Dry Bulk Contracts Paper 9-8-10

7/28/2019 Dry Bulk Contracts Paper 9-8-10

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Microeconomic Determinants of Dry Bulk Shipping Freight

Rates and Contract Times

Amir H. Alizadeh

Cass Business School

City University

London EC1Y 8TZ

United [email protected]

Wayne K. Talley

College of Business and Public Administration

Old Dominion University

Norfolk, Virginia 23529

[email protected]

ABSTRACT

Th i f thi i t l l ifi d d t i t f hi i f i ht t i th
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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The aim of this paper is to analyze vessel specific and voyage determinants of shipping freight rates in the

1. Introduction

International sea transportation has been an instrumental factor in world economic activity andinternational trade. Total seaborne trade in commodities reached an estimated 8,226 million metric tonnes

(mmt) in 2008 consisting of 3,060 mmt of dry bulk commodities, 3,052 mmt of liquid bulk

commodities, and 2,114 mmt of other dry cargo and manufactured goods.1 The dry bulk shipping market

is by far the largest sector of the world s shipping market in terms of cargo volume and weight. In 2008

the dry bulk shipping fleet transported 843 mmt of iron ore, 794 mmt of coking and thermal coal, 314

mmt of grains, 119 mmt of bauxite, alumina and phosphate rock, and 990 mmt of minor dry bulk

commodities, e.g., cement, sugar, and fertilizers. At the end of 2008 the cargo carrying capacity of theworld dry bulk shipping fleet of 418 million metric tonnes was 34.7% of the total world shipping fleet,

and the number of dry bulk ships exceeded 7,000.2 Therefore, it is not surprising that a large number of

studies have investigated the formation and behavior of dry bulk freight (charter) rates, chartering

decisions and policies, transportation strategies, and fleet deployments and operations of the dry bulk

shipping industry(See section 2).

The existence of different types of ship chartering contracts in the bulk shipping industry provide

charterers greater flexibility to secure their sea transportation requirements, while minimizing their costs.The contracts vary depending on the terms of agreement and the type of service that shipowners agree to

provide to charterers. Broadly speaking, chartering contracts can be classified into five different types:

Voyage Charter (VC), Consecutive Voyage or Contracts of Affreightment (CoA), Trip Charter (TC),

Time or Period Charter (PC), and Bareboat Charter (BC) contracts. The main differences among these

contracts are the: duration of the contract, method of freight rate calculation, cost allocations and

commercial and operational responsibilities3.

Freight rates in the bulk shipping industry fluctuate considerably in the short run (Kavussanos, 1996a).

Such fluctuations affect the formation of shipping policies, transactions and contracts and ship owners

and charterers cash flows and costs (Brown et al. 1987 and Laulajainen, 2007). Hypothesized


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window, then the charterer has the option to cancel the contract, and potentially claim compensations.

Thus, the time period between the fixture date and thelayday is the laycan period.

Once the loading or lifting day (layday) of the cargo has been determined, the trader (vessel charterer)

will enter the market to find and charter the most suitable ship for transportation of the cargo from the

loading port to the destination port. Depending on the nature of the trade, the layday may occur anytime

from one day to couple of months after the fixture date. Hence, assuming vessels are available in the

market at all time and at a constant flow, the trader has the option to enter into the freight market and hire

a vessel anytime until the very last minute (as long as it is practical) before the layday. Therefore, it is the

traders decision for all practical purposes as to when to enter the market and charter (or hire) a ship. For

instance, if the conditions are not favorable and there is enough time before the layday, the trader may

wait and not inform the shipbroker about the need for a ship. The charterers decision of when to charter a

ship i.e., the fixture date, is dependent on such market conditions as current and expected freight (charter)

rates, the volatility of freight rates, and the cost to be incurred of not being able to find a ship to charter if

the decision to hire a ship is delayed.

Although numerous macroeconomic studies on the formation and behavior of shipping freight

(charter) rates exist, there has been little investigation of microeconomic determinants, such specificvessel and voyage determinants, of shipping freight (charter) rates. Moreover, there is no study in the

literature that investigates determinants of the laycan period in shipping contracts. This paper attempts to

fill this gap not only with respect to shipping freight (charter) rates but also with respect to the laycan

period of ship charter contracts. In addition, the paper analysis, for the first time the relationship between

freight rate and the laycan period of shipping contracts.

