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.     

Some properties of international maritime statistics

This paper tests two fundamental hypotheses concerning international maritime statistics. The first one deals with the question of stationary of the maritime market statistics. The second hypothesis tested is the assumption that the international maritime statistical time series are not distributed according to a normal of Guassian probability law, but rather belong to the same family of distributions with distinctly different critical parameters. Through well documented statistical methods, the paper concludes that the international freight rates observed on a day to day basis are generated by a random walk process. The paper finds that the shipping industry's conventioal wisdom is essentially correct. 'Last done' is as good a forecast of tomorrow's freight rate as any other generated by more sophisticated forecasting methods. Furthermore, freight rates and secondhand tonnage prices fluctuate closely together. The freight rates are generated by stochastic processes fully described by the Paretian family of distributions. The critical parameters of these distribution, the characteristic exponents, are such that the risk conscious ship operator can indeed reduce his exposure to risk by securing a correct set of freight rate contracts.     

Some properties of international maritime statistics

This paper tests two fundamental hypotheses concerning international maritime statistics. The first one deals with the question of stationary of the maritime market statistics. The second hypothesis tested is the assumption that the international maritime statistical time series are not distributed according to a normal of Guassian probability law, but rather belong to the same family of distributions with distinctly different critical parameters. Through well documented statistical methods, the paper concludes that the international freight rates observed on a day to day basis are generated by a random walk process. The paper finds that the shipping industry's conventioal wisdom is essentially correct. ‘Last done’ is as good a forecast of tomorrow's freight rate as any other generated by more sophisticated forecasting methods. Furthermore, freight rates and secondhand tonnage prices fluctuate closely together. The freight rates are generated by stochastic processes fully described by the Paretian family of distributions. The critical parameters of these distribution, the characteristic exponents, are such that the risk conscious ship operator can indeed reduce his exposure to risk by securing a correct set of freight rate contracts.     

Examining the theoretical–empirical inconsistency on stationarity of shipping freight rate

As market price, shipping freight rates should in theory be stationary, but most empirical tests have found them to be non-stationary. To examine the causes of this theoretical–empirical inconsistency, we investigate the sensitivities of the stationarity of shipping freight rates from two perspectives: sample length and sample window. Longer samples are found not sufficient to make them stationary. Instead, sample windows separated by structural breaks are tested as stationary. Moreover, freight rates are found to have entered into a new phase since the 2008 financial crisis. This study contributes to the literature on the stationarity of shipping freight rates by providing an explanation for the theoretical–empirical inconsistency.     

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.     

Dynamics and interactions between spot and forward freights in the dry bulk shipping market

Analyzing the interactions between spot and forward freight agreement (FFA) prices in the dry bulk shipping is important as they play a significant role for shipping companies to secure their profits and avoid potential risks in the volatile market. By applying the vector autoregression (VAR) and the vector error correction model (VECM), this paper identifies the long-run and mutual causal relationship between the spot and FFA prices on the BPI T/C and BCI C7 routes. Along with these cointegrating rates, exogenous factors such as the market demand and supply and some economic indices are also recognized as contributing variables for the dynamic movement of the spot and FFA prices. Importantly, the mean-reverting process is justified on both routes with different mechanisms. When the spot and FFA prices deviate from their equilibrium level in the short run, they will be adjusted to their long-run equilibrium more directly and clearly on the BPI T/C route than those on the BCI C7 route. It also indicates that this adjusting power has direction and size asymmetries on both routes. In addition, the impulse analysis indicates that the spot rate is more volatile than its corresponding FFA prices confronting innovations. The results of this study provide a reference to the participants in the dry bulk shipping market on the causes of fluctuation in spot and FFA prices and their interactions, which can be used to promote the risk management in the market.     

Valuation mismatch and shipping q indicator for shipping asset management

ABSTRACT

This paper aims to develop an adaptation of the Tobin Q investment model for the shipping asset management in order to monitor valuation mismatch and bubble pricing of shipping assets. In this circumstance, the market prices of various shipping assets (e.g., Capesize or Panamax dry bulk carriers in different age profiles) are compared to the measured long-term asset value with second-hand ship prices. The mark-to-market prices of shipping assets are led by current market trends and freight rates, while the long-term asset value is estimated by using past data under certain assumptions (mean reversion, trend reversion). The discrepancy between market prices and the long-term nominal value of a shipping asset reflects any mispricing, which in turn sheds light on investment timing and market entry-exit decision.     

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.     

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.     

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.     

Shipping finance: time to follow a new track?

