Authors: Dr. Theo Notteboom, Dr. Athanasios Pallis and Dr. Jean-Paul Rodrigue
Seaports facilitate local and international maritime trade through well-organized transportation systems. Their structure and organization are shaped by the dynamics of trade and emerging trends within the shipping industry. The demand and supply at port level are defined by several strategic and economic factors.
1. Demand for Ports and their Services
A. Derived demand
The demand for port services is fundamentally a derived demand, a principle that applies to transportation in general. For freight, it arises from the need to transport goods by sea for consumption or processing at a location other than their point of production. For passengers, it represents their willingness to travel via a particular port to another destination. These factors collectively drive the demand for the services provided by the port.
The demand for maritime transport and, by extension, port usage is closely tied to various factors, including the unequal distribution of natural resources, the seasonality of agricultural goods, the availability or scarcity of production factors, and the varying rates of economic development across regions. Additional influences include the physical characteristics of a location (e.g., soil structure and subsoil), prevailing consumption patterns, the evolution of social and cultural relationships, and the geopolitical and military significance of maritime transport. Economic cycles within the global economy and the fluctuations in market prices affect the demand for maritime transport, with the degree of impact related to the elasticity of maritime trade in relation to changes in industrial production.
The distribution of the resources of an economy, including the scarcity or abundance of available production factors and raw materials, plays a significant role in shaping the scale of international trade. The economic trajectory, whether an economy is dynamic, growing, developing, or declining, and the characteristics of its key sectors, such as the size and needs of industrial production and the shifts in imports and exports, also contribute to the volumes of international and, thus, maritime trade. Geographical factors, such as a region’s terrain, subsoil characteristics, and hinterland structure, can either enable or limit the development of transport infrastructure and the use of specific transport modes. The consumption patterns of an economy and the evolution of social and cultural interactions between social groups determine communication and trade. The balance between work and leisure strongly influences the demand for passenger port services, as it determines the demand for port services for coastal shipping, cruise, and tourist ports.
Geopolitical relationships play a critical role in shaping trade connections between countries and determining the structures of maritime and land transport corridors. Supporting military transport is also a key factor in developing certain ports, as their strategic role in defense and security operations can drive infrastructure investments and influence their overall functionality.
The demand for cargo-related port services is significantly shaped by the following factors:
- Changes in the Gross Domestic Product.
- The price elasticity of demand for the specific goods being transported.
- The ratio of transport costs to the value of the goods being shipped.
- The availability of alternative transportation methods.
The demand for passenger port services is shaped by the following factors:
- Discretionary income and leisure time.
- The necessity or purpose of the passenger’s journey.
- The ratio of transportation costs to the perceived value of the journey.
- The availability of alternative means of transportation.
- The passenger’s ability to select alternative destinations.
B. Ports as demand generators
At the same time, ports can function as demand generators for their services. A port can establish a competitive edge by offering adequate infrastructure, cost advantages, efficient resource organization, effective service delivery, and integration into supply chains. This advantage attracts freight traffic and helps increase the traffic volume it serves over time. Three key factors are essential for generating demand for moving goods through a specific port:
- The range and quality of port and related services, which play a crucial role in attracting users.
- The specialization of port services, with modern production, distribution, and consumption networks often necessitates specialized port services (such as transshipment) to facilitate specific ship calls or cargo types transportation.
- The interconnection with landside networks, with the integration of port services with broader landside transport networks and supply chain systems, improves connectivity and enhances the port’s appeal for cargo movements.
Demand creation is noticeable in ports handling international cargo traffic, especially containerized cargo. These ports often manage not only goods related to the local economy but also cargo such as unfinished or intermediate goods that require value-added services like storage, transshipment, or assembly, which can be provided even at a significant distance from the port itself. An illustrative example is the Port of Piraeus in Greece, particularly its container terminals. Piraeus facilitates cargo destined for Budapest, Hungary, despite the 1,476 km distance. Once the cargo arrives at Piraeus, it is transferred onto commercial trains for onward transportation. Interestingly, alternative ports closer to Budapest, such as Rotterdam (1,409 km), Hamburg (1,100 km), Trieste (550 km), and Rijeka (505 km), offer shorter distances. This suggests that other criteria influence port selection in addition to geographical proximity. Value-added services, logistical efficiency, and the ability to integrate into broader supply chains can be decisive factors for some users when choosing a port.
