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Is It Rational to Order Ships When Freight Markets Are in Depression?

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  • Alexandros M. Goulielmos
Abstract
Very high spot rates induce excessive orders this statement is tested. Time charter rates found not only to influence orders more than spot rates, but so does the price of shipbuilding. It is also shown that the surplus of supply over demand is a more accurate measure for shipowners in placing orders. This was first proposed by Koopmans (1939), but never tested statistically till this paper. Shipowners only remember well a depression that occurred in their life-time. They order ships during a depression to secure low prices, embody new technology (e.g. energy saving - ECO ships) or invest in promising ships (e.g. LNG, offshore units and large containerships). Some orders are placed at low freight rates. This phenomenon was first described by Zannetos (1966) (the Zannetos’ paradox). This paradox, however, contradicts maritime economists’ assumption of perfect foresight and a normal distribution for market disturbances. We take into account that a depression reduces capital cost (due to the lower new-building prices) and at the same time obliges shipowners to reduce operating costs. The previous boom (2003-2008) greatly helped subsequent orders in 2009-2014, as owners have built up sufficient liquidity. A depression is a period when, historically, shipowners have committed serious errors. It is rational to order ships when freight rates are high, but is it not suicidal to order them when spot, or time charter, rates, produce great losses? This is cleared out.

Suggested Citation

  • Alexandros M. Goulielmos, 2014. "Is It Rational to Order Ships When Freight Markets Are in Depression?," International Journal of Social Science Research, Macrothink Institute, vol. 2(2), pages 179-199, September.
    • Handle: RePEc:mth:ijssr8:v:2:y:2014:i:2:p:179-199
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