In this paper we introduce, for the first time, a methodology from the most recent literature of finance to reveal the duration of shipping cycles and then show the benefit of the use of this information to make more successful shipping loans. This is so as banks are willing to finance, during boom periods, shipping loans for new buildings but by this way 'create' oversupply and thus depress the freight market by their own actions. The information about cycles, especially their forecasting, is mostly important as shipping loans are based on project financing/cash flow financing, which means that ship revenue is of utmost importance. The Rescaled Range Analysis is applied here to 379 monthly freight trips—made stationary—between 1971 and 2002 (July), due to Hurst 1 and elaborated and popularized by Mandelbrot 2. The most important effect, however, is that shipping freight series exhibit non-normality and long-run dependence rendering the use of random walk models such as GARCH (Generalized Autoregressive Conditional Heteroscedasticity) problematic. Thus an adequate literature review is carried out with criticism against the models used. The cycles have been calculated as equal to 4.5 years and 2.25 years. This is almost compatible with the most recent paper of Stopford 3. The Hurst exponent was found equal to 0.93, alternating over the periods examined (0.65, 0.73, 0.62, 0.59 and 0.55) and indicating long-term persistence but seriously away from normal/random walk domain. Most studies have said the same using the Jarque--Bera test for normality but provided no alternative.     

Spatial efficiency in the bulk freight market

In the short run, there can be substantial differences in spot freight earnings between geographical regions of the global freight market for bulk carriers. Such differences can be consistent with an efficient market if they are temporary and if they cannot be exploited financially by pursuing chartering strategies that are based on publicly available information. In this paper, we apply a simple optimal switching model to evaluate whether such chartering strategies exist. We model the spot freight rate differential between the Atlantic and Pacific basins as a mean-reverting Ornstein–Uhlenbeck process and the entry–exit decision using the discount factor approach, which results in optimal trigger values for the entry/exit from each basin. Our empirical results suggest that the market is spatially efficient during normal freight market conditions when there is a surplus of vessels. The tight market conditions during the 2003–2008 freight market boom caused a persistent upward bias in Atlantic freight rates, but also here we find little added value from pursuing an active switching strategy.     

Some current aspects of marketing in the near-sea ferry and liner trades with particular reference to the lrish Sea

The marketing of ferry services has almost unique characteristics but little literature exists in this field. This paper is the result of a preliminary investigation, based on a series of interviews, into some current aspects of marketing on the Irish Sea. The study considers three services types: container; freight only; ro-ro and multi-purpose ro-ro.

The complementarity, or otherwise, of carrying passengers and freight together is debated, as is the organizational conflict or confusion that may arise from this type of operation. The need to adopt different marketing strategies in the freight and passenger markets is derived from consumers' different buying behaviours. The sometimes contentious relationship between product differentiation and market segmentation strategies is explored and definitions provided. Both market coverage and specialization strategies are found in the ro-ro industries and the more competitive segments are identified. Using 'purpose of travel' as the basis for segmentation, potential growth segments of the passenger market are identified. The marketing strategies employed by the freight industry are less apparent, although segmentation does seem to play a major role in the identification of target markets.

The study indicates the extent to which shipping companies on the Irish Sea have adopted the marketing concept and that scope still exists for them to make greater use of this fundamental business philosophy.     

Shipping freight derivatives: a survey of recent evidence

In an industry that is characterized by highly volatile prices, seasonality, strong business cycles, cyclicality and capital intensiveness, risk management is extremely important. Ship-owners and charterers face enormous risks, which emanate from fluctuations in freight rates, bunker prices, interest rates, foreign exchange rates and vessel values. These risks substantially affect the interplay between revenue and cost. Modern risk management techniques, involve the use of financial derivatives products, some of which have been developed exclusively for protecting (hedging) against the adverse price fluctuations of the aforementioned sources of risk in shipping. By using derivatives products, ship-owners and charterers can secure (stabilize) the level of their future income or costs and thus reduce uncertainty and unforeseen volatility of their cash-flow. To explore the importance of hedging freight rate risk in shipping operations, a survey of recent empirical evidence that has appeared in economic studies has been conducted. Developments over the past 20 years have been fast, with certain amount of research carried, which has helped to understand better the special features of these derivatives markets. They are all summarized in the current study, which can provide the stepping stone for further work in the area of shipping derivatives and risk management in shipping.     