The purpose of this paper is threefold: (1) investigate vessel and voyage determinants (e.g., vessel age,hull type, deadweight size of the fixture and route) of individual dry bulk shipping freight (charter) rates;

(2) investigate vessel and voyage determinants of the individual delivery times of chartered ships (laycan

periods); and (3) investigate the relationship between dry bulk shipping freight (charter) rates and laycan


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2. Review of literature

Like any market, dry bulk freight (charter) markets are characterized by the interaction of supply anddemandfor this market the supply and demand for charter dry bulk ships (Stradenes 1984, Beenstock

and Vergottis 1993, and Tsolakis 2005). The demand for charter dry bulk ships is a derived demand

which depends on the economics of the commodity markets and international seaborne trade, world

economic activity such as imports and consumption of energy commodities (see Stopford 2009). The

supply of charter dry bulk ships, on the other hand, depends on the size of the shipping fleet, the fleets

tonnage that is available for trading, shipbuilding activities, bunker fuel prices, the scrapping rate of the

fleet and the productivity of the shipping fleet at any point in time. Heretofore, studies analyzing,

modeling and forecasting freight (charter) rates have done so from a macroeconomic perspective.

Studies by Hawdon (1978), Strandenes (1984), and Beenstock and Vergottis (1989, 1993), among

others, argue that the shipping freight (charter) rate is determined through the interaction between supply

and demand for sea transportation. They find that world economic activity, the growth in industrial

production, seaborne trade in commodities, oil prices, availability of tonnage or stock of fleet, new vessel

buildings on order, and shipbuilding deliveries and scrapping rates determine freight rates for sea

transportation. More recent studies by Dikos et al. (2006) and Randers and Gluke (2007) also usemacroeconomic variables in a system dynamic setting to model and forecast freight (charter) rates.

Other studies have examined the time series properties of shipping freight (charter) rates such as their

dependence on past values; further, they use univariate or multivariate time series models to capture the

dynamics of freight rates. These models are then used to forecast shipping freight (charter) rates and their

volatilities (Veenstra and Franses, 1997, Kavussanos and Alizadeh, 2002, Adland and Cullinane, 2005

and 2006, Lyridis et al., 2004, and Batchelor et al., 2007). Moreover, studies such as Kavussanos and

Alizadeh (2001) investigate the seasonal behavior of dry bulk shipping freight (charter) rates and explainhow seasonal production, trade and transportation of commodities impact ship charter rates. These studies

utilize macroeconomic economic data in an attempt to capture the dynamics and fluctuations in shipping

f i ht ( h t ) t h th i f i di ti hi i f i ht t h b d


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3. Methodology

The models dependent variable for investigating determinants of shipping freight (charter) rates is

defined as the difference between an individual shipping freight rate and the value of the Baltic Index

freight rate for that specific class of vessel on the fixture date. Since Capesize and Panamax fixtures are

considered, the Baltic Capesize Average Four Trip-Charter and the Baltic Panamax Average Four Trip-

Charter Rates are used. These freight indices are used by the industry to monitor the overall shipping

market movements, to trade and settle freight derivatives4, and to benchmark operating performance of a

vessel or a fleet. Therefore, it can be argued that the Baltic Average 4TC Rates reflect the movement of

the ship freight charter market with respect to changes in macroeconomic factors. Consequently, the

difference between the freight rate for a particular charter contract and the Baltic 4TC Rates, at any point

in time, should reflect the factors specific to the vessel or the voyage under which the vessel is contracted

to operate. In other words, the difference between a single fixture rate and the benchmark index rate

should be a function of the route over which the vessel operates,RT, the laycan period of the fixture,LC,

the size of the vessel, SZ, the age of the ship, AG, and the volatility in the market, VOL. Thus, the

determinants of freight rates for dry bulk trip charter contracts are investigated using the followinghypothesized freight (charter) rate regression model:

(1)

wherettiti bfifrdfr ,, is the difference between the log of fixture rate for contract i at time t, fri,t,, and

the log of Baltic benchmark freight rate (Baltic Average 4TC Rates) at time t, bfit=ln(B4TCt). Thevariable, age-squared, appears in equation (1) since the operational performance, technological efficiency

and quality standard of ships decline, as they get older, and consequently their hire rate is assumed to be a

nonlinear function of age. The dummy variables for individual routes, RTi j, also appear in equation (1).


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rates and laycan periods can be investigated by using the Hausman (1978) test for simultaneity. The

Hausman test is performed using the two step method of Davidson and Mackinnon (1993), i.e., by first

estimating freight equation (1) and then using the estimated residuals as observations for the explanatoryvariable )( iv in the laycan equation. The significance of the coefficient of residuals of the freight

equation in the laycan equation is an indication that there is a simultaneous relationship between the

laycan period and freight rate of shipping contracts. In addition, the test can be performed by first

estimating laycan equation (2) and then using the estimated residuals as observations for the explanatory

variable )( i in the freight equation. Again, significance of the coefficient of residuals of the laycan

equation in the freight model can be evidence of the existence of a simultaneous relationship between the

two variables.

If a simultaneous interrelationship exists between the freight rate and the laycan period of a shipping

contract, then equations (1) and (2) must be re-specified to reflect this simultaneous interrelationship

i.e., by including LCi,t as an explanatory variable in the dfri,t equation (1) and including dfri,t as an

explanatory variable in theLCi,tequation (2). Therefore, we define the following system:

(3)

where i is the vector of residuals which follows a bivariate distribution with zero mean and variance-covariance matrix, .

