WHAT DRIVES THE STOCK RETURNS OF MARITIME COMPANIES

Transcription

1 UNIVERSITY OF PIRAEUS DEPARTMENT OF BANKING AND FINANCIAL MANAGEMENT MS IN FINANCIAL ANALYSIS FOR EXECUTIVES WHAT DRIVES THE STOCK RETURNS OF MARITIME COMPANIES Vasiliki Tsitziloni Piraeus June 2009 Supervisor Professor: George Skiadopoulos

2 Appendix Introdution...2 Chapter 1 Historial review of International Maritime the Shipping Cyles...4 Chapter 2 Shipping setors overview & the Freight Market The Dry Bulk Shipping Market The Tanker Shipping Market The General Cargo Market / Cargo liners - Containerships...14 Chapter 3 The Freight Market & the Freight Indies...16 Chapter 4 Literature review...30 Chapter 5 - Companies Profile Tanker Market Companies Dry Bulk Market Companies Containership Market Companies...46 Chapter 6 - Methodology and Data Desription...48 Chapter 7- Summary and Conlusions...72 Chapter 8 - Referenes

3 Introdution Shipping is a global industry and its prospets are losely tied to the level of eonomi ativity in the world. The maritime shipping industry is fundamental to international trade beause it is the only pratiable and ost-effetive means of transporting large volumes of basi ommodities and finished produts over long distanes. During the last 30 years the shipping industry has been through the biggest revolution, sine the first steel ships were built 130 years ago, supporting international trade and globalization. The reent world eonomi growth driven primarily by China has led to a substantial growth in global trade. This growth led to the enormous inrease of freight rates, whih in term gave boost for new investments in the global shipping market. Investments, whih reflet the inreased number of Maritime Companies that hoose to go publi and trade in the world s biggest Stok Exhanges. But what are the riteria that need to be onsidered by an investor who wants to inlude shipping ompanies stoks in his portfolio? In other words, what fators determine the stok returns of maritime ompanies? The answer to this question will be the objetive of this study. We will try to investigate the behaviour of the stok returns of listed shipping ompanies (emphasizing on the Greek partiipation) and determine the fators that affet their movement by traing statistial important variables (miro- & maroeonomi) that enable us and investors to interpret the shipping stok returns framework. An eonometri model will be used for this purpose, in order to examine if speifi variables may be used not only in the interpretation of stok returns movement but also in the predition of future pries ontraditing the weak form effiieny hypothesis of the markets. The variables seleted for testing reflet miro & maroeonomi fators that are losely related to the shipping industry, through the transations of trading (Freight Rates Indies, exhange rates, oil & ommodity pries ). A detailed analysis of these variables and their eonomi relationship with the shipping stok returns is provided in speifi hapter later in this paper. 2

4 The behavioural analysis of the stoks returns of the ompanies engaged in shipping industry is onsidered to be a great hallenge, taking into aount the highly international nature of the industry & the omplex, volatile & perfetly ompetitive environment in whih it operates. Volatility is the main harateristi not only in respet of the industry but also from the point of the stok returns, sine as we will see in detail through the relevant study, shipping ompanies profits are positive orrelated to the upwards and downfalls of freight rates. In our sample test, we seleted all Greek shipping ompanies listed in the US Stok Exhange Markets (21) and a number of the largest foreign ones (8). The reason for targeting on Greek ompanies, was to highlight the signifiant market share that Greee owns worldwide in relevant industry, sine the Greek owned fleet remains the first in the world. The sample period ran from 1 January 2002 to 31 Deember In order to ahieve our goal and give feedbak to all potential investors and operators in shipping market to redue investment risk and inrease profitability respetively, we should first get an overall understanding of the industry and its elements, sine shipping is a omplex industry and the onditions whih govern its operations in one setor do not neessarily apply to another. For this purpose an overview of shipping industry disaggregated to the three main subsetors (Dry Bulk Shipping Market, Tanker Market & Containerships Market) is provided in the seond hapter of this study, where in the first one we give a brief historial review of the most signifiant developments in the international shipping industry till latest progress. In hapter three we provide an analysis of the freight market and the freight indies, whih will be later inorporated into our multi fator model developed in hapter six. We ontinue with hapter four and the literature review over the maro and miroeonomi variables that have been examined by a number of studies for their signifiant impat on international shipping stok returns. In hapter five we give a brief desription of the ompanies operation, fleet and strategy, the stoks of whih have been inluded in our model. Chapter six inludes our methodology and data desription, where in hapter 7 we end our thesis by summarizing our results and reah a final general onlusion onerning our objetive to detet signifiant explanatory fators for the shipping stok returns. 3

5 Chapter 1 Historial review of International Maritime the Shipping Cyles Shipping history reveals the main harateristi of Shipping industry, the market yles. These yles reflet unexpeted peaks in the freight market, resulting to massive & sudden profits, whih are then replaed by deep reession deriving from the utting of rates. But what is the eonomi mehanism that generates the yles and auses shipowners to flutuate between the deisions of the aquisition or disposal of vessels? Aording to Hampton (1986, p.19), starting with a growing eonomy and a depressed shipping market, freight rates rise with an inrease in transport demand. Rising freight rates inrease the earnings of ship-owners who respond to a more favourable investment limate by bidding up the prie of seond hand ships and by ordering new ships. The orderbook builds until rates rest. At the peak there is a slowing of eonomi growth and freight rates deline. The delivery of vessels into a falling market helps to depress rates further. Low freight rates disourage ordering and enourage layup and demolition of ships. Eventually the exess supply redues until it approahes a balane with demand. Then the yle is ready to begin again. An entire regular yle of this type might take about three to four years from trough to trough. The mehanism desribed above, orresponds to the model known to the eonomists as the obweb model. Based on Vassilis C.Mavron & Timothy N.Phillips (Mathematis for Eonomis and Finane, p.270),..the obweb model is an eonomi model for analysing periodi flutuations in prie, supply and demand that osillate towards equilibrium. It is assumed that the quantities involved hange only at disrete time intervals and that there is a time lag in the response of suppliers to prie hanges. The relevant desription by all means applies to shipping setor, whih is a highly volatile market, with a signifiant timing gap between demand and supply, sine by nature, merhant ships take long time (approximately one to five years) to build depending on the type of vessel and the state of the orderbook held by the shipyards. This means that, by the time the new ship will be ready and available for sail, demand may have been dropped in suh levels (due to a number of possible fators that are desribed later in other setions) that would be onsidered more effetive and profitable not to operate the ship. 4

