Tanker Market
Tanker Market
Tanker Market
2.1 Introduction
Oil tanker is designed for the bulk transport of oil. Basic types of tankers include
crude tanker and product tanker. Crude tanker transports unrefined crude oil from
extraction locations to refineries while product tanker ships refined products to
points close to consuming markets. Tankers are generally categorized by size, e.g.,
Panamax, Aframax, Suezmax, VLCC, and ULCC. Tanker shipping provides an
economical and convenient way to transport liquid bulk for international seaborne
trade. Many maritime economists believe that the supply of tanker shipping
operates under perfect competition is characterized by several conditions. The first
feature is number of shipping service providers. There are a number of ship owners
that own tankers that provide identical shipping services. The second characteristic
is the availability of information. In the tanker market, information on freight rate
can be searched via such means as the Baltic Index. Hence, shipping service
providers are unable to manipulate the price. Obstacles to entry to and exit from
the industry exist but these challenges can be managed. Entry barriers, such as
government regulations, economic factors, and marketing condition, are not
present in the tank shipping industry. On the one hand, huge capital investment is
needed to acquire ships (new ships from the new building market or second-hand
ships from the sales and purchase market) to enter the industry. On the other hand,
shipping firms may withdraw from the market by selling their assets (i.e., ships) in
the second-hand vessel sale and purchase market.
In 2010, the tanker trade volume reached to 2,767 million tons due to growth in
demand for energy commodities. The increased cargo volume in the tanker market
leads shipping firms to adjust their supply by building new ships in the new
building market, and acquiring second-hand vessels in the sale and purchase
market. In tanker shipping, price level (i.e., freight rate) is influenced by the
market (i.e., demand for shipping service and supply of shipping service). In the
context of research in tanker shipping, the demand for shipping is seaborne trade in
energy products because demand for tanker shipping occurs as a result of demand
13
14
for seaborne tanker shipping service (i.e., derived demand). On the other hand, the
supply of shipping service is fleet size in the tanker shipping market. From the
perspective of the industrial organization paradigm, the interaction between
the demand for and the supply of tanker shipping service affects the market
structure, which in turn plays a significant role in determining the investment and
operation decisions in the marketplace (Tirole 2003).
The tanker shipping market brings shippers and carriers together to determine
the supply of shipping capacity (i.e., fleet size) and demand for shipping services.
Hence, demand for shipping service plays a significant role in the shipping
industry. Although oil prices have experienced a sharp increase, there is a significant growth in the demand. The volume of seaborne trade has doubled over the
past two decades. The increase in quantity demand for shipping services due to
growth in seaborne trade volume leads to rise in freight rate. Freight rate motivates
shipping firms to adjust their fleet sizes by placing orders for new vessels or
scrapping their serving vessels. It also affects vessel prices.
The topic of tanker shipping is important to explore from the perspectives of
both academic researchers (Glen and Martin 2002; Lyridis et al. 2004; Alizadeh
and Nomikos 2006; Goulielmos and Psifia 2007) and industrial practitioners
(Ocean Shipping Consultants Ltd 2004; UNCTAD 2009; Clarkson Research
Studies 2010). Studies dedicated to developing an empirical model to forecast fleet
size is desirable to facilitate industrial practitioners to make key decisions such as
capacity management and investment strategy. This chapter aims to provide
empirical evidence to illustrate the linkages between the different market segments
in tanker shipping industry. Another aim of this chapter is to provide an overview
of the linkage among different segments in the shipping market for researchers and
practitioners to better understand the shipping industry.
15
trades sea transport services and the sale and purchase market trades second-hand
vessels. These two markets are categorized as auxiliary market as their transactions do not change existing shipping capacity. Shipping firms provide sea
transport services to shippers in the freight markets and shipper owners trade their
used ships in the sale and purchase market.
16
demand, demand for sea tanker shipping services depends on the seaborne trade
volume (Lun and Quaddus 2009). On the other hand, supply of shipping service is
inelastic in the short run. Excessive supply of shipping capacity not only causes
reduction in freight rate but also extra operational cost to lay up ships. On the other
hand, shortage in ships leads to an increase in freight rate to motivate shipping
firms for adjusting their shipping capacity. Although trade volume grows in the
past decades, shipping firms may make their investment decision only when they
expect that future freight rate will increase. However, it may take a few years for
shipping firms to take delivery of new ships if they decide to increase their
shipping capacity.
17
ships may require waiting for a few years after placing the new order, the lead time
to deploy second-hand ships to freight market are much shorter. At the time of
freight booms, the second-hand vessel market is a good option for shipping firms
to adjust their shipping capacity to satisfy the demand for tanker shipping services
(Goulielmos 2009).