When specifying a system of simultaneous equations, there are two main points that should beconsidered. The first issue is the problem of identification, which arises when parameters of the structural

equation cannot be deduced using the parameters of the reduced form model. Therefore, for a system of

simultaneous equations to be identified both the order and the rank conditions should be satisfied 5 The


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4. Description of Data

The worlds dry bulkfleet of ships is broadly differentiated into five size classes: Handysize (20,000

to 35,000 dwt), Handymax (35,000 to 45,000 dwt), Supramax (45,000 to 55,000 dwt), Panamax (60,000

to 80,000 dwt) and Capesize (more than 80,000 dwt, normally 120,000 to 180,000 dwt).6 Capesize bulk

carriers are almost exclusively involved in transportation of major dry bulk commodities, i.e., iron ore and

coal, between exporting and importing regions. Panamax vessels are also involved in transportation of

iron ore and coal in addition to grain. Midsize dry bulk carriers, using Supramax and Handymax vessels,

are involved in transportation of grain, bauxite and alumina, and phosphate rock, in addition to minor

bulk commodities. Handysize and smaller bulk ships are usually equipped with cargo handling gears

(cranes) and transport small-shipment-size bulk commodities between ports with relatively shallow water

depths.

The data for this study were collected from Clarksons Research Services Ltd website, Shipping

Intelligence Network (SIN), and comprise information on Panamax and Capsize trip-charter fixtures over

the period January 2003 to July 2009. The larger-sized Panamax and Capsize ships were selected for thestudy, since the trading routes for these ships are distinct and their trading activity is concentrated in a

number of major shipping routes thereby simplifying the empirical analysis of this paper. The trading

routes for smaller bulk ships are very scattered, since the market for these vessels are quite fragmented,

e.g., their trade routes utilize almost any combination of seaports. Around 45% of spot market activities in

the Capsize sector are trip-charter with the remaining contracts being voyage charter contracts. In the

Panamax sector, more than 90% of the spot fixtures are based on trip-charter contracts. The data include

information on vessel characteristics, voyage characteristics, shipowners, and charterers. After filtering

the data for missing values, omitted information, and other unusable observations, a total of 3,039 and

9,076 fixtures observations remain for Capsize and Panamax dry bulk ships, respectively.7 Specifically,

the information on each fixture consists of the vessels name, size, age, type, dwt, and the owner of the


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routes. The non-Baltic routes for Panamax carriers are: Mediterranean to Far East, PG - Indian Ocean to

Far East, Far East to PG-Indian Ocean, Continent to PG-Indian Ocean, and PG-Indian Ocean to

Continent. See the Appendix for further description of these routes. Theroutes identified represent about86.8% of the observed trip-charter fixtures; the remaining fixtures are for numerous minor routes with

less trading activities, while the four main Baltic routes represent 67% of the trip-charter fixtures, thus

indicating how concentrated the market is.

Table 22 also presents descriptive statistics for these routes via vessel type with respect to the number

of fixtures and the laycan period. It is interesting to note that the average (or mean) and the standard

deviation of the laycan period are directly related to vessel size. For instance, the average and standard

deviation of laycan periods for Capesize fixtures are 7.5 and 6.7 days, respectively, while the average and

standard deviation of the laycan period for Panamax fixtures are 4.4 and 4.6 days, respectively. The

average laycan period for the Baltic routes (first 4 routes) also seems to be longer for Capesize vessels

compared to Panamax ships. In addition, the most liquid route seems to be the Trans Pacific Round

Voyage route for both vessel types, with 54% and 35% of the activity in the Capesize and Panamax

sectors, respectively.

The descriptive statistics for the variablesvessel age, vessel size, Laycan period, freight rate and theBaltic Average 4TC Ratesare reported in Table 32. The results reveal similar average ages and standard

deviations for both Capesize and Panamax fleets. As expected, the average Capesize vessel has a

deadweight capacity of 165,000 mt, with standard deviation of 14,900 mt, while the average deadweight

capacity of Panamax vessels is 72,300 mt, with a standard deviation of 3,900 mt. The largest Capesize

vessel fixed over the sample period has a 301,800 dwt capacity. The average Capesize trip-charter rate

over the sample was 66,964 $/day, with a standard deviation of 47,611 $/day. The maximum Capesize

trip-charter rate was 303,000 $/day, and the minimum rate was 1,000 $/day. The average trip-charter ratefor Panamax ships was 32,001 $/day, with a standard deviation of 20,877 $/day. The maximum freight

rate was 125,000 $/day, and the minimum rate was 1,000 $/day. These statistics illustrate the existence of

very high volatility in the dry bulk shipping markets that has been documented in the literature. The


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5.1 Determinants of freight rates