6 In the following paragraphs, we ome aross reorded yles in the international shipping history starting from the period marked by the opening of Suez Canal in Apart from this tehnologial development, politial events had a positive impat on the freight market, during the 1 st deade of the 19 th entury. Aording to Martin Stopford (Maritime Eonomis), the South Afrian War & the Frano-German War, reated the needs for inreased demand over shipping tonnage. The prosperous era ontinued with the overapaity of ships reahing its peek on the Then the Wall Street rash pushed world eonomy to the edge, sinking the whole shipping market to deep depression. The period after the World War II ( ), was a period of inreased demand, mainly due to the rapid growth of seaborne trade influened, by the politial events in Korea and the shortage of shipbuilding apaity as a result of the destrution of the Japanese and German yards during the war. In 1956 the problems in the Middle East led to the losure of the Suez Canal ontributed to the outweigh inrease in tanker and dry argo freight rates, sine the ships had to go a muh longer journey around the Cape. The reopening of the anal in April 1957 along with the overall eonomi depression in 1958, deteriorated the freight rates levels, a situation that ontinued for almost 10 years, onfirming the fat that the World eonomi ativity is by far the most important single influene on the demand for sea transport. One again in 1967, the market took advantage of the losure of Suez Canal, there was plenty of demand for ships and the fleet grew rapidly. During this period, ship owners engaged in long term time harter ontrats (over 15 years) with harterers from oil and steel setor. Banks finaned the fleet expansion taking as seurity the long term Charter Party agreements. After two deades of ontinuous growth there was a fall in the mid 1970s. This downturn was triggered by the oil risis of Otober 1973, whih affeted the growth of tanker demand. Aording to Clarkson researh, the fleet grew to 350 million dwt in 1977, but demand ould not follow, and reahed 250 million dwt, resulting to a signifiant imbalane and a supply/demand gap. Pries ollapsed and the risis in tanker market was followed by the risis in the dry bulk setor, sine the owners of 5

7 tanker ships found more profitable to onvert them to bulk arriers. This led also to oversupply in dry market and deline of rates. The reession bottomed out in Figure 1. The Clarksea Index (tankers, bulkers, ontainer,gas) (Clarkson Researh, COSCO Summit Tienjin 1 st November 2007).The Clarksea Index. shows the average earnings for tankers, bulk arriers, ontainerships and gas.the figure shows that during 90s an average of $11,000 per day dominated the market. Later in , reovering from the Asian risis, rate peaked to $25,000 in average, where during the dot.om risis the index surged ahead to a new peak of $42,700 in November During 1990s China started to grow rapidly. The merhant fleet expansion grew slower than demand, ompared to the previous deade of oversupply, lower freight rates and overall depression. The gap between demand and supply was extinguished, with demand being the leader thereafter due to the developments in China eonomy. However, this sign of prosperity was snowed under by the following risis, finanial risis of 1991, the 1997 Asia finanial risis and the 2001 dot om risis. The finanial risis of 1997 aused a deep fall in industrial ativity, espeially in Asia. The next business yle ame in 2001, whih was aused by the finanial risis aompanied by the internet stok bubble. The figure above shows the average earnings for the four shipping segments (tankers, bulkers, ontainers and gas), whih reflet the impat of the abovementioned risis. For a period of six years ( ), shipping industry was enjoying exessive returns, as a result of the extraordinary strong average global eonomi growth of 5 perent, whih has resulted in a tonnage demand growth of 8 perent on average for the total world merhant shipping (Platou annual report 2009). Freight rates, newbuilding and seonhand pries reahed reord high-levels. As shown in the figure 6

8 below, seaborne trade was estimated at 8,02 billion of tons goods loaded, implying a 33 perent volume inrease from Figure 2. International seaborne trade from 1970 to 2007 ( Soure: UNCTAD Review of Maritime Transport). The figure shows the volume inrease in seaborne trade per millions of tons loaded for a period from 1970 to The tons loaded are distinguished between the main ategories of produts shipped; rude oil and produts, five major bulks ( iron ore, grain, bauxite/alumina and phosphate) and other dry argo. During the relevant period ( ), orderbook (orders for newbiuldings) has exeptionally inreased, reahing high reords in 2007, as derives from the relevant figure 3 below. Figure 3. World Tonnage on order measured in thousand of dwt, (for ships f 100GT and above) ( Soure: Compiled by the UNCTAD seretariat on the basis of data supplied by Lloyd s Register - Fairplay 7

