Combination hedging strategies for crude oil and dry bulk freight rates on the impacts of dynamic cross-market interaction

The fluctuation of freight rates revenue and the fierce volatility of oil cost are two of the most key risk exposures in the shipping industry. However, neglecting the dynamic interrelationship between the cost and the revenue markets leads to the overestimation or underestimation of hedging ratios, which makes the present single hedge strategy less efficient. This paper proposes an optimal combination hedging model for a shipowner trading the derivatives of crude oil and dry bulk freight rates simultaneously with the cross-market economic linkages. We investigate the impacts of spillover transmission, structural breaks, and dynamic conditional correlations (DCCs) on the optimal combination hedging trading. It is found that the significant volatility transmission between oil future and dry bulk forward freight agreements suggests a high dependence of the Capesize sector on the oil fluctuations, which means that the dynamic cross-market interactions have significant impacts on the aggregate risk exposures. Furthermore, the DCCs incorporating structural breaks significantly improve the performance of the combination hedge, which is superior to the two separate hedging strategies. Our study offers new insights into how the freight rates and oil markets relate to a combination hedging, which can be used to promote the risk management in the market.     

Exploring the link between oil prices and tanker rates

Given the secular and sharp rise in oil prices over the past decade, this study analyses the impact that the spike in oil prices has on tanker rates. We investigate a dynamic model explaining spot tanker rates. The magnitude of the impact of oil prices on the shipping industry, in terms of the level and volatility of spot (voyage) under bull and bear market conditions. The West African–US Gulf Tanker Rates, West Texas Intermediate spot and 3-month futures contract, and US Weekly Petroleum Inventories are analysed using cointegration and Granger causality analysis, from 1997 through 2007, in order to examine the lead–lag relationship between oil prices and tanker freight rates. Our findings show a relationship between spot and future crude oil prices, crude oil inventories and tanker rates. The significant increase of freight rates, and the simultaneous increase in oil prices, during the recent years, provides an intriguing economic environment to identify relationships between shipping market rates and oil prices. These relationships have significant implications for the markets. At the practical level, the better understanding of the relationship between freight rates and crude oil prices can improve operational management and budget planning decisions.     

我国远洋干散货船型经济论证

干散货运输市场是世界海运市场的3大市场之一,虽然运输市场机制趋于完善,但受运价、船价和油价的影响,市场波动较大。针对这一现实情况,文章以船型技术经济论证方法为基础,建立单船运输经济性测算模型,判定出最优船型,并对运价、船价和油价3个影响因子进行敏感性分析,为航运企业制定船队发展规划和港口企业制定到港船型规划提供参考。     

The market for ship demolition

Little has been written about the ship demolition market, an essential element in the supply/demand balance for shipping. Either technical or economic obsolescence may be the cause for scrapping a ship, where the latter is strongly influenced not only by anticipated freight market levels, but the rate at which more efficient ships are being introduced. The scrap value of a ship is a function both of the realizable value of the materials within the ship and cost of demolition. Both are strongly influenced by the cost structures prevailing in the likely country of demolition. The paper explores not only the fundamentals of the ship demolition market, but the trends from the 1960s to the present. The shipbreaking market has moved in that time from being West European-centred to Asian-centred, concentrating for some years in Taiwan, but now shifting to the Indian subcontinent.     

On the nature and sorces of controversy in the economic analysis of the liner shipping industry†

The simulations performed show that demand for quality tankers has to increase by 30% for a two-tier tanker market to emerge. The two-tier freight structure will only last for 3–5 years due to contracting induced by higher freight rates. This means that OPA does not by itself result in higher freight rates for tankers that comply with the requirements. If Western Europe also closes their trades to substandard tankers, a two-tier market emerges and quality tankers obtain a premium. The paper presents a simulation model for international tanker markets. The non-linear complementary equilibrium model solves for a sequence of static equilibria in segmented tanker freight markets, shipbuilding and scrapping markets. Freight markets are segmented according to quality requirements for tankers. The model specifies three tanker classes and one—quality tankers—can operate both market segments.     

Is there potential for a two-tier tanker market?

The simulations performed show that demand for quality tankers has to increase by 30% for a two-tier tanker market to emerge. The two-tier freight structure will only last for 3-5 years due to contracting induced by higher freight rates. This means that OPA does not by itself result in higher freight rates for tankers that comply with the requirements. If Western Europe also closes their trades to substandard tankers, a two-tier market emerges and quality tankers obtain a premium. The paper presents a simulation model for international tanker markets. The non-linear complementary equilibrium model solves for a sequence of static equilibria in segmented tanker freight markets, shipbuilding and scrapping markets. Freight markets are segmented according to quality requirements for tankers. The model specifies three tanker classes and one quality tankers can operate both market segments.     