Separate OLS estimates of equation (1) for the two dry bulk vessels Capesize and Panamax are

presented in Table 4. Diagnostic tests of the residuals, including the Breusch and Godfry test for serial

correlation and the White test for heteroscedasticity, suggest that the residuals of all models are non-

spherical. Therefore, the Newey-West (1987) method is applied to correct the standard errors of estimated

coefficients. The results suggest that in both the Capesize and Panamax markets, the dependent variable,

which is the difference between the freight rate for individual fixtures and the Baltic Indices (market rate),

can be explained by the laycan period of the contract as well as by the size and age of the vessel. The

significant and positive coefficients of the laycan and vessel size variables suggest that there exist a

positive relationship between these two variables and the freight differential (dfri,t). Estimated coefficients

of vessel age and vessel age-squared in the model suggest that there is a negative and nonlinear

relationship between the age of the vessel and hire rate for dry bulk vessels. Moreover, coefficients

measuring the impact of market volatility on freight rate differential are not significant in both the

Capesize and Panamax markets. Moreover, in the model for Capsize freight rates, significant and positive

estimated coefficient of the route dummy variable, 2, indicate that on average freight rates in route C9_03(European Continent to Far East) is 26.85% higher than the Baltic Capeszie Average 4TC Rate, while

significant and negative coefficients of route dummy variables, 4, indicate that freight rates in route

C11_03 (Far East to the European Continent) on average are 32.3% lower than the Baltic Capeszie 4TC

Rate. This is expected because routes C9_03 is considered to be a front-haul route, while C11_03 is

considered to be back-haul route, and in general back-haul routes trade at a discount to front-haul routes.

In the Panamax market, estimated coefficients for all route dummy variables are significant, which

means that there are significant differences in freight rates amongst the routes. For instance, the results

reveal that Panamax vessels operating in routes P1A and P2A tend to earn on average 3.68% and 14.94%

higher than the Baltic Panamax Average 4TC Rate, respectively. On the other hand, vessels trading in


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5.2 Determinants of Laycan Period

Separate OLS estimates of Laycan equation (2) for Capesize and Panamax vessels are found in Table5. In both equations, estimated standard errors of parameters are corrected for the presence of

heteroscedasticity and serial correlation using the Newey and West (1987) method. Starting with the

Capesize estimate, it can be seen that there is no significant difference between the laycan periods of the

Capesize charter contracts since coefficients of all dummy variables are not significantly different from

zero. The only exception is the estimated coefficient for the transpacific route in which the laycan period

is on average 1.38 days shorter than other routes. The estimated coefficients of other explanatory

variables in equation (2) reveal that laycan period of trip-charter contracts are positively related to the

freight differential (dfri,t) and log of Capesize Baltic 4TC average, bfit. This is expected because a higher

freight rate level is an indication that there is shortage of supply. As a result, charterers tend to hire ships

earlier with longer laycan period in order to avoid future freight rate increases and the possibility of

incurring extra cost due to unavailability of tonnage.

Negative and significant coefficients of vessel size and age in the laycan equation for capsize vessels

indicate that there is negative relationship between the duration of the laycan and vessel size as well as

vessel age. In other words, larger vessels and older vessels tend to be hired later than smaller and newer

Capsize vessels, everything else being equal. This is also expected, because if the charterers have a choice

between a modern and an old ship with similar freight rates, the newer vessel will be preferred to the

older ship; at the same time, a smaller Capsize vessel is preferred to larger one, since the daily freight rate

of the former will be less than that of the latter. Of course, the size of the cargo to be loaded on the vessel

is the most important factor in determing the size of the vessel chosen for hire by the charter. Finally, the

results reveal a negative and significant relationship between the duration of the laycan period of trip-

charter contracts and the volatility of capsize freight rates. Such a relationship can be attributed to the fact

that everything else being equal, the greater the uncertainty in the market the later the charterer would like

to fix tonnage (ships) for their transportation requirements. This can be explained through the option

valuation theory in the sense that higher uncertainty will increase the value of the option to wait or delay

fi i hi l h li h l d fi d h i i f i


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The estimated coefficients of other explanatory variables in equation (2) reveal that the laycan period

of trip-charter contracts in the Panamax market are also positively related to the freight differential (dfri,t)

as well as the log of the benchmark Baltic Panamax 4TC average, bfit. As explained earlier, chartererstend to hire ships earlier when a longer laycan period exists in order to avoid future freight increases,

when they expect a shortage of supply and higher freight rates due to unavailability of vessel tonnage. In

contracts to what was observed in the Capesize model, insignificant coefficients of size and age in the

laycan equation for Panamax vessels suggest that there is no relationship between the duration of the

laycan and vessel size as well as vessel age. Moreover, in line with what was observed in the Capesize

market, the results reveal a negative and significant relationship between the duration of the laycan period

of trip-charter contracts and the volatility of Panamax freight rates. Finally, the estimated coefficients of

goodness of fit of 5.77% and 3.41% for Capesize and Panamax laycan equations, respectively, suggest

that only small proportion of the variation of laycan period can be explained by variables such as the

freight rate level, volatility, size and age of the vessel.