2. Factors Defining the Demand for Port Services
The organization of cargo ports and the volume and type of cargo that each port handles are shaped by a set of demand-determining factors that are either internal or external to the development of maritime transport systems.
The dominant influence is exerted by internal factors. At the core of the internal factors is the flow of cargoes; the port’s operation and growth prospects are defined and depend on it. Other internal factors are decisive determinants in shaping the structures, growth rates, and prospects of cargo ports, with each factor influencing the others in succession:
- Trade patterns. Fluctuations in trade volumes directly affect the cargo a port manages, shaping its operations and infrastructure.
- Production Process. Many aspects of the manufacturing supply chains directly impact the demand of port services:
- Raw material sources. The increased reliance on diverse sources of raw materials affects trade volumes and port operations. Ports may need to accommodate intermediate products for production practices and prepare goods for final consumption.
- Location of production. The geographical focus of production significantly impacts port development. For example, China’s rapid economic and industrial growth has driven the expansion of containerized trade and transformed the approach to servicing international trade.
- Quantity of production. High production volumes in an economy necessitate the development of ports or new facilities near production hubs to handle exports and raw material imports.
- Containerization. The widespread adoption of containers has prompted significant investments in container terminals, requiring ports to reorganize and enhance infrastructure and services to support this mode of transport.
- Logistics. The reaction of ports to the evolution of supply chains and developments regarding providing value-added services to the transported goods.
- Transportation services. Factors such as the services provided by shipping companies, the size and requirements of ships deployed, the chosen maritime corridors, and the range of services offered all influence how ports adapt to meet these criteria. Land-based transport systems linked to ports are equally critical, as their characteristics and efficiency impact a port’s ability to support broader trade and logistics networks.
Three external factors play a critical role in shaping the context in which ports operate and develop:
- Technological Advancements. Technological innovations are transforming the design and operation of ships and other transportation vessels, as well as the efficiency and range of services provided for transporting goods and passengers. This dynamic necessitates continuous adaptation by ports to maintain competitiveness and integrate modern solutions.
- Port Policy. Port policy determines strategic planning and operational frameworks, formulated at local, national, regional (e.g., European Union), and international levels (e.g., International Maritime Organization). Key considerations include land use and development, ownership models (public, private, or mixed-use), governance structures (e.g., roles of operators and managers), and operational regulations (e.g., waste management, mitigation of external impacts). These policy decisions shape the long-term development of port systems and the prospects of individual ports.
- Cultural Perspectives on Economic Organization. The prevailing approach to the roles of public and private sectors, economic regulation or deregulation, and market organization significantly influence port operations. These perspectives are shaped at multiple levels (national, local, and increasingly international) affecting how ports are structured and governed.
These external factors, in combination with internal dynamics, define the strategic and operational environment for ports, influencing their capacity and need to adapt and thrive in a rapidly evolving maritime landscape.
3. Seasonal Demand for Port Services
Seasonality is a defining characteristic of all maritime markets to varying degrees, leading to recurring fluctuations in the demand for port services. This seasonality is evident in different sectors of the maritime industry:
- Agricultural sector. When harvesting occurs, the demand for transporting dry bulk goods, such as cereals, peaks in early autumn in the northern hemisphere. For the southern hemisphere, the situation is reversed, which creates a form of complementarity between ports in the northern and southern hemispheres.
- Energy sector. In the liquid bulk market, petroleum shipments to the northern hemisphere increase before winter to meet heightened heating and energy needs.
- Manufacturing and retail sectors. Demand for maritime container transportation rises during autumn, as large volumes of goods, including foodstuffs and apparel, are shipped from Far East countries to Europe and North America in preparation for seasonal consumption that peaks in November and December. Conversely, demand tends to decline in early February, especially around the Chinese New Year, when production slows, and the transfer of goods faces logistical constraints.
These seasonal patterns require ports to adapt their operations and resource allocation to manage demand fluctuations effectively.