9 In 2008 world eonomi ativity took a dramati turn, whih influened severely all industries, inluding the shipping setor. The finanial disorder that emerged in USA in summer 2007 and led in 2008 and 2009 to the most serious finanial risis sine the Great Depression of 1929, had dramatially affeted the shipping market during the seond half of The impat of liquidity risis has been refleted on the massive drop in demand for new tonnage partiularly for dry bulk and ontainerships. Demand ould no longer absorb the extreme strong expansion of orderbook of previous period and deliveries of new buildings left aside. The imbalane between supply and demand due to the fleet overapaity, whih exeeds the requirements, pushed freight rates down and lowered owners desire for new orders. This, along with the fat that the finanial risis has put restritions over finaning newbuilding projets, reates a reverse trend in order to orret overapaity. But supply will take time to adjust, and espeially now taking into aount the sequene of problems in the banking world. The overall onsideration is that we are in the middle of the next shipping risis and looks partiularly severe sine it has been aompanied by another risis in finanial world. The timing of reovery is extremely unertain, sine nobody knows how long it will take supply to adjust. 8

10 Chapter 2 Shipping setors overview & the Freight Market Shipping market is ategorised into the following three setors, based on the type of servies rendered by the harterers sine it is the type of ommodity that determines whih type of ship the harterer (argo owner or shipper) requires for the transportation of his/her argo. Any hange in the trade pattern for that ommodity is refleted in the demand and freight rates for different types of vessels with different size and partiulars and different sea routes. The three subsetors are: - The Dry Bulk Market - The Tanker Market - The General Cargo Market / Containerships 2.1 The Dry Bulk Shipping Market Dry bulk shipping was developed as a result of the need for the movement of large quantities of the major and minor bulk ommodities, suh as oal, iron ore, wheat and other loose argo. These are transferred through large argo vessels, the bulk arriers. The major and minor ommodities transferred through bulk arriers are the following: Coal: There are two prinipal types of oal: steam (or thermal) oal and oking (or metallurgial) oal. The main exporters of oal are Australia, South Afria, Indonesia, United States, Colombia, Canada, and China. The main importers of oal are Europe, Japan, South Korea, Taiwan, China, India, and the Middle East. The oking oal market is losely linked to demand from integrated steel makers who use oking oal in blast furnaes to make pig iron whih, in turn, is onverted into steel. Steam oal is mainly used in the prodution of eletriity, and the transportation of steam oal is the bakbone of the Capesize and Panamax markets. Inreases in steam oal demand have been signifiant, as both developed and developing nations require inreasing amounts of eletri power. 9

11 Iron Ore. Until the start of the 1990s, when it was overtaken by the ombined steam and oking oal setors, iron ore was the largest drybulk trade. It remains, however, the primary employer of the largest ships in the drybulk fleet. Used prinipally as the primary raw material in steel making, iron ore imports are dominated by Europe, Japan, China, South Korea, and the United States. The primary exporters of iron ore are Brazil, Australia and India. Other signifiant exporters inlude Canada, Sweden, South Afria, Venezuela, Mauritania, Peru and Chile. Grain. The prinipal exporters of grain are Canada, United States, Europe, Australia, and South Ameria. The prinipal importers are Japan, South Korea, China, South East Asia, the Middle East, North Afria, and Europe. Grain prodution is subjet to both growing onditions and natural disasters whih affet rop yields and demand patterns. Minor Bulk Cargoes: Minor bulk argoes inlude steel produts, forest produts, agriultural produts, bauxite and alumina, phosphates, petoke, ement, sugar, salt, minerals, srap metal, and pig iron. Minor drybulk argoes are not a major omponent of Capesize or Panamax arrier demand, although Panamax vessels also transport argoes suh as bauxite, phosphate rok, sulphur, fertilizers, various other ores and minerals and agribulks. Dry bulk shipping is divided into four different setors aording to the argo arrying apaity of the vessels. These are : - handysize ( 30,000 dwt) - handymax ( 45,000 dwt) - panamax (65,000 dwt) and apezize (120,000 dwt and over) Handysize. Vessels in this setor are the smallest [under 30,000 dwt] and arry finished produts and minor bulk argoes, although, inreasingly, vessels in this setor are now more limited to trading regionally and in oastal waters. Handymax and Ultra-Handymax. Vessels in this ategory range in size from [30,000 to 45,000] dwt and are often equipped with argo loading and unloading gear, suh as ranes, whih makes them well suited to all at ports that either are not equipped with 10

12 gear for loading or disharging of argo or have draft restritions. These vessels an trade on worldwide routes arrying a variety of major and minor bulk argoes. Panamax. These vessels range in size from [45,000 to 65,000] dwt and are designed with the maximum width that will allow them to travel fully-loaded through the Panama Canal. They are also often engaged in many major international trade routes that do not involve transit through the Panama Canal. Panamax bulk arriers are mainly used to transport major bulk argoes, suh as oal and grain and, to a lesser degree, iron ore, as well as a number of minor bulk argoes, suh as bauxite, petroleum oke, some fertilizers and fertilizer raw materials, and various minerals. Capesize. These vessels, whih are [120,000 dwt and over], are the largest size of drybulk arriers. Capesize vessels typially arry relatively low value argoes for whih large argo lot sizes are of primary importane. Consequently, Capesize vessels are mainly used to transport iron ore or oal and, to a lesser extent, grains, primarily on long-haul routes. These vessels are not apable of traversing the Panama Canal due to their size and, therefore, lak the flexibility of smaller vessels. The above ategories in whih the dry bulk setor is distinguished are summarized in the following (Table 1) along with the assoiated argo types and routes that the relevant vessels trade in. Class of Commodities (perentage of total shipments) Bulk Carriers Iron Ore Coal Grain Bauxite & Alumina Phoshate Rok Capesize 70% 45% 7% - - Panamax 22% 40% 43% 45% 20% Handumax and Handysize 8% 15% 50% 55% 80% Major Routes Iron Ore Coal Grain Bauxite & Alumina Phoshate Rok Capesize ( 120,000 dwt and over) Panamax ( 65,000 dwt ) Handumax and Handysize ( 45,000 dwt) & (30,000 dwt) Brazil to West Europe & Japan W. Australia to West Europe & Japan Brazil to West Europe & Japan Australia to West Europe & Japan India to Japan & Korea Canada to USA & Japan Liberia & Mauritania to West Europe Australia to Far East, Japan & West Europe South Afria to West Europe and Far East N.Ameria to Japan & W.Europe Australia to Far East, Japan & West Europe S. Afria to Far East & Europe Argentina and River Plate to Near East, & East Europe N.Ameria to Far East, W. Europe & Near East Australia to Far Japan & Middle East N.Ameria to Afria & West Europe Caribbean to North Ameria & W. Europe West Afria to W. Europe & Japan Australia to Japan & West Europe Table 1. Different size vessels with their respetive argo and routes (Costas TH.Grammenos, The Handbook of Maritime Eonomis and Business) Moroo to W.Europe Russia to W. Europe The US to Japan & West Europe 11