The second-hand vessel market can be categorized as an auxiliary market and
the buying and selling of used ships are unlikely to alter the existing number of
ships and the carrying capability in the tanker shipping market (Strandenes 2002).
The sales and purchase market facilitates the entry of shipping firms to the shipping market as shipping firms may acquire ships in the sales and purchase market
with lower capital requirements. Another key function of the second-hand vessel
market is the allocation of ships among ship operators. With the sales and purchase
of used ships, the ship owners are able to exit the market or restructure their
existing fleets in response to the changing demand (Strandenes 2002). As the
demand for second-hand ships increase during the freight booms, the second-hand
vessel market is also closely linked with the freight market. At the time of high
freight rate, demand for second-hand ships are high as shipping firms can deploy
these ships to earn higher than normal profit. Hence, the price of second-hand ships
increases during the time of freight boom and decreases during the time of freight
depression (Lun and Quaddus 2009). On the other hand, low vessel prices usually
correspond with low freight rates.
18
19
New building
vessel priced
Second-hand
vessel pricee
Scrapping
vessel pricef
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
36.00
45.00
54.00
66.00
68.00
62.50
62.00
51.00
54.00
51.00
52.00
44.00
42.50
52.50
46.50
43.75
51.50
71.00
71.00
80.50
90.00
91.00
62.50
66.75
25.00
35.00
42.00
39.00
40.00
32.50
33.00
34.00
38.00
42.50
44.00
36.50
35.00
49.00
39.00
38.00
47.00
75.00
75.00
82.00
92.00
78.00
56.50
59.00
4.92
6.24
5.76
4.56
4.08
3.36
3.72
4.32
4.80
4.08
3.94
2.90
3.46
4.39
3.22
4.32
6.60
9.36
7.92
9.84
12.60
6.84
8.16
11.88
1343.00
1488.00
1661.00
1587.00
1551.00
1641.00
1783.00
1802.00
1844.00
1942.00
2041.00
2070.00
2108.00
2180.00
2237.00
2223.00
2356.00
2486.00
2576.00
2686.00
2764.00
2760.00
2659.00
2767.00g
54.33
62.37
82.04
87.88
89.73
59.95
72.98
73.27
82.47
92.69
96.83
85.28
75.91
160.96
110.53
80.50
135.00
196.99
159.52
151.68
118.75
180.34
65.53
98.78
31.90
32.11
32.62
34.34
35.33
37.29
40.13
40.49
40.08
39.63
38.89
40.42
41.70
40.79
41.51
39.39
41.30
42.71
44.62
48.21
51.83
54.08
54.82
59.50
trade. When there is an increase in the demand for tanker shipping service, freight
rate will go up. High freight rate attracts ship owners to provide more shipping
capacity to increase the supply of shipping services. Hence, seaborne trade is a
crucial variable in tanker shipping market.
To illustrate these relationships, we develop several regression models. The
results are shown in Table 2.3. The findings suggest that the following relationships: (1) freight rate is positively associated with fleet size with b value of 0.408,
(2) freight rate is positively associated with seaborne trade with b value of 0.654,
and (3) seaborne rate is positively associated with fleet size with b value of 0.902.
Their relationships are illustrated in Fig. 2.1.
To examine the mediating effect of seaborne trade, we use path analysis to
compare the direct and indirect effect of the relationship among the study
20
New building
vessel price
Freight rate
sig. (2-tailed)
N
New building vessel price
sig. (2-tailed)
N
Second-hand vessel price
sig. (2-tailed)
N
24
0.578a
0.003
24
0.760a
0.000
24
24
0.843a
0.000
24
0.443b
0.030
24
0.665a
0.000
24
a
b
Second-hand
vessel price
Scrapping
vessel price
1
24
0.826a
0.000
24
1
24
Table 2.3 Results of the regression analysis to examine the linkage between freight rate and fleet
size
Independent variable
Dependent variable
b
p
Freight rate
Freight rate
Seaborne trade
a
b
Fleet Size
Seaborne Trade
Fleet Size
0.408
0.654
0.902
0.048a
0.001b
0.000b
p \ 0.05
p \ 0.01
variables. Direct effect refers to the relationship linking two constructs, whereas
indirect effect refers to the relationship characterizing a sequence of relationships
with a mediator variable involved. Table 2.4 shows the results of path analysis to
examine the linkages between freight rate and fleet size. The results suggest that
the path coefficient of the direct effect of freight rate on fleet size (i.e., freight
rate ? fleet size) is 0.408, while the path coefficient of the indirect effect (i.e.,
freight rate ? seaborne rate ? fleet size) is 0.590. Hence, the indirect effect is
stronger than the direct effect. The results suggest that seaborne trade is a mediator
influencing the relationship between freight rate and fleet size.