Demand for passenger services is even more seasonal than for cargo transportation. Ferries show a wide variation in the number of calls, vessels, and passengers, with demand being limited in winter. In the case of cruise shipping, seasonality is one of the main characteristics of a market dictated by the weather conditions in the various destination cities. In the most important cruise market, the Caribbean, peak activity is usually between November and April. In the Mediterranean, the second most important cruise market, more than 85% of cruise calls take place from April to October, while cruises are extremely limited in the period from November to March. These seasonal patterns necessitate flexible scheduling, resource management, and strategic planning by port authorities to optimize operations and cater to fluctuating passenger volumes.
4. Microeconomic Perspectives of Demand for Port Services
Changes in the macroeconomic environment would affect the prospects of any given port. Political stability and favorable trade policies in the port’s location can enhance its attractiveness. The same applies to the regulatory environment (i.e., local regulations, including taxes, tariffs, and environmental compliance costs) and trade policies. The overall volume of trade in the region is also driven by macroeconomic conditions, and international trade policies.
From a microeconomic perspective, within a given specified macroeconomic context, the demanded quantity of a particular port service (e.g., cargo loading or unloading) is determined by a demand function that typically includes the following factors:
- Price of the Port Service. Demand typically is inversely related to price (price elasticity). As prices increase, the demanded quantity generally decreases.
- Prices of substitute services. The availability and pricing of similar services at nearby ports or alternative modes of transportation. For instance, if a nearby port offers similar services at a lower price, demand at the given port may decrease.
- Prices of complementary services. The pricing and quality of related services such as warehousing, customs clearance, and storage are complementary to cargo handling.
- The population of the hinterland market linked to the port.
- GDP (income) per capita. Linked with market size and the purchasing power and, thus, the demand for goods and services.
- Proximity to major markets or production centers. The geographical location of the port in relation to significant markets, production centers, or trade routes affects its competitiveness and demand.
- Seasonal variations. Demand for port services often fluctuates with seasonal trade cycles. For example, agricultural harvest seasons or holiday-related consumer goods spending can lead to higher demand for cargo handling.
- Port service quality. Ports offering superior services may attract more clients, even at relatively higher prices.
- Technological advancements. Innovations in port operations, as well as in shipping and supply chains, can shift demand patterns, such as the emergence of mega-ships requiring larger and more specialized ports.
Shipping companies, shippers, or other parties involved (i.e., freight forwarders, supply chain partners, etc.) short and long-term preferences and contract agreements for using specific ports will be determined by the relative importance they assign to these parameters. Port managers and policymakers consider the determinants of demand as the background to plan for capacity, pricing strategies, and investments accordingly.
A. Optimal balance between supply and demand for port services
The optimal balance between supply and demand for port services reflects a state where the price or quantity of services improves one stakeholder’s position without worsening another’s. This balance (in economic terms called Pareto optimum) represents the optimal social welfare and considers the following characteristics:
- Congestion: Overuse of port and transport services can reduce efficiency and increase costs, affecting user satisfaction.
- Perceptions of economic organization: Public vs. private provision of services and market regulation shape operational dynamics.
- Social impact: The effect of port activities on local communities, such as employment and environmental factors, contributes to stakeholder perceptions and demand.
- Efficiency (Productivity): The port’s ability to maximize output with minimal resource use ensures competitiveness and sustainability.
- Effectiveness (User Satisfaction): Meeting user needs through high-quality, reliable, and responsive services is key to demand growth.
- Other Factors include technological advancements, policy decisions, and global market dynamics affecting port operations.
5. Factors Defining the Supply of Port Services
From a general macroeconomic perspective, the strategic objectives of the port, and therefore those of the port service providers, define the overall focus, and thus the level of port services supply. Ports might opt for any of the three available strategies. The first one is to prioritize social and economic development, often accepting lower profitability for regional growth. The second one is to prioritize private interests and focus primarily on profit generation and delivering value to shareholders. The third one is to balance, public and private Interests, thus aiming to achieve financial viability while maintaining public service commitments. The selected strategic objective affects planning and the types of port service providers active at a port.
Port service providers – which might be the managing entity of the port, a terminal operator or a hybrid entity – define the quantity of the particular port service (e.g., cargo loading or unloading) they offer, via a decision reflecting various economic and operational factors. These factors are:
- The objectives of the port service provider.
- The price of the service.
- The cost of the factors of production used to produce the service.
- The price of the complementary services.
- The price of the substitute services.