13 2.2 The Tanker Shipping Market Tankers are vessels designed to arry liquid argo in bulk. Liquid argo inludes mainly rude oil and refined oil produts. However tank ships are also engaged in the transfer of other produts suh as hemials, wine and other food oils. Sine rude oil is the largest seaborne ommodity, the tanker market is by far the largest part of shipping industry, onstituting approximately 40% of the world s merhant fleet. The behaviour of tanker market an be understood only through the review and monitoring of eonomi development in the oil industry. The tanker demand is influened and stritly determined by the world oil prodution and demand. Oil transportation needs are born due to the fat that oil is produed in regions of little demand (Saudi Arabia, Iran, Kuwait, e.t.). As a result rude oil and other refined produts must be transported to the onsumption entres (United States, Japan,EU, e.t.). Tankers are the vessels used for mathing the supply and demand for oil. Tanker demand is expressed in ton-miles and is measured as the produt of (a) the amount of argo transported in tankers, multiplied by (b) the distane over whih this argo is transported. Tonnage of oil shipped is primarily a funtion of global oil onsumption, whih is driven by eonomi ativity as well as the long-term impat of oil pries on the loation and related volume of oil prodution. Tonnage of oil shipped is also influened by transportation alternatives suh as pipelines. The distane over whih oil is transported is the more variable element of the ton-mile demand equation. It is determined by seaborne trading and distribution patterns, whih are prinipally influened by the loations of prodution and the optimal eonomi distribution of the prodution to destinations for onsumption. Seaborne trading patterns are also periodially influened by geo-politial events that divert tankers from normal trading patterns, as well as by inter-regional oil trading ativity reated by oil supply and demand imbalanes. 12

14 Tanker Supply The supply of produt tankers is a funtion of new produt tanker deliveries, srapping and onversion and loss of tonnage. The level of newbuilding orders is primarily a funtion of newbuilding pries in relation to urrent and antiipated harter market onditions. Typially, delivery of a produt tanker ours within 18 to 36 months after ordering. There are two basi types of oil Tankers aording to the servie they provide: - The rude tankers, whih serve the transportation of rude oil from its point of extration to the refineries. - The produt tankers, whih are designed to arry refined produts (petrohemials) from refineries to onsumption entres. - The liquefied gas arriers, whih are tankers designed to ship Liquified Natural Gas (LNG) and Liquefied Petroleum Gas (LPG). LNG is mainly produed from dediated gas fields, whereas LPG is the gas produed as a byprodut of oil wells. Furthermore, tankers are lassified aording to their apaity in the following ategories: Class Size in dwt General Purpose tanker 10,000-24,999 Medium Range tanker 25,000-44,999 LR1 (Large Range 1) 45,000-79,999 LR2 (Large Range 2) 80, ,999 VLCC (Very Large Crude Carrier) 160, ,999 LCC (Ultra Large Crude Carrier) 320, ,999 13

15 Petroleum Tankers Types Class Length Beam Draft Typial Min DWT Typial Max DWT 7.92 m 10,000 DWT 60,000 DWT Seawaymax 226 m 24 m Panamax m m 12 m 60,000 DWT 80,000 DWT Aframax 80,000 DWT 120,000 DWT Suezmax 16 m 120,000 DWT 200,000 DWT VLCC (Malaamax) 470 m 60 m 20 m 200,000 DWT 315,000 DWT ULCC 320,000 DWT 550,000 DWT 2.3 The General Cargo Market / Cargo liners - Containerships Container shipping, the main subsetor of Cargo liners market, is responsible for the seaborne movement of a wide range of goods from one part of the world to another in a unitized form, representing an important and inreasingly signifiant part of the global seaborne movement of goods. The supply of argo liners aims to satisfy the demand needs reated by the general argo trade. As general argoes are defined the argoes that omprise of a number of goods, eah of whih is not traded in quantities adequate to utilise, as a single argo, the whole transport apaity of a regular size ship. The majority of goods onveyed through ontainerships relate mainly to manufatured produts from heavy and smaller industry on behalf of a multipliity of individual shippers, ompared to the bulk argoes that relate mainly to raw materials usually from one speifi shipper running a regular sheduled servie. A limited number of players partiipate in the relevant market, mainly due to the inreased apital requirements. These have also developed logistis terminals in various ports in order to serve loading and unloading needs. In the following (Table 2), we have summarized the 10 top ontainer shipping ompanies based on the TEU apaity of 2006 ( where TEU is defined as the Twentyfoot Equivalent Unit, used to desribe the apaity of ontainerships and ontainer terminals). 14