Black Boxes - Pathetic progress but some success now in sight

Little has been written about the ship demolition market, an essential element in the supply/demand balance for shipping. Either technical or economic obsolescence may be the cause for scrapping a ship, where the latter is strongly influenced not only by anticipated freight market levels, but the rate at which more efficient ships are being introduced. The scrap value of a ship is a function both of the realizable value of the materials within the ship and cost of demolition. Both are strongly influenced by the cost structures prevailing in the likely country of demolition. The paper explores not only the fundamentals of the ship demolition market, but the trends from the 1960s to the present. The shipbreaking market has moved in that time from being West European-centred to Asian-centred, concentrating for some years in Taiwan, but now shifting to the Indian subcontinent.     

Market efficiency in the bulk freight market revisited

Given that the freight rate is the price of a transportation service that cannot be traded or stored; the traditional form of the efficient market hypothesis (EMH) does not apply to the freight rate price process. However, the notion of market efficiency still applies in the freight market. In particular, under the hypothesis that the market is semi-strong-form efficient, it should not be possible to make excess profit by taking chartering positions in the freight market based on public information such as past levels of the spot freight rate or the shape of the term structure of freight rates. This paper contributes to the literature by proposing an alternative test of market efficiency in the bulk freight market. We utilize technical analysis based on the history of spot freight rates and investigate the profitability of such chartering strategies for a tanker operator. The chartering decisions are based on identification of the peaks and troughs in the freight market cycles using kernel smoothing of the spot freight rate history. The empirical results suggest that a large tanker operator (e.g. a pool) could have achieved significant profits without investing in ships by trading on such information, although this does not hold in the most recent subset of the sample.     

An analysis of freight rate volatility in dry bulk shipping markets

The world bulk shipping market has been in a peak period since 2003, and this has lasted an incredibly long time considering that the markets are much more complex than before. This paper investigates the characteristics of volatility in dry bulk freight rates of different vessel sizes (capesize, panamax and handysize). The daily returns of freight rate indices of three different types of bulk vessel in the sample period have been examined. The sample period ran from 1 March 1999 to 23 December 2005, and applying the GARCH (generalized auto regressive conditional heteroskedasticity) model showed that the shocks will not decrease but have the tendency to strengthen for all the daily return series. Further, external shocks on the market have a different magnitude of influence on volatility in different types of vessels due to their distinct flexibility. To examine the asymmetric characters of daily return volatility in different bulk shipping sectors and different market conditions, the sample was divided into two periods: one is from 1 March 1999 to 31 December 2002, the other is from 1 January 2003 to 23 December 2005; the EGARCH (exponential generalized auto regressive conditional heteroskedasticity) model was then applied to investigate the asymmetric impact between past innovations and current volatility. The results show that the asymmetric characters are distinct for different vessel size segments and different market conditions. The reasons for the results are discussed and it is considered that the main reasons may be the different flexibility and different commodity transport on different routes. The results from this investigation will be useful for the operators and investors in the dry bulk shipping market to increase profitability and reduce investment risk.     

Evaluation of risk attitude in the shipping freight market under uncertainty

ABSTRACT

The main purpose of this study is to examine how market participants take risks, in other words, what their risk attitude/preference is, and how their risk attitude could be related to the shipping freight and other markets. To address them, we calibrated the risk attitude of participants in shipping freight markets from 2007 to 2013, and provided an example of the application of risk attitude. For market participants, risk attitude/preference has an important role in understanding shipping freight markets and managing risks under uncertainty. However, risk attitude is not directly observable. To achieve this, we applied a framework that consists of structural model and calibration with market data. We interpreted risk attitude and confirmed that a structural break occurred around 2008 for the calibrated risk attitude parameter. The average risk attitude of market participants tended to be more risk-averse after 2010. We conducted an additional analysis to provide an example of the application of calibrated risk attitude, using structural equation modeling to calculate a latent variable that reflected other commodity markets. We compared the risk attitude parameter and the latent variable, and clarified the relationship between the risk attitude parameter and commodity markets.     

A new perspective on price dynamics of the dry bulk market

The main result of this article is that freight rates and second hand prices in the dry bulk market seem to be stationary. By unit-root tests, an established tool for testing for random walk in economic time series, the random walk hypothesis can be rejected in most cases for the freight rate samples. This result is in contrast to the findings of a number of papers during the 1990s. However, the results confirm classical shipping market models that indicate stationarity in freight rates, which is not the case if the freight rates follow a random walk. By transforming all observations from US$ to Japanese yen detrended freight rates and prices seem to become stationary and volatility is reduced.     

A new perspective on price dynamics of the dry bulk market

The main result of this article is that freight rates and second hand prices in the dry bulk market seem to be stationary. By unit-root tests, an established tool for testing for random walk in economic time series, the random walk hypothesis can be rejected in most cases for the freight rate samples. This result is in contrast to the findings of a number of papers during the 1990s. However, the results confirm classical shipping market models that indicate stationarity in freight rates, which is not the case if the freight rates follow a random walk. By transforming all observations from US$ to Japanese yen detrended freight rates and prices seem to become stationary and volatility is reduced.     