5.3 Simultaneous-Equation Determinants of freight rate and laycan period

The estimated coefficients of the simultaneous system of equations (3) for Capesize and Pananaxfreight (charter) rates and laycan periods using the 3SLS estimation method are reported in Table 6and

Table 7, respectively. The results are qualitatively similar to those for the single equation models of the

freight rate and the laycan period -- although estimation of the two equations as a system of simultaneous

equations allows interaction between the dependent variables and yield more efficient estimates of

parameters due to higher degrees of freedom.

Estimated coefficients of route dummy variables in the freight rate equation reveal that only 2 of the 4

route dummy variables are statistically significant at the 1% levelContinent to Far East (route C9_03)

and Far East to Continent (route C11_03). The freight rate in route C9_03 is 26.75% higher than for

Capesize 4TC capsize vessels, while the freight rate in route C11_03 is 32.13% lower than that for


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freight rate increases. The positive and significant coefficient of the Baltic 4TC Rate suggest that

charterers tend to hire vessels earlier when freight rates are high. The estimated coefficient of freight

market volatility is negative and significant. Furthermore, the coefficients of vessel size and age are bothnegative and significant in the laycan equation, suggesting that the laycan period for larger and older

Capesize vessels is shorter than for smaller and newer vessels. This is to be expected as noted by the fact

that newer and more modern vessels are fixed earlier than older vessels.

The estimation results of the Panamax freight rate and laycan period simultaneous equations also

reveal similar results to those of the single equation models. Once again, freight rates differ among

Panamax routes. Vessel age and size are significant determinants of freight rates, Larger panamax vessels

command higher freight rates than smaller Panamax vessels and freight rates decrease non-linearly in

relation to vessel age. The laycan period is also a significant determinant of the Panamax freight rate; the

freight rate is higher when the vessel is hired early as opposed to being hired later.

As for the single equation model, the results for the determinants of the Panamax laycan period for

the simultaneous equation model reveal that the laycan period varies among routes. and these differences

are consistent with those observed in single equation model of laycan period. Furthermore, the laycan

period for Panamax vessels is positively related to the freight rate, the Baltic 4TC freight rate, and age of

the vessel. Among these three determinants of the laycan period, only the coefficient sign for vessel age is

not consistent with what was found for Capesize laycan period. The positive coefficient for vessel age

suggest that older Panamax vessels have a longer laycan period than newer panamax vessels.

The negative and significant coefficient of freight market volatility once again confirms that there is

an inverse relationship between market volatility and laycan period for charter contracts. This result is

consistent with real option valuation theory in the sense that as volatility increases the value of the option

to wait increases, i.e., charterers tend to delay fixing vessels. On the other hand, as freight rates (or thevalue of the underlying asset) increase, the value of the option to wait decreases and charterers tend to

enter the market earlier to hire vessels.


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shortages will seek to enter the charter market earlier, i.e., to fix their transportation requirements well in

advance. When the volatility and uncertainty of freight rates increase, charterers are expected to delay

their hiring of vessels as long as it is feasible to wait for the market to stabilize and avoid paying apremium to fix a vessel. Finally, laycan periods for trip-charter contracts in the dry bulk market are

negatively related to the age of vessels, i.e., newer ships have longer laycans than older ones.

Appendix

In the capsize 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 capsize 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.

In the Panamax sector, the Baltic Exchange compiles and reports more or less the same four main routes,

which again cover a large proportion of activities and fixtures. These routes are numbered as: P1A_03,

transatlantic route with delivery and redelivery in Europe; P2A_03, Europe to the Far East; P3A_03,

transpacific round trip with delivery and redelivery in the Far East for trips to Australia, North Pacific, or

even South Africa or India; and P4_03, Far East to the Continent. The equally weighted average of these

four routes is reported as the average Panamax 4TC. The average Panamax 4TC rate is also believed to

convey the general earnings of Panamax vessels that are actively used for FFA trading.


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http://www.sciencedirect.com/science/journal/13665545http://www.sciencedirect.com/science/journal/13665545http://www.sciencedirect.com/science/journal/13665545


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Table 1: Components of the Baltic Average 4TC Rates (Indices) for Capsize and Panamax

Dry Bulk ShipsCapesize

Route Size (dwt) Description WeightingC8_03 172,000 Delivery Gibraltar to Hamburg range for Transatlantic round voyage 25%C9_03 172,000 Delivery Continent Europe to Mediterranean for a trip to the Far East 25%C10_03 172,000 Delivery China to Japan range for a Transpacific round voyage 25%

C11_03 172,000Delivery China to Japan range for a trip to European Continent andMediterranean

25%

Panamax

Size (dwt) Description WeightingP1A_03 74,000 Delivery Gibraltar to Hamburg range for Transatlantic round voyage 25%