16 Top 10 ontainer shipping ompanies in order of TEU apaity, 1st January 2006 Company TEU Market Number apaity Share of ships A.P Moller Maersk Group 1,900, % 600+ Mediterranean Shipping Company S.A 865, % 376 CMA CGM 507, % 256 Evergreen Maritime Corporation 477, % 153 Hapag - Lloyd 412, % 140 China Shipping Container Lines 346, % 111 Amerian President Lines 331, % 99 Hanjin - Senator 328, % 145 COSCO 322, % 118 NYK Line 302, % 105 Table 2 :(Soure : "Liner market shares BRS report for Alphaliner. January 2006) With regard to the General Cargo market fleet, the following types of vessels exist: - Containerships, for ontainers transportation - Multi Purpose Vessel / Carrier, a newer version of general argo ship with holds designed for ontainer stowage. The holds generally have tween deks and ontainers an be staked and lashed on to the hath overs. The MPP is still apable of arrying breakbulk argoes, and bulk argoes. Some are also equipped with tanks for liquid argoes. It generally also has its own ranes and derriks, sometimes with heavy lift apability. - General Cargo Liners, this older type of argo ship generally arry argo that is too large to be arried in a ontainer - Ro-Ros, are used to arry motor vehiles - Barge Carriers (or Lash ships), for arrying floating argo - Reefers, are designated to arry frozen argo Based on their TEU apaity general argo vessels are ategorised as follows Type of Vessel TEU Speed Capaity (knots) Feeder Feedermax Handy Sub-Panamax Panamax Post-Panamax >

17 Chapter 3 The Freight Market & the Freight Indies Freight is defined as the prie paid to a shipowner for the transportation of a argo from one speifi port to another, or in other words, the quantity of money a shipper or onsumer will exhange for a unit of shipping servies. Additionally, the freight market an be determined as the plae where the buyers and sellers of shipping servies ome together to strike a deal. (Grammenos, 2002) In his book, ( The handbook of Maritime Eonomis and Business ), Costas Th. Grammenos identifies the following four setors : - The Voyage Charter Market, where a shipowner is paid freight on the basis of moving argo from a loading port to a disharge port. Normally per ton of argo. The shipowner is responsible for paying both operating osts and voyage osts. - The Contrat of Affreightment Market (C.O.A), where the movement of argo on a regular basis is ontrated. - The Time Charter Market, where the shipowner hires out a ship for a speified period of time. The shipowner is responsible for providing the rew and paying ship operating expenses while the harterer is responsible for paying the operating expenses and additional operating insurane. - The Bareboat Charter Market, where the shipowner is usually paid a fixed amount of harter hire for a ertain period of time during whih the harterer is responsible for the operating and voyage osts of the ship, as well as for the management of the ship, inluding rewing. A bareboat harter is also known as a 'demise harter' or a 'time harter by demise.' The freight market is a highly ompetitive market and the rates (freight rates) at whih a vessel an be hartered an hange radially in a period of few months or even days. As in other ompetitive markets, rates (pries), are determined through the interation of supply and demand. Equilibrium in shipping world is rather seldom. The main problem, as the majority of eonomists engaged in shipping eonomis and shipping analysts explain, is the timing gap between the order of new ships and their delivery from the shipbuilding yards to the owners. In general, there are two main fators that determine the freight rates: a) inreased number of vessels for limited argo volume 16

18 b) shortage of sea transport apaity To be more speifi, when under apaity of ships is reorded in the market, the freight rates are inreased and as a result even ships whih are lose to the end of their useful life beome apable to earn higher rates than they really worth. Aordingly in periods of oversupply, there are too many ships for limited argo apaity. As a result laid up tonnage rises (ships not in ative servie) and freight rates ollapse. Unpreditability is a ommon problem of the mehanism of supply and demand in shipping industry. The problem is refleted on the inreased number of order books when the market is at its top, whih is then followed by dereased freight rates with the delivery of the vessels. The result is that ship owners had to deal with negative NPV, derived from the mismath between the huge initial osts of aquisition (advanes paid for vessels under onstrution in yards, whih in most of the times aompanied with enormous finaning obligations) and the disappointing future inflows, sine the vessels will be hartered under lower Charter rates. Sine we have gained an understanding over the mehanism of Freight rates and the market in whih they are determined, we an proeed with a brief presentation of the Freight Indies. The freight indies, whih are distinguished into further indies based on the different shipping setors, are finanial tools that have been developed for monitoring eah freight market. They measure the freight rates of different vessels sizes aross different international routes. Freight indies are ategorised in a way similar to the ategorisation of shipping markets, depending on the size of the vessel, the type of the argo arried, the route and the delivery period. The Freight indies are published by Balti Exhange, a global maritime organisation whih provides daily shipping market information. Their values are reported one every day and they are determined by the individual daily quotes of the panellists, the member ompanies of the Exhange. Balti Dry Index (BDI) The Balti Dry Index (BDI) whih ontinues the established time series of the Balti Freight Index (BFI) was introdued on November 1, BDI is published daily from the Balti Exhange in London whih is omprised from ompanies related to 17

