2. their arrivals at full ports. RECOVERY. Recovery is

2. Literature Review2.1 Market The shipping industry can be divided into four markets, Newbuilding
market, where ships are being ordered. Freight market, where they are being
chartered (used for transportation). Sale and purchase market, where they are
being sold to other ship-owners. Demolition market, where they are being sold
to scrap yards (Stopford, 2009).One of the essential things in the Dry Bulk shipping industry
is the Baltic Dry Index (BDI) (Clarkson Research Studies, 2004). The BDI
denotes a shipping and trade index created to measure the trends in the
shipping industry. It particularly pays attention to the freight rates, demand,
and supply among other related issues. The BDI categorizes the industry into
three distinct segments, the Capesize, the Panamax and the Supramax, all based
on the volume of cargo and the offloading and loading process. The Capesize is
the biggest, followed by the Panamaxes and lastly are the Supramaxes
(Grossmann, H. et al., 2006). 2.2 Shipping cycleThe shipping cycle is an economic concept that explains how
shipping companies and freight charges respond to supply and demand. It
examines how and why ships build up in sea trading ports. The cycle also seeks
to explain what affects the selling price of ship fleets and what types of
ships sell during slow business periods. It is important to point out that shipping industry has a
short cycle 2-12 years and ha the following stages. TROUGH The first stage
of the shipping cycle is called a trough. An excess in capacity characterizes a
trough. Ships begin to accumulate at trading ports, while others slow down
shipments by delaying their arrivals at full ports. RECOVERY. Recovery is
the second stage of the shipping cycle. In this stage, supply and demand move
toward equilibrium, meaning both supply and demand levels match each other
closely. Freight charges begin to increase, eventually surpassing operating
costs. PEAK The shipping
cycle’s third stage is a peak or plateau. At this point, the shipping freight
rates become quite high – often double or triple the amount of fleet operating
costs. The levels of supply and demand are almost completely equal.COLLAPSE The fourth stage of the shipping cycle, collapse,
occurs when supply levels begin to exceed demand. Freight rates begin to
decline during a collapse. Shipping containers and fleet begin to accumulate in
trading ports once again.2.3 EquilibriumThe equilibrium price is the only price where the plans of
consumers and the plans of producers agree—that is, where the amount of the
product consumers want to buy (quantity demanded) is equal to the amount
producers want to sell (quantity supplied). This common quantity is called the
equilibrium quantity. At any other price, the quantity demanded does not equal
the quantity supplied, so the market is not in equilibrium at that price.
The word “equilibrium” means
“balance.” If a market is at its equilibrium price and quantity, then it has no
reason to move away from that point. However, if a market is not at
equilibrium, then economic pressures arise to move the market toward the
equilibrium price and the equilibrium quantity.Excess supply and demandBased on the demand and supply curve, the market forces drive
the price to its equilibrium level. There are two possibilities: 1) Excess
Demand or 2) Excess Supply Excess supply is the situation where the price is
above its equilibrium price. The quantity willing supplied by the producers is
higher than the quantity demanded by the consumers. Excess demand is the
situation where the price is below its equilibrium price. The quantity supplied
is lower than the quantity demanded by the consumers. When we have lower prices
and excess demand, there will shortage of goods, putting an upward pressure on
the price as there will be more buyers chasing the available goods. As price
increases the suppliers will start producing more but the demand from buyers
will decrease. This will drive the price and quantity to its equilibrium level.2.2 Demand in Dry
Bulk MarketThe most important single influence on ship demand is the
world economy. Since the world economy generates most of the demand for sea
transport (import of raw materials for manufacturing industry, trade in
manufactured products), the growth of sea trade follows closely the growth of
world economy growth of trade (Kendall, 1986). Furthermore, the transport costs
as well as political events and the competition are also to be taken into
account. The demand for sea transport depends upon the distance over which the
cargo is shipped is an important factor also. However, there are other more
variables which affect the demand for the business. The overall concept is that
some customers would prefer to use ships with bigger DWT to ensure they benefit
from economies of scale. To address these issues, shipping companies try to
balance out on the three major market segments, ensuring that those with
midsized volumes do not skip the Panamax ships for the Capesize. Balancing out
the prices means shippers will ensure constant demand in either of the category
guarantee the Dry Bulk fleet continuous business all through the year (Stopford,
2001). Speed and transport reliability is also a key concern which is affecting
demand. In 1985, the average speed for a ship was 11 knots (Marigou et al.,
1992), which has increased to around 13 knots currently. That shows the average
speed of ships has significantly improved. Other than speed reliability is also
another concern, with customers looking for shipping options which conform to
their raw material supply needs. Therefore, speed and reliability play a
greater role in determining demand in the industry. The Panamax segment has
been one of those recording marginal profits, with the Capesize recording
losses. However, in a report released last year, there was strong evidence that
demand was strong growth and the Capesize daily earnings were approaching a
breakeven point. The Panama segment was also likely to benefit from the surging
demand, making it a highly profits given the fact that the largest segment of
customers were those shipping medium-sized volumes.2.3 Supply in the
Dry Bulk MarketOn the supply side the most important things are the world
fleet and its productivity, the shipbuilding, the shipbreaking and the freights.
Furthermore, travel speed, deadweight utilization, productivity days per year,
efficiency and productivity of ports are also factors affecting the seas transportation
which is measured in billion tonne-miles per year. The fleet size is among the
leading reasons affecting supply in sea transport. The industry is cyclonical
in nature, contracting and improving in twenty years period when new ships are
built, coming up with different designs, capacity and even capabilities
(Grammenos, 2010). For instance, it took over twenty years from 1985 to build
ships with a higher speed. The larger the fleet size, the higher the supply of
the vessels in the industry, something whose elasticity is inelastic. Another
issue on the supply side is the shipbuilding production, which is the time
between when a vessel orders and when it is delivered to the merchant. Usually,
it takes up to four years, something which can seriously affect supply in the
event of higher demand. Scrapping and losses are about reducing the fleet size.
There are various issues affecting this issue, including the scrapping cost,
the market situation and the financial needs of the owners. Either way, these
factors affect the number of vessels available to customers and can increase or
reduce them depending on timeliness given the industry is cyclical.This short-term cycle in the shipping industry is largely
affected by demand, but rarely are they influenced by supply which can only be
affected in the long run (Lun, Venus, et al., 2010). There have been shifts in
freight fees in the past few months, including firms operating in the industry
trying to pull their resources together as a way of increasing their profits.
The global economy, particularly in the key destination in India and the Far
East for Dry Bulk vessels, has not been doing well, and that affected the
demand for raw materials. The overall effect has been shipping companies
recording low demand for their services, leading to losses. The Panamax segment
was hit, but not as worse as the Capesize. However, there is slow but constant
growth, assuring the firm that soon they will turn into profitability. However,
even as an economic resurgence in key economies continues to pick, shipping
firms, operating in an oligopolistic market are conspiring to form a pool in a
bid to boost their profits. This trend will not stop in the short run.
Customers faced with the need for large volumes of raw materials in a
predetermined period will likely continue to seek these services; Customers are
not likely to influence the market in the short run. With collaboration from
key operators in the industry, the freight rates are likely to be standardized,
reducing competition and compelling customers to pay higher prices (Alizadeh, and
Nomikos, 2009). This move is likely to generate higher revenues for the
companies involved, but at the expense of customer’s freight needs.