P2A_03 74,000 Delivery Skaw to Gibraltar range for trip to the Far East via US Gulf 25%

P3A_03 74,000 Delivery Japan to South Korea for a Transpacific round voyage 25%

P4_03 74,000Delivery Far East for a Trip to Europe (Skaw to Cape Passero range) viaNorth Pacific or Australia

25%

Route C8_03 to C11_03 are based on a standard Baltic Capesize vessel of the following specification: 172,000mt dwt, not over 10 years of age, 190,000 cbm grain, max LOA 289m, max beam 45m, draft 17.75m, 14.5 knotsladen, 15 knots ballast on 56 mts fuel oil, no diesel at sea

Routes P1A_03, P2A_03, P3A_03 and P4_03 are based on a standard Baltic Panamax vessel of the followingspecifications: 74,000 mt dwt , not aged over 7 years with 89,000 cbm grain, max LOA 225 m, draft 13.95 m,capable of about 14 knots on 32 mts fuel oil laden, 28 mts fuel oil ballast and no diesel at sea.


17/22

Table 2: Descriptive Statistics for Routes and Laycan Periods for Dry Bulk Ships

Sample period: 1st January 2003 to 31 July 2009.

Route Number of Fixtures Laycan Period (days)Capesize No Percentage Mean Median Min Max SD

1 Trans Atlantic Round Voyage 366 12.0% 8.6 8.0 0.0 39.0 7.02 Continent to Far East 492 16.2% 9.0 8.0 0.0 35.0 7.23 Trans Pacific Round Voyage 1642 54.0% 6.7 6.0 0.0 77.0 6.34 Far East to Continent 391 12.9% 7.7 7.0 0.0 31.0 6.55 Other routes 148 4.9% 8.2 7.0 0.0 42.0 7.7

Total Fixtures 3039 7.5 6.0 0.0 77.0 6.7

Panamax

1 Trans Atlantic Round Voyage 1397 15.4% 3.7 3.0 0.0 40.0 4.42 Continent to Far East 1033 11.4% 4.1 3.0 0.0 38.0 4.53 Trans Pacific Round Voyage 3174 35.0% 4.2 3.0 0.0 61.0 4.24 Far East to Continent 503 5.5% 4.8 4.0 0.0 34.0 4.55 Mediterranean to Far East 104 1.1% 5.5 5.0 0.0 27.0 5.26 PG - Indian Ocean to Far East 865 9.5% 5.7 4.0 0.0 32.0 5.57 Far East to PG-Indian Ocean 376 4.1% 3.7 3.0 0.0 30.0 3.98 Continent to PG-Indian Ocean 218 2.4% 3.3 3.0 0.0 17.0 3.69 PG - Indian Ocean to Continent 208 2.3% 5.2 4.0 0.0 30.0 5.510 Other routes 1198 13.2% 4.8 3.0 0.0 47.0 5.3

Total Fixtures 9076 4.4 3.0 0.0 61.0 4.6


18/22

Table 3: Descriptive Statistics of Explanatory Variables

AgeSize

Dwt

Laycan

period

Freight

Rate

BalticAve 4TC

Diff FRand Baltic

years 000 mt days $/day $/day %

CapesizeMean 9.9 165.1 7.5 66,964 72,451 -0.0307

Median 9.0 170.2 6.0 55,000 63,235 -0.017Maximum 36.0 301.8 77.0 303,000 233,988 1.058Minimum 0.0 101.7 0.0 1,000 2,320 -1.957Std. Dev. 7.1 14.9 6.7 47,611 46,378 0.227Skewness 0.6 -0.1 1.4 1.5 1.3 -0.38Kurtosis 2.5 6.6 8.7 5.2 4.2 6.39JB test 215.9 1652 5175 1747 1039 4554P-value 0.000 0.000 0.000 0.000 0.000 0.000

PanamaxMean 9.6 72.3 4.4 32,001 32,506 0.0003

Median 8.0 73.6 3.0 26,500 27,642 0.000Maximum 33.0 79.9 61.0 125,000 94,977 2.394Minimum 0.0 50.3 0.0 1,000 3,537 -2.295Std. Dev. 7.0 3.9 4.6 20,877 20,189 0.373Skewness 0.85 -1.05 2.07 1.22 1.02 0.096Kurtosis 2.83 3.48 12.09 4.14 3.35 6.42JB test 1100 1745 37726 2758 1636 1488.8

Probability 0.000 0.000 0.000 0.000 0.000 0.000

Sample period: 1st January 2003 to 31 March 2009, consist of 3039 Capsize Trip-charter fixtures, and 9079 ofPanamax trip-charter fixtures.

JB is the Bera and Jarque (1980) test for normality which follows 2)2(. The 5% critical value for this test is 5.991.


