An econometric analysis for container shipping market

Abstract

This article presents an econometric analysis for the fluctuation of the container freight rate due to the interactions between the demand for container transportation services and the container fleet capacity. The demand is derived from international trade and is assumed to be exogenous, while the fleet capacity increases with new orders made two years before, proportional to the industrial profit. Assuming the market clears each year, the shipping freight rate will change with the relative magnitude of shifts in the demand and fleet capacity. This model is estimated using the world container shipping market statistics from 1980 to 2008, applying the three-stage least square method. The estimated parameters of the model have high statistical significance, and the overall explanatory power of the model is above 90%. The short-term in-sample prediction of the model can largely replicate the container shipping market fluctuation in terms of the fleet size dynamics and the freight rate fluctuation in the past 20 years. The prediction of the future market trend reveals that the container freight rate should continue to decrease in the coming three years if the demand for container transportation services grows at less than 8%

Structural Analysis of Shipping Fleet Capacity

“…Broadly speaking, two approaches have been developed. First, many researchers have focused on modelling the demand and supply for transportation using the structural model [12][13][14][15]. Second, in recent years, inspired by developments in financial economics, the focus has been on modelling the freight rate or freight derivatives directly in a stochastic-statistical model [5,[16][17][18][19][20][21][22][23][24][25][26].…”

“…He concluded that it is difficult to forecast freight rates in the long term because of the unpredictability of factors influencing these rates. Luo, Fan [15] developed an econometric model to analyse the fluctuation of the container freight rate and fleet capacity. They estimated the Simultaneous Equations Model using three-stage least squares, demonstrating a high degree of accuracy for insample and out-sample prediction.…”

“…This will motivate the shipping companies to place new orders for new ship investment. Because of the construction lags, when the new-buildings are delivered to the market, the market situation may have changed, which determines the new freight level [1,15,25]. The uncertain transportation demand plus this shipbuilding lag make the freight market volatile.…”

A Critical Review of the Literature on Firm-Level Theories on Ship Investment

“…In the literature, there are some studies on containership investments (Fan and Luo 2013;Fan and Yin 2015;Luo et al 2009) from either firm level or industry level perspective due to firm-level data availability for container shipping companies. However, the studies in bulk shipping are confronted with low availability of firm-level data.…”

“…Along with the increase in investment, container shipping market has recently received increasing attention from scholars. The study of Luo, Fan and Liu (Luo et al 2009) analysed the container freight rate fluctuation attributable to the interactions of demand for container transportation services and the container fleet capacity. They empirically evaluated demand increase and fleet capacity increase which will lead to freight rate increase.…”