The objectives of the service provider define significantly the relationship between the price of port services and the supply of port services. The supply of port services responds to price changes depending on whether the provider aims to maximize profit or operates under a public service framework. Cargo handling and related port services in seaports serving international trade and broader hinterlands and forelands fall in the first of these categories, irrespective of whether the port service provider is a private terminal operator or a publicly owned or hybrid entity. Exceptions in these cases are few. The scale of provided services is determined differently in secondary or smaller ports. Typically, a government-owned port serving an island or remote community may continue to provide services even at a loss to promote local industries or connect remote regions with economic centres. An illustrative example is ports serving island communities. In absolute numbers, the ports of the second category outnumber those of the former. However, he vast majority of the world cargo throughput is today handled by ports where services are offered by ports where the quantity of the services.
The price of the factors of production (capital, labor, land, and technology) plays a crucial role in linking the supply with the production for port services. Changes in these input costs directly affect profitability and, in turn, the supply of transport services. When the price of any production factor increases, higher input costs reduce the expected profits from offering port services. To maintain profitability, service providers may reduce the quantity of services they offer. The impact of each factor on supply depends on how intensively the production factor is used in the service production process. The more intensively a factor is used, the more sensitive the supply will be to changes in its price. For instance, if technology is the dominant input, the cost of technological improvements will have a more significant impact.
Modern port service providers tend to shift toward capital-intensive and technology-intensive operations. This transition affects the relative importance of each factor. Ports are adopting more automation, machinery, and digital technologies, increasing the use of capital and technology. As capital and technology use increases, there is a corresponding decrease in labor intensity, particularly for unskilled labor. For example, automated container-handling systems reduce the need for labor. Today’s high-capital ports are more sensitive to changes in capital costs (e.g., interest rates on loans for infrastructure), rather than labor wages, while technological advances that reduce reliance on labor yet increase dependence on specialized technology.
The prices and quality of substitute services and complementary services are crucial factors for the level of supply of a port service. These interdependencies reflect the competitive and interconnected nature of port operations.
The presence (absence) and the price changes in substitutes affect the supply levels by a given provider. A substitute service is an alternative that can replace the port service in question. A cargo handling service at a neighboring port or a second or service provider at an alternative terminal within the same port are such substitute services. If a competing service becomes more expensive (e.g., cargo handling at a nearby port becomes more expensive), the demand for similar services at the current port increases, prompting providers to expand their supply. If substitutes become cheaper (e.g., lower handling fees at another terminal), users may switch to those alternatives, decreasing service supply in the competing terminal. The absence of any alternative service is not rare in the port industries, due to either geographical characteristics or the selected port governance model. In these cases, the supply levels are defined by the market size and the captive users’ needs.
A port service, such as cargo handling, is not offered as a single service alone but is bundled and used with other complementary services. Several services are offered to seagoing vessels, including nautical-technical services (e.g., pilotage, towage, mooring) and utilities (waste management, water, electricity, etc.). The cargo reaching a port will need temporary storage, and further services (i.e. customs clearance, inland transport) to be forwarded to the hinterland, as well as perhaps value-added services and logistics. The same applies to passenger ports, as passengers will seek ways to move from (to) the port to (from) their landside destination. Most of these services are interconnected. Independent services are rare due to the operational linkages (e.g., cargo handling depends on complementary services like storage and transportation, infrastructure sharing, with many services sharing physical assets (e.g., cranes, terminals), and customer needs, as shippers require seamless service bundles rather than isolated services. This interdependence means that changes in one service often affect the supply of others.
The supply levels of a particular service at a port are related to the price and quality of the complementary services offered in the given port: a more expensive and lower quality of a complementary service will lead to lower service levels and vice versa. Increasing the price of a complement increases the total cost for customers, thus decreasing the supply of a service. Conversely, if complements become more affordable, the combined service package becomes more attractive, prompting an increase in supply. For example, if the cost of trucking services from (to) the port drops, more users may choose to use the cargo handling service at the port, increasing the supply of handling services.
Two categories of exogenous factors also contribute in determining the quantity of port service offered. First, the opportunities or limitations set by social factors, including the legislation, rules, and operating norms of the economy that hosts the port. Second, the physical and geographical factors, the limits and possibilities offered by geography, the morphology of the port and the area, weather conditions (strong wind, fog), etc.