Calculation of the freight revenues in Turkey-focused maritime transportation

The Central Bank of the Turkish Republic (TCMB) in Turkey has announced the data of freight revenues. The data that have been announced depends on the information obtained from the port customs and compiled by the Turkish Statistical Institute (TUIK). Because of the distinctive structure of the freight market, certain requisite generalizations and projections are used for data calculation. Accordingly, calculations that depend on generalizations and predictions are likely to weaken the effectiveness of the decisions already made or going to be made. The aim of this study is to calculate more realistically the real freight revenues of ships that have carried out loading or discharging operations in Turkish ports. In accordance with this purpose, the volume of freight revenues and their distribution between Turkish and foreign flagged ships is calculated. A Microsoft SQL-based algorithm is developed in order to do the calculation. Within the scope of the study, the total fright revenue of Turkey-oriented shipping industry is calculated to be USD 5.8 billion. Proportionately, 79.53% of the revenue belongs to foreign flagged ships, 12.70% of it belongs to foreign flagged ships with Turkish owners, and only 7.78% of it belongs to Turkish flagged ships.     

Spillover effects and dynamic correlations between spot and forward tanker freight markets

Monitoring and analysing information transmission across different shipping markets is an important tool for participants to predict shipping freight rates, design portfolio investments and manage freight rate risks. The purpose of this article is to investigate spillover effects and dynamic correlations between shipping spot and derivatives markets (tanker forward freight agreement, FFA) under the multivariate generalized autoregressive conditional heteroscedasticity framework. Empirical results show that spillovers in returns are unilateral from one-month FFA to spot markets, while they are bilateral between one-month and two-month FFA markets. However, insignificant mean spillovers between spot and two-month FFA markets are found. Volatility spillover effects among one-month FFA, two-month FFA and spot freight markets are bilateral. By analysing the correlation between different markets, highly persistent and significantly volatile correlations are found. Moreover, time-varying correlations between one-month and two-month FFA markets are much higher than those of between spot and each FFA market. Results from this article will be helpful to improve participants’ predictions of return, volatility and correlation, which are significant for determining hedge strategies. In addition, the management of freight rate risk and portfolio investment can also benefit from the empirical results obtained in this article.     

Duration analysis for recurrent ship accidents

About 63% of the world’s shipping accidents are recurrent—they occur to ships that have already experienced at least one prior accident. Therefore, reducing recurrent accidents can contribute significantly to maritime safety. We study the factors affecting both first and recurrent accidents, by focusing on the duration between two accidents. Cox proportional hazard models are applied to ship accident data from 1996 to 2015, and the results identify which ships have a high risk of recurrent accidents, based on ship attributes, ship supply and market conditions, shipbuilding country, previous accident type, and ship type. The recurrent rate is high when the ship involved in the accident is old, small, flies a flag of convenience, and has no detention record. In addition, the accident risk increases when the shipping market faces a high bunker price, overcapacity in supply, a high time charter rate, or low newbuilding price. On the other hand, ships built in China and Japan have lower recurrent accident rates than those built elsewhere, although ships built in China have earlier first accidents than do others. General cargo ships have the highest recurrent accident rate, followed by dry bulkers, container ships, and tankers, in that order.     

Longhaul feeder services in an era of changing technology: an Asia-Pacific perspective

Traditional liner carriers, operating in the highly competitive commercial environment of the last few years, have attempted to lower the marginal cost of each box carried. Technological improvements in both construction and propulsion systems have led to a steady growth in carrying capacity. Ships of 600+ TEUs are now in service and, as a result of this trend, have displaced 'smaller' ships from the major east-west trades. The more competitive environment of these trades has in turn led to a redeployment of ships in the 2500+ TEU range to the north-south trades. The result has been a rapid increase in north-south capacity, including feeder services and falling freight rates. Despite the current excess supply in shipping and historically low freight rates, significant developments in technology have created opportunities for new fast containerships. The paper analyses the key economic factors in the differentiation of the new fast ship technology from the traditionally designed containerships and demonstrates the potential financial viability to owners of these new 'greyhounds'.     

Containerization and liner conferencs: A polemic

By the mind-1960s there was a great deal of inefficiency in the Europe/Australia liner trade which reflected the ultra-conservative management of the British shipping lines under the benign protection of the conference system. Containerization per se was not necessary to realising a large gain in efficiency and therefore permitting a reduction in the level of freight rates. The introduction of containerization with cellular container ships and under the aegis of a strengthened conference monopoly has meant that shippers have been denied much of the potenital beneifit.     

Maritime transport and international seaborne trade

Drawing upon over four decades of the United Nations Conference on Trade and Development (UNCTAD) Review of Maritime Transport, this article considers selected key trends that have shaped the maritime transportation of today. Over the review period, a fundamental shift in the geography of trade has been observed, with developing countries increasingly driving growth in the world economy and seaborne trade, and becoming important players in global value chains. The specialization of countries, including in developing regions, in the provision of the maritime goods and services for which they have established a comparative advantage constitutes another major trend, a move away from previous patterns where developing countries were typically users of maritime transport services. The article also observes that bilateral freight sharing agreements between countries which were prominent in 1970s have largely lost their practical relevance, leading to a further liberalization of markets and resulting in overall relatively lower freight costs.