19 bulk-shipping industry, shipbrokers, shipowners et. Balti Dry Index is a omposite of three indies whih measure different sizes of bulk arriers. The Balti Handymax Index (BHMI) (replaed by the Supramax Index in 2006) The Balti Handymax Index (BHMI), was published on Otober 2, 2000, to reflet the hanges in the dry bulk arriers market. It replaed the Balti Handy Index (BHI), introdued on January 7, The BHMI is based on bulk arriers of 45,500 tones dwt, and omprises of six typial Time Charter routes weighted to take aount of their importane. In January 2006 the Balti Supramax Index (BSI) superseded the BHMI as part of the general evolution of ship types. The BSI omprises of six typial Time Charter routes, weighted to take aount of their importane. Balti Handymax Index Routes Route Route Desription Weighting HS1 Skaw - Passero trip Realada - Rio de Janeiro 12.5% HS2 Skaw - Passero trip Boston - Galveston 12.5% HS3 Realada - Rio de Janeiro trip Skaw - Passero. 12.5% HS4 US Gulf trip via US Gulf or NCSA to Skaw - Passero 12.5% HS5 SE Asia trip via Australia to Singapore - Japan 25% HS6 S Korea - Japan via NOPAC to Singapore-Japan 25% (soure: Clarksons website) Balti Supramax Index Routes Route Route Desription Weighting S1A Antwerp - Skaw Trip Far East 12.5% S1B Canakkale Trip Far East 12.5% S2 Japan - SK / NOPAC or Australia rv 25% S3 Japan - SK Trip Gib - Skaw range 25% S4A US Gulf - Skaw-Passero 12.5% S4B Skaw-Passero - US Gulf 12.5% (soure: Clarksons website) 18

20 Balti Panamax Index (BPI) The Balti Panamax Index (BPI) was published on Deember 21, 1998 and is an indiator for grains and minerals demand for Panamax type bulk arrier vessels (50,000 80,000 tones dwt). The BPI omprises four typial Time Charter routes, weighted to take aount of their importane. Balti Panamax Index Routes Route Route Desription Size mt Weighting P1A_ mt Transatlanti RV 74,000 25% P2A_ mt SKAW-GIB/FAR EAST 74,000 25% P3A_ mt Japan-SK/Paifi/RV 74,000 25% P4_ mt FAR EAST/NOPAC/SK-PASS 74,000 25% (soure: Clarksons website) Balti Capesize Index (BCI) The Balti Capesize Index (BCI), was published from Balti Exhange on April 26, This index roads the ost on the largest of the dry bulk ships, the Capesize vessels. These vessels are those in exess of 80,000 dwt and primarily arry oal and iron ore. The BCI omprises ten typial Time Charter routes, weighted to take aount of their importane. Balti Capesize Index Routes Route Route Desription Size mt Weighting C lt Tubarao - Rotterdam 160,000 10% C mt Tubarao - Beilun/Baoshan 150,000 15% C mt Rihards Bay - Rotterdam 150,000 5% C mt W Australia - Beilun/Baoshan 150,000 15% C mt Bolivar - Rotterdam 150,000 5% C8_ mt Gibraltar/Hamburg trans Atlanti RV 172,000 10% C9_ mt Continent/Mediterranean trip Far East 172,000 5% C10_ mt Paifi RV 172,000 20% C11_ mt China/Japan trip Mediterranean/Cont 172,000 5% C mt Gladstone - Rotterdam 150,000 10% (soure: Clarksons website) For the alulation of BDI initially was used the average rate of BHI, BPI and BCI. Sine January 1, 2007 the omputation of the BDI derives from the weighted average rate of the four (4) time harter routes of BHMI, the weighted average rate of the four 19

21 (4) time harter routes of BPI and from the weighted average rate of the four (4) time harter routes of BCI. As we have mentioned before, the above indies are based on professional assessments made by a panel of international ship broking ompanies. This panel is omprised by the following ompanies (Panelists): Aropolis Chartering & Shipping In, Arrow Chartering (UK) Ltd, Banhero-Costa & C s.p.a., Barry Rogliano Salles (London), Braemar Seasope Ltd, Clarksons, Fearnleys A/S, Galbraith s Ltd, G F I Brokers Ltd, E A Gibson Shipbrokers Ltd, Howard Houlder (Dry Cargo) Ltd, Howe Robinson & Co Ltd, ICAP Hyde, Ifhor SA, John F Dillon & Co, Lawrene (Chartering) Ltd, LSS SA, Maersk Broker (UK) Ltd, Neo Chartering, Optima Chartering, Thurlestone Shipping Ltd, Simpson Spene & Young Ltd, Yamamizu Shipping Co Ltd, Clarksons Melbourne,Dori Shipbrokers S.A., HSBC Shipping Servies, Rigel Shipping, Ildo Chartering Corporation, Lightship Chartering A/S, Vogemann Balti Dirty Tanker Index (BDTI) and Balti Clean Tanker Index (BCTI) Until today the tankers market is desribed by two indies. The Balti Dirty Tanker Index (BDTI) whih desribes the routes of tankers regarding the rude oil and the Balti Clean Tanker Index (BCTI) whih desribes the routes of tankers regarding the petrohemials argoes. Both indies are published from the Balti Exhange organization. The alulation of both indies is made by multiplying the average prie of eah route with a relevant route fator. The two indies differ in the number of routes, ten for the BDTI and six for the BDCI. The main fators that affet routes seletion from the Balti Exhange are the global overage, the representation of eah market, the transpareny and the ommerial balane. The average prie of eah route is alulated from the Balti Exhange in ollaboration with the Panelists. The Panelists are big shipping agents, whih make estimation for the prie ($/ton) of eah route. The Balti Exhange ombines these estimations and alulates the average prie for eah route. The importane of eah route depends mainly on the empirial knowledge of the personnel in the Balti Exhange rather than on mathematial omputations. 20