19/22

19

Table 4: Determinants of Capsize and Panamax Trip-Charter Freight Rates

)iid(0,~;d 2

1

,5

2

432,10, ii

K

j

jijtiiititi vvRTVOLAGAGSZLCfr

Capesize Panamax

Coeff P-val Coeff P-val

0 Constant -0.7242 0.000 0 Constant -0.4435 0.0001 Laycan LCi,t 0.0024 0.000 1 Laycan LCi,t 0.0035 0.0002 Size SZi 0.0039 0.000 2 Size SZi 0.0060 0.0003 Age AGi 0.0084 0.001 3 Age AGi 0.0066 0.0004 AG

2i -0.0008 0.000 4 AG

2i -0.0006 0.000

5 Volatility VOLt -0.0233 0.154 5 Volatility VOLt 0.0020 0.878

Route Route

1 Trans Atlantic Round Voyage 0.0298 0.319 1 Trans Atlantic Round Voyage 0.0368 0.000

2 Continent to Far East 0.2685 0.000 2 Continent to Far East 0.1494 0.000

3 Trans Pacific Round Voyage -0.0301 0.263 3 Trans Pacific Round Voyage -0.0910 0.000

4 Far East to Continent -0.3230 0.000 4 Far East to Continent -0.1709 0.0005 Mediterranean to Far East 0.2474 0.000

6 PGIndian Ocean to Far East 0.0809 0.000

7 Far East to PG-Indian Ocean -0.0757 0.000

8 Continent to PG-Indian Ocean 0.1900 0.000

9 PGIndian Ocean to Continent -0.1504 0.0002

R 0.5807 0.346

BG test 37.054 0.000 111.44 0.000White test 208.10 0.000 801.53 0.000JB test 2.15*105 0.000 1.4*104 0.000

BG test is the Breusch and Godfrey LM test for 10 th order serial correlation in residuals, which follows Chi-squared distribution with 10 degrees of freedom. White Test is the White (1980) the F-test for heteroscedasticity. This is an LM test which follows Chi-squared distribution with 4 degrees of freedom. JB the Jarque and Bera test for normality of residuals, which follows a Chi-squared distribution with 2 degrees of freedom. Standard Errors are corrected for hetreoscedasticity and Serial Correlation using Newey and West (1987) method.


20/22

20

Table 5: Determinants of the Laycan Period of Trip-Charters Contracts

)iid(0,~; 2

1

,5432,10, ii

K

j

jijtiittiti RTVOLAGSZbfidfrLC

Capesize Panamax

Coeff P-val Coeff P-val

0 Constant 11.0116 0.000 0 Constant -0.9773 0.6591 Diff Freight Rate dfri,t 3.3320 0.000 1 Diff Freight Rate dfri,t 2.1310 0.0002 Baltic 4TC Rate bfit 0.4027 0.046 2 Baltic 4TC Rate bfit 0.4602 0.0003 Size SZi -0.0273 0.007 3 Size SZi 0.0205 0.4564 Age AGi -0.0849 0.000 4 Age AGi 0.0139 0.3645 Volatility VOLt -3.2349 0.000 5 Volatility VOLt -1.0252 0.000

Route Route

1 Trans Atlantic Round Voyage 0.1386 0.846 1 Trans Atlantic Round Voyage -1.2121 0.000

2 Continent to Far East -0.3820 0.614 2 Continent to Far East -1.1709 0.000

3 Trans Pacific Round Voyage -1.3851 0.033 3 Trans Pacific Round Voyage -0.5197 0.0054 Far East to Continent 0.1803 0.816 4 Far East to Continent 0.1840 0.480

5 Mediterranean to Far East 0.2333 0.662

6 PG - Indian Ocean to Far East 0.7599 0.003

7 Far East to PG-Indian Ocean -1.0153 0.000

8 Continent to PG-Indian Ocean -1.9339 0.000

9 PG - Indian Ocean to Continent 0.6261 0.1262

R 0.0577 0.0341

BG test 44.27 0.000 65.15 0.000White test 26.53 0.055 63.28 0.000

JB test 6283 0.000 4.17*104 0.000

BG test is the Breusch and Godfrey LM test for 10

th

order serial correlation in residuals, which follows Chi-squared distribution with 10 degrees of freedom. White Test is the White (1980) the F-test for heteroscedasticity. This is an LM test which follows Chi-squared distribution with 4 degrees of freedom. JB the Jarque and Bera (1980) test for normality of residuals, which follows a Chi-squared distribution with 2 degrees of freedom. Standard Errors are corrected for hetreoscedasticity and Serial Correlation using Newey and West (1987) method.