In the regression model, seaborne trade is an indicator of fleet size in the
tanker shipping market with b value of 0.902. Figure 2.2 is a scatter plot of
regression line and observed values fleet size expectancy. The observed values
are evenly distributed above and below the regression line. The results indicate
that seaborne trade is a significant factor influencing fleet size in the tanker
shipping market.
21
Seaborne
Trade
0.902
0.654
Freight
Fleet
Rate
Size
0.408
Direct effect
Indirect effect
0.408
22
Table 2.5 Results of the regression analysis to examine the linkage between freight rate and
vessel prices
Independent variable
Dependent variable
b
p
Freight rate
Freight rate
SH price
a
0.578
0.760
0.843
0.003a
0.000a
0.000a
p \ 0.01
rate ? new building vessel price) is 0.578, while the path coefficient of the indirect
effect (i.e., freight rate ? second-hand vessel price ? new building vessel price) is
0.641. Hence, the indirect effect is stronger than the direct effect. The results suggest
that second-hand vessel price is a mediator influencing the relationship between
freight rate and new building vessel price.
23
Second-hand
Vessel Price
0.843
0.760
Freight
New Building
Rate
Vessel Price
0.578
Indirect effect
0.578
be classified as the product market where sea transport services are traded in a
market place. Hence, shipping firms are involved in two exchange functions. On
the one hand, they sell product (i.e., shipping services) in the product market.
Freight rate is the value that ship operators are willing to accept and shippers are
willing to pay for the shipping service. On other hand, ship owners obtain production factors (i.e., ships) in the new building market or sale and purchase market.
In the product market, seaborne commodities trade determines the demand for
tanker shipping services. In this chapter, the volume of seaborne trade is identified
as a mediator affecting the relationship between freight rate and fleet size in tanker
shipping. The result shows that seaborne trade has a stronger impact on influencing
fleet size. In a period of trade boom, tanker shipping firms tend to adjust their
capacity when demand for tanker shipping increases. The findings suggest that
both freight rate and seaborne have significant impacts on fleet size. In comparing
the magnitudes of the effect on fleet size, the coefficient of seaborne trade
(b = 0.902) is stronger than that of freight rate (b = 0.408). The results indicate
that the key factor affecting the decision of ship owners to adjust their fleet size is
capacity utilization. Return on investment in vessels relies on cargoes to fill the
ships. Seaborne trade increases continuously in a growing market lead to a
shortage of ships. Ship owners decide to adjust their fleet sizes when they are
confident that additional shipping capacity can be utilized to earn revenue from
freight market as lay up of ships are costly.
In tanker shipping, the order of new ships in the new building market and the
purchase and sale of vessels in the second-hand market are activities in the factor
24
market while trading in sea transport services in the freight market belongs to the
product market. Our study shows the result that the prices of both new building
and second-hand vessels are affected by freight rate. New building vessel price is
the value that ship builders are willing to accept and ship owners are willing to pay
to buy new ships, whereas second-hand vessel price is the value that ship owners
are willing to pay and accept to trade used ships in the sales and purchase market.
Our study results show that the prices of both new building and second-hand
vessels are affected by freight rate. The results indicate that freight rate positively
influences both the product market and the factor market.
The findings of this study also suggest that second-hand vessel price is a mediator
in influencing the relationship between freight rate and new building vessel price.
New building market and the freight market are associated with the sale and purchase
market in tanker shipping. The findings of this study also suggest that second-hand
vessel price is a mediator in influencing the relationship between freight rate and new
building vessel price. High level of freight rate leads ship owners to acquire extra
shipping capacity by ordering new ships from new building market or buying used
ships in sale and purchase market. New building vessels and second-hand vessels
substitute each other, and the only difference is their age. Ship owners look for ships
in the sale and purchase market when freight rate increase because acquired ships can
be deployed to carry cargoes in a short period of time. High vessel prices and shortage
of ships in the sale and purchase market may divert ship owners to acquire shipping
capacity in the new building market.
The implications of this study are two fold. From a research perspective, this
study illustrates the role of freight rate in both the product market and factor
market. In addition, the factors influencing fleet size and the mediator of seaborne
trade have been identified in the product market. In addition, the mediating role of
second-hand vessel price has been examined. From a management perspective,
this study examines how the four key markets in tanker shipping are interrelated. It
provides a useful reference for shipping firms to anticipate opportunities and
threats in the tanker shipping business. On the other hand, we should take account
of the limitations and pitfalls in this study. Methodologically, this study uses
secondary data to conduct the data analysis. Although we have gathered data
spanning 24 years (i.e., between 1987 and 2010), it is difficult to validate the data
accuracy. Additionally, this study is confined to tanker shipping operations.
Therefore, further research could be extended to other shipping sectors, including
the container shipping market and the bulk shipping market.
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