Shipping freight derivatives: a survey of recent evidence

In an industry that is characterized by highly volatile prices, seasonality, strong business cycles, cyclicality and capital intensiveness, risk management is extremely important. Ship-owners and charterers face enormous risks, which emanate from fluctuations in freight rates, bunker prices, interest rates, foreign exchange rates and vessel values. These risks substantially affect the interplay between revenue and cost. Modern risk management techniques, involve the use of financial derivatives products, some of which have been developed exclusively for protecting (hedging) against the adverse price fluctuations of the aforementioned sources of risk in shipping. By using derivatives products, ship-owners and charterers can secure (stabilize) the level of their future income or costs and thus reduce uncertainty and unforeseen volatility of their cash-flow. To explore the importance of hedging freight rate risk in shipping operations, a survey of recent empirical evidence that has appeared in economic studies has been conducted. Developments over the past 20 years have been fast, with certain amount of research carried, which has helped to understand better the special features of these derivatives markets. They are all summarized in the current study, which can provide the stepping stone for further work in the area of shipping derivatives and risk management in shipping.     

The impact of low sulphur fuel requirements in shipping on the competitiveness of roro shipping in Northern Europe

Annex VI of the MARPOL Convention aims for a reduction in sulphur oxide emissions from ships. The limits applicable at sea in Emission Control Areas (ECAs) were reduced from 1.5% to 1% in 2010 and are planned to be further reduced to 0.1%, effective from 1 January 2015. This paper analyses the impact of the International Maritime Organization’s Tier II/III standards introduced by Annex VI amendments adopted in October 2008 on costs and prices of roro (roll on/roll off) traffic in the ECAs in North Europe and on the competitiveness of roro shipping in the ECAs compared to trucking. We demonstrate that the new Annex VI agreement may be quite costly for the participants in the shipping industry and will result in higher freight rates. Based on a detailed price analysis on modal competition between the roro/truck option and the ‘truck only’ option on thirty origin–destination routes linked to the ECAs, we conclude that the use of low sulphur fuel is expected to increase the transport prices particularly on the origin–destination relations with a medium or long short sea section. The paper also presents the results of a survey among leading short sea operators in the ECAs in view of providing more insight on expected modal shifts and price elasticity in the short sea market.     

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.     

Combined ships: an empirical investigation about versatility

Combined ships have been built in order to minimize ballast voyages and to take advantage of the highest freight rates on either market, oil or dry cargo market. Then their versatility should have been very attractive for shipowners. So why has the combined fleet shrunk to such an extent? This paper provides an analysis of the employment of combined ships, how this has been influenced since the 1970s, and how these ships may have influenced oil and dry market balances. The research identifies the decisive role that grain trade seems to be able to play about shifting markets, and that combined ships were the largest bulk carriers in the 1970s. It is an opportunity to stress that freight rates are not always the only salient point for a shipowner's decision and to consider the importance of combination ships contribution to shipping markets.     

Seasonality patterns in the container shipping freight rate market

Shipping indexes have attracted many researchers because they reflect the overall trend of corresponding seaborne markets and can provide implications for the future. Apart from the Baltic Dry Bulk Index (BDI) and correlated indices, the China Containerized Freight Index (CCFI) has been gaining more attention. As a country with large-scale manufacturing, China is an important exporting country and the CCFI was chosen to reflect the container shipping market because the data are more convincing and representative. There have been no systematic attempts to understand the seasonality patterns of container freights. Seasonality patterns reveal the regular fluctuation patterns within a 1-year period. They exist in time series, which are observed more than once a year, like the CCFI. To investigate the nature of seasonality (stochastic and/or deterministic) in container freight rates across different line services, we analyze the CCFI. This paper uses the HEGY method and Monte Carlo method comprehensively to figure out the small sample problem. In addition, seasonal dummy variables are used to test deterministic seasonality. Except for the Japan service series, which contains a half-year unit root, the other container freight rates seem to only involve a non-seasonal unit root at the zero frequency. Deterministic seasonality exists in all the line service series. Furthermore, the seasonality depends on the balance between supply and demand. Under this premise, the seasonal law of freight rates is much obvious.     

Are there bubbles in the shipping freight market?

ABSTRACT

This paper addresses the reconsideration of price bubbles specific to the shipping freight market based on the method of the Generalized Supremum Augmented Dickey–Fuller (GSADF). This approach offers the opportunity to recognize multiple bubbles and set their corresponding original and final dates. Empirical results reveal that four bubbles existed in the shipping freight market between October 1988 and February 2018 in which freight deviated from fundamental values. Strong demand (especially in China), the supply capacity, crude oil prices and U.S. dollar fluctuations are potential explanations for the first three bubbles. The global financial crisis that burst in 2008 is the major factor results in the last bubble. Hence, we must distinguish the potential reasons of bubbles in different periods and take measures such as promoting economic multipolarization, strengthening the bargaining power of China, building an effective information transfer system, employing financial derivatives and accelerating the consolidation of the shipping industry to alleviate the negative influences on global seaborne trade.