22 The Panelists that modulate this index are: A C M Shipping Ltd, Barry Rogliano Salles, Bassoe (PF) A/S & Co, Braemar Seasope Ltd, Capital Shipbrokers Ltd, Clarksons, Eastport Chartering Pte Ltd, Fearnleys A/S, Galbraith's Ltd, E A Gibson Shipbrokers Ltd, Island Shipbrokers, Mallory Jones Lynh Flynn & Asso. In, MQuilling Brokerage Partners In, Odin Marine, Simpson Spene & Young Ltd Balti Dirty Tanker Index (BDTI) The index derives from the equal ontribution of eah of the below routes. In other words, eah route puts in the index a perentage of 6.25%. Balti Dirty Tanker Index Routes Route Route desription Size mt Following indiative routes form the basis TD mt ME Gulf to US Gulf Ras Tanura to LOOP TD mt ME Gulf to Singapore Ras Tanura to Singapore TD mt ME Gulf to Japan Ras Tanura to Chiba TD mt W Afria to US Gulf O.S Bonny to Loop TD mt W Afria to USAC O.S Bonny to Philadelphia TD mt Blak Sea / Med Novorossiyk to Augusta TD mt North Sea to Cont Sullom Voe to Wilhelmshaven TD mt Kuwait - Singapore(Crude/DPP Heat 135F) Mena al Ahmadi to Singapore TD mt Caribs to US Gulf Puerto la Cruz to Corpus Christi 50000mt Caribs to USCA - Double TD10D hull vessel Aruba to New York TD mt Cross Med Banias to Lavera TD mt ARA to US Gulf Antwerp to Houston TD14 Trial mt SE Asia to EC Australia Seria to Sydney TD15 Trial mt West Afria to China Zaffiro and Bonny to Ninqbo TD16 Trial mt Blak Sea to Mediterranean Odessa to Augusta (soure: Clarksons website) 21

23 Balti Clean Tanker Index (BCTI) The index derives from the equal ontribution of eah of the below routes (16.67%). Balti Clean Tanker Index Routes Route Route Desription Size mt Following Indiative Routes form the Basis TC mt Middle East Gulf - Japan Ras Tanura to Yokohama TC2_ mt Continent to USAC Rotterdam to New York TC3_ mt Caribbean - USAC Aruba to New York TC mt Singapore to Japan Singapore to Chiba TC mt Middle East to Japan Ras Tanura to Yokohama TC mt Algeria/Euromed Algeria/Euromed (soure: Clarksons website) We have already mentioned the ylial patterns that define the maritime eonomy, and the omplex mehanism through whih freight rates are determined through the interation of supply and demand. During the review over the reorded shipping yles, Martin Stopford has identified ten key influenes on the shipping market, five of them determine the shipping demand and the remaining five the supply. But before starting to analyse these fators, it would be appropriate to refer to the obweb theorem that has been already mentioned earlier in the introdution setion. Based on James MConville, the obweb model desribes a situation in whih the amount urrently supplied is dependent on the level of prie, freight rate, set in some previous period. As Hiks highlights, ( Hiks,J.R Value and Capital -2 nd edition-, London Oxford University Press p 117), The urrent supply of a ommodity depends on not so muh upon what the urrent prie is as upon what entrepreneurs have expeted it to be in the past. It will be those past expetations that, whether right or wrong, whih mainly govern urrent output; the atual urrent prie has a relatively small influene. 22

24 The obweb model applies in the shipping freight market, as follows: The equilibrium in shipping market is not established simultaneously after a hange in demand, due to the fat that supply takes time to adjust. The reason behind this delay, is nothing else but the time needed for a vessel to be delivered from the yard. As a result when responding to a hange in demand, shipowners will inrease, or derease the tonnage offered (new buildings) upon the expetation of freight hanges as based on previous experiene. - Fators affeting the Shippping supply and demand model (Stopford 1988) As mentioned in previous setions, shipping is a highly volatile market, where pries (i.e freight rates), an be determined only by the interation between supply and demand. A hange in demand and supply of ships leads to a shortage or surplus of tonnage ausing signifiant imbalanes. When D>S, freight rates inrease and investments are boosted (inreased ordering). Equally, when S>D (supply outweighs the demand), ompetition drives freight rates down, pushing shipowners to srap unprofitable ships. With regard to the demand the following determinants have been identified : 1) The World Eonomy 2) Seaborne ommodity trades 3) Average haul 4) Transport osts 5) Politial events And with regard to the supply : 1) The World fleet 2) Shipbuilding output 3) Srapping and losses 4) Fleet performane 5) Operating environment 23

25 Based on the relevant fators, whih have been also adopted by Grammenos and other shipping engaged eonomists, we will establish our expetations regarding the fators that an be used in determining the stok returns of maritime ompanies in our eonometri model later in the relevant setion. Demand 1) The World Eonomy The lose relationship between world eonomy and sea trade derives from the demand for sea transport that is generated from the need for the import of raw materials used in manufaturing industry or in the trade of manufatured produts. The empirial analysis shows that eonomi business yles are major determinants of shipping industry performane. As Dr Martin Stopford indiates, positive orrelation exists between eonomi business yles and shipping industry trends. As already desribed briefly in the introdution setion, business yles have defined the movement in shipping setor, and this is obvious through the review of the reorded eonomi yles of 1991, 1997 and However, with regard to industrial business yles, two yles are identified with China playing the leading role. The first was the finanial risis in Asia during 1997 and 1999, whih aused a deep fall in industrial ativity as shown also in the Figure below. The next yle took plae in 2001 aused, as desribed above, by the finanial risis and the dot.om risis. China grew through this one, but the rest of the world slowed dramatially. This lead to an inrease in the ships overapaity, whih was steadily being absorbed by China s industrial growth. In 2003/04 the movement hanged and the eonomy grew fast. 24