21/22

21

Table 6: Determinants of Freight Rates and Laycan Periods of Capeszie Ship Trip-Charter contracts: A

Simultaneous Equation Estimation

i

K

j

jijtiittiti

i

K

j

jijtiiititi

RTVOLAGSZbf if rLC

RTVOLAGAGSZLCfr

,2

1

,,25432,10,

,1

1

,,15

2

432,10,

d

d

)(0,~,2

,1

i

i

i

dfri,t Equation LCi,t Equation

Variables Coeff p-val Variables Coeff p-val

0 Constant -0.7532 0.000 0 Constant 11.921 0.0001 Laycan LCi,t 0.0047 0.000 1 Diff Freight Rate dfri,t 6.4483 0.000

2 Size SZi 0.0039 0.000 2 Baltic 4TC Rate bfit 0.4878 0.021

3 Age AGi 0.0084 0.000 3 Size SZi -0.0386 0.0004 AGi

2 -0.0008 0.000 4 Age AGi -0.0518 0.012

5 Volatility VOLt -0.0150 0.238 5 Volatility VOLt -3.1427 0.000Routes Routes

1,1 Trans Atlantic Round Voyage 0.0293 0.083 2,1 Trans Atlantic Round Voyage -0.0010 0.999

1,2 Continent to Far East 0.2675 0.000 2,2 Continent to Far East -1.2539 0.048

1,3 Trans Pacific Round Voyage -0.0266 0.074 2,3 Trans Pacific Round Voyage -1.3085 0.019

1,4 Far East to Continent -0.3213 0.000 2,4 Far East to Continent 1.1686 0.0762

R 0.5777 0.0507

BG test 58.93 0.000 62.65 0.000

White test 71.94 0.000 35.10 0.000

JB test 20.9*104 0.000 6223 0.000

BG test is the Breusch and Godfrey LM test for 10

th

order serial correlation in residuals, which follows Chi-squared distribution with 10 degrees of freedom. White Test is the White (1980) the F-test for heteroscedasticity. This is an LM test which follows Chi-squared distribution with 4 degrees of freedom. JB the Jarque and Bera test for normality of residuals, which follows a Chi-squared distribution with 2 degrees of freedom. Standard Errors are corrected for hetreoscedasticity and Serial Correlation using Newey and West (1987) method.


22/22

22

Table 7: Determinants of Freight Rates and Laycan Periods of Panamax Ship Trip-Charter Contracts: A System of

Simultaneous Equations

i

K

j

jijtiittiti

i

K

j

jijtiiititi

RTVOLAGSZbf if rLC

RTVOLAGAGSZLCfr

,2

1

,,25432,10,

,1

1

,,15

2

432,10,

d

d

)(0,~,2

,1

i

i

i

dfri,t Equation LCi,t Equation

Variables Coeff p-val Variables Coeff p-val

0 Constant -0.4487 0.000 0 Constant -0.2105 0.902

1 Laycan LCi,t 0.0067 0.000 1 Diff Freight Rate dfri,t 4.0890 0.000

2 Size SZi 0.0058 0.000 2 Baltic 4TC Rate bfit 0.4508 0.000

3 Age AGi 0.0064 0.000 3 Size SZi 0.0093 0.653

4 AGi2 -0.0006 0.000 4 Age AGi 0.0329 0.005

5 Volatility VOLt 0.0074 0.346 5 Volatility VOLt -1.0504 0.000

Routes Routes

1,1 Trans Atlantic Round Voyage 0.0404 0.000 2,1 Trans Atlantic Round Voyage -1.2722 0.000

1,2 Continent to Far East 0.1522 0.000 2,2 Continent to Far East -1.4568 0.000

1,3 Trans Pacific Round Voyage -0.0887 0.000 2,3 Trans Pacific Round Voyage -0.3438 0.028

1,4 Far East to Continent -0.1703 0.000 2,4 Far East to Continent 0.5248 0.034

1,5 Mediterranean to Far East 0.2450 0.000 2,5 Mediterranean to Far East -0.2508 0.595

1,6 PG - Indian Ocean to Far East 0.0778 0.000 2,6 PG - Indian Ocean to Far East 0.6009 0.003

1,7 Far East to PG-Indian Ocean -0.0720 0.000 2,7 Far East to PG-Indian Ocean -0.8621 0.001

1,8 Continent to PG-Indian Ocean 0.1950 0.000 2,8 Continent to PG-Indian Ocean -2.2912 0.000

1,9 PG - Indian Ocean to Continent -0.1514 0.000 2,9 PG - Indian Ocean to Continent 0.9270 0.0072

R 0.3412 0.0278

BG test 167.18 0.000 122.35 0.000White test 799.29 0.000 60.479 0.000

JB test 13495 0.000 41000 0.000

BG test is the Breusch and Godfrey LM test for 10 th order serial correlation in residuals, which follows Chi-squared distribution with 10 degrees of freedom. White Test is the White (1980) the F-test for heteroscedasticity. This is an LM test which follows Chi-squared distribution with 4 degrees of freedom. JB the Jarque and Bera (1980) test for normality of residuals, which follows a Chi-squared distribution with 2 degrees of freedom. Standard Errors are corrected for hetreoscedasticity and Serial Correlation using Newey and West (1987) method.

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Dry Bulk Contracts Paper 9-8-10