Microeconomic determinants of dry bulk shipping freight rates and contract times

Statistics are from Clarksons Research Services (Shipping Intelligence Network).

Deadweight tonne (dwt) is a term used for expressing the carrying capacity of a ship in metric tonne.

Statistics are from Clarkson Research Services Limited for dry bulk carriers greater than 10,000 deadweight tonne capacity.

The terms freight rate and charter rate are used in shipping markets interchangeably to express the hiring cost of a ship for transportation.

See Stopford (2009), and Alizadeh and Nomikos (2009) for more details on differences among shipping contracts.

There is also a time window, starting from the layday, within which the vessel must be presented for loading or be delivered to the charterer, which is known as the layday/cancellation (or laycan) window. If the vessel is delivered to the charterer or presented ready for loading cargo after this time window, then the charterer has the option to cancel the contract, and potentially claim compensation. For the purpose of this study, we distinguish the time from the contract day to the layday as the laycan period, and the time between the layday and cancellation as the laycan window.

See Alizadeh and Nomikos (2009) for more detail on Baltic Indices and freight derivatives trading.

The results of Huasman test indicate that there is significant simultaneity between freight rate and laycan period of Eqs. 1 and 2. These results are not reported here but they are available from the authors.

There are two conditions which must be satisfied for the system of simultaneous equation to be identified. These are the order and the rank conditions of identifications. The order condition, which is a necessary but not sufficient condition for identification of simultaneous system of equations, requires the number of excluded and predetermined variables in each equation to be at least less than the number of endogenous variables minus one. The two equations in the system defined in (3) satisfy this condition; that is, the freight equation is exactly identified and the laycan equation is over-identified. The over-identification is not a major problem because we use the 3SLS estimation method, which yields efficient, unbiased and consistent estimates.

In January 2009, the dry bulk fleet was comprised of 820 Capesize (142.5 million dwt), 1,556 Panamax (114.51 million dwt), 1708 Handymax (82.93 million dwt), and 2,927 Handysize (78.14 million dwt), vessels. The Supramax fleet is relatively small as this a new class of dry bulk carriers. The percentage of dry bulk fleet in terms of cargo carrying capacity is Capesize 34.1%, Panamax 27.4%, Handymax 19.8%, and Handysize 18.7%.

The percentage of trip-charter activities were obtained from the whole sample (i.e. January 2006 to April 2009). Therefore, the figures represent the percentage of contract type over the period. However, the proportion of fixtures under trip-charter contracts compared to voyage charter contracts has been increasing over the years.

The data used here is dry bulk trip-charter contracts by observations every day. Therefore, although the structure of the data can be considered both cross sectional and time-series, the difference here is that the number of observations every day may vary depending on the number of actual fixtures reported.

In the Capesize market, route C8_03 is a transatlantic route with delivery and redelivery in Europe (Gibraltar to Hamburg range). Route C9_03 is a trip from Europe to the Far East with delivery in Europe or Mediterranean and redelivery in the Far East. Route C10_03 is a transpacific round trip with delivery and redelivery in the Far East for trips to Australia, North Pacific, or even South Africa or India. Route C11_03 is a trip from Far East to the Continent Europe via South Africa or Australia. The Baltic Exchange also reports the average of these four routes as the Average 4TC, which is used for Forward Freight Trading. The four main Baltic routes represent 95% of the trip-charter fixtures, which shows how concentrated the Capesize market is. It should be noted that there are other active Capesize routes such as Bolivar to Rotterdam (C7) and Richards Bay to Rotterdam (C4), amongst others, where vessels are hired on a voyage charter basis. These fixtures are not considered in our sample of trip-charter contracts.