26 Figure 4 (Industrial yles showing China, Paifi & Atlanti, Clarkson Researh,2005) The above trends are pretty lear in ase of tanker market, three tankers spikes reorded in the 90s oinided with peaks in the rate of industrial growth in the major eonomi regions. Figure 5:( Tanker Market Prospets and beyond, Martin Stopford/ Intertanko Maritime London Conferene 17 September 2003) The figure shows the year on year growth rate of industrial prodution in Atlanti and Paifi eonomies. In 1997 both eonomies peaked in the first quarter but Asian risis reated huge onerns for the future resulting to the most depressed year in shipping in Unexpeted boom reorded in 2000 (unexpeted beause it was expeted that Asia would need 2-3 years to reover).in 2003, the underlying driver of tanker freights was one again the industrial eonomy refleting mainly the developments in Asia, with China being the leader of all. 25

27 Another point whih reflets the influene of world eonomy, is that in periods of depletion, where domesti raw materials are in shortage, ountries turn to foreign produts by inreasing the demand for sea trade transations. However, in the last three deades, it is the surging eonomy that has primed the shipping market. A key part of this eonomi drive has ome from China, whih has boosted demand for ontainership and dry-bulk shipping in order to satisfy its industrial prodution needs. This positive orrelation between global eonomi growth and world seaborne trade is outlined in figure 4 that follows, where seaborne dry and oil trade seems to hase the world output. Figure 6: World seaborne trade and eonomi growth (Soure: Platou Annual Review 2009, p.6) A signifiant driver for this orrelation, is the fat that world s manufaturing has been outsoured to China, while most of the onsumption takes plae in the West. As a result an effetive seaborne transport system was neessary in order to math prodution with onsumption and vie versa. 2) Seaborne Commodity Trades Apart from world eonomy and world industrial growth whih is onsidered to be the prime driving fore, shipping demand is also determined by the ommodity trades. The major seaborne ommodity trades inlude ; oil and oil produts, five dry bulks 26

28 (iron ore, oal, grain, bauxite/alumina and phosphate ) and other dry argoes. The Table 3 below, outlines the developments in seaborne ommodity trades sine 1970s. Commodity trades volumes are influened by : a) seasonality patterns, refleted in the demand for various ommodities suh as rude oil and agriultural produts b) stok building, refleting the antiipation of ompanies for dereased future pries Table 3: The World seaborne trade in ton-miles from (Soure: Fearnleys Review, various issues) The table above displays the world-seaborne trade measured in billions of ton-miles. a : Inludes wheat, maize, barley, oats, rye, sorghum and soya beans b : Inludes iron ore, oal, grain, bauxite/alumina and phosphate The last olumn of world s total trades reveals a steady growth in volume of total trades over the three deades 3) Average haul Average haul is determined as the tonnage of argo shipped multiplied by the average distane. As a result it is lear that the larger the required distane over whih the argo is shipped, the greater the shipping demand. 4) Transport osts Over the last deades major developments in shipbuilding tehnology has enabled the onstrution and operation of more effiient and ost-utting vessels. 27

29 This has ontributed to the inreased demand for shipments and in overall growth of shipping setor. 5) Politial events Geopolitial environment is a ruial element of the fators that affet demand in a sudden and unexpeted manner. Suh events inlude mainly loal wars and other politial and eonomi inidents whih have a major impat in shipping not diretly but through their indiret onsequenes. Some examples of relevant inidents revealed through history review performed by Martin Stopford in Maritime Eonomis are the following: The Korean war The Suez risis The Six Day War between Israel and Egypt The 1979 Iran Revolution Supply 1) The World fleet. The first determinant of supply funtion is onsidered to be the world merhant fleet, the growth of whih is determined by the srapping and deliveries of vessels. The key harateristi of the shipping supply with regard to the world fleet fator, is the fat that supply takes long time to adjust and response to hanges in demand. The reason for that is that ships take approximately five years to build and delivered in order to over demand needs. For example in the early 1960s the oil tankers fleet was signifiantly expanding, the ompletion of whih took approximately twenty years to ahieve. However during this period of time, demand for oil transport rose extensively, whih ombined with the shortage of tanker apaity led to reord orders for new ships. However, the delivery of vessels found demand and onsequently freight rates in downturn. 1) Shipbuilding output 28

30 Shipbuilding market represents an important and strategi industry in a number of ountries around the world, with extreme numbers of funds apaity going around in order to meet onstrution needs. Sine orderbooks are made based on future demand estimations, the world shipbuilding market suffers from over-apaities and depressed pries. 2) Srapping and losses The rate of growth of merhant fleet is determined by the equilibrium established between the rate of the delivery of new vessels and the rate of deletions from the world fleet, refleted by the srapping (meaning the sale of a ship as srap metal) and the losses ( number of ships lost at sea due to severe aidents). Four fators are identified to have an impat on srapping, these are a) the age of the fleet, b)the tehnial obsolesene, ) srap pries and 4) market expetations 3) Fleet performane and produtivity Fleet produtivity is one of the most important variables in determining transport apaity, sine the volume of argo that an be transported by a given number of ships an vary based on : a) the mean operating speed, b) the deadweight utilization and ) the loaded days at sea. 4) Operating environment The environment in whih ships operate play a signifiant role in the determination of shipping apaity. For example safety and environmental legislation set rules and standards that ships need to omply with and in many ases an strongly impat the transport apaity. 29