A Study On The Dynamic Relationships Between The Shipbuilding Market And The Freight Market In The Dry Bulk Shipping Industry

Since the U.S. Subprime crisis and the European debt crisis, although being a brief rebound, the global shipping industry did not last long, then again stumbled, which is a particularly evident change in the dry bulk industry. Now the whole industry is lack of effective demand, being excess supply capacity, facing largely-cost pressure, and a prolonged slump in freight rates, where excess capacity is currently the most prominent problem. In this paper, based on time lag between the shipbuilding market and the freight market the dry bulk shipping industry, we explore the economics motivation behind overcapacity.Shipbuilding has scarcely been studied from the economic perspective in shipping related literatures; most studies only involve shipbuilding as related variables when discussing other shipping markets. A large amount of studies on shipping markets are based on the efficient market theory. This study apply techniques of the time series analysis and the panel data analysis in a innovative way from the shipbuilding perspective explore the dynamics of the shipbuilding market and the freight market in the dry bulk shipping industry.We look into the dynamics between freight and shipbuilding markets in a more delicate way:the interaction among freight rate, shipbuilding order and delivery. Our first research question concerns the causal mechanism from freight rate to shipbuilding price. To determine the interrelationships between shipbuilding price and freight rate, a three-stage approach is taken with each step being a prerequisite of its next step. Firstly, the unit root test is performed to check whether the freight rate and shipbuilding price time series are stationary or not. Secondly, the test for cointegration is conducted to determine the existence of long-term relationships between the two time series. Thirdly, the Granger causality test is conducted to determine the cause-effect relationship with variables. Impulse response analysis acts as one step further to Granger causality test, which provides a more detailed insight on causal relationship by indicating whether the impacts are positive or negative, and whether such impacts are temporary or long-termed. Our findings have revealed a positive correlation between freight market and shipbuilding market, and The lags from freight rate to shipbuilding price are approximately three to six months. The existence of time lags implies that the information flow between these two markets may not be as efficient as that expected by the Efficient Markets Hypothesis.The second research question discusses the determinants of shipbuilding activities. Through pooled panel data analysis, we verify the important role of freight market to the ship investment decision and the strong cluster effect of Asian shipbuilding countries.Our third research question looks into the impact of the change of fleet size on freight volatility. Our results prove that fleet size is a critical determinant of freight volatility and affects it in a nonlinear manner.The study is for improving the shipowner’s investment decisions and has important reference value to formulate appropriate national policies.