles to 11,000 miles.4.Random shocks: shocks that affect the stability of the economic system such as natural disasters, wars, economic crises and the like.5.Transport costs: raw materials will only be transported from remote places of origin if transport costs have been reduced to an acceptable level.The five principal factors on the supply side are:1.The world fleet: The size and composition of the world fleet clearly reflects the current supply of vessels.2.Fleet productivity: even though the size of the fleet is fixed, ship productivity provides an element of flexibility.3.Shipyard production: shipbuilding plays an active role in the adjustment of the fleet. However, it usually takes between one and three years from the ship is ordered until delivery takes place.4.Scrapping: scrapping also plays a key role in fleet growth.5.Freight earnings: Freight rates motivate shipowners to adjust their capacity in the short term and to identify savings and improvement in the longer term.