How ship tracking systems can improve our understanding of freight rate evolution
Study is the first to use a capacity measure derived from ships' radio signal data to explain the evolution in voyage charter freight rates.
Tanker freight markets are of enormous importance, being central to the distribution of crude oil – one of the most actively traded commodities in the world, and the largest component of global energy consumption.
The international trade of crude oil determines the demand for tanker services. The tanker shipping industry itself is cyclical, highly volatile, and characterised by fluctuations in freight rates, which are often attributed to short-term fluctuations in the balance between supply and demand. This can be problematic for freight market participants.
Recently however, it has become possible for these participants to track the movement of vessels via the radio signals sent by Automatic Identification Systems (AIS). This information provides a detailed view of the supply side in freight markets.
By combining AIS data with information on vessel fixtures, the authors of the paper The eye in the sky – Freight rate effects of tanker supply propose a novel measure of available short-term capacity.
The study focuses on the voyage charter market for very large crude oil carriers (VLCC).
The combination capacity measure proposed adds to the freight rate price discovery above and beyond what is already explained by other market variables. The findings suggest that AIS measures can explain parts of the freight rate evolution, which is not already explained by traditional supply measures or FFA rates. It finds that the evolution of freight rates depends on the fleet’s geographical distribution as well as its employment status.
There is also considerable economic magnitude to the measure. A standard deviation decrease in the capacity measure leads to an increase in the freight rate level.
The fact that freight rates directly influence shipowners’ profitability and charterers’ expenditure makes this measure particularly relevant for these market participants. This paper is the first to use an AIS derived capacity measure to explain the evolution in voyage charter freight rates.
The results have implications for practitioners and academics alike. First, the proposed measure of tonnage availability is a potentially useful indicator of shipping economic activity and, as such, may be used more widely by both practitioners and academics as a freight rate forecast indicator and a proxy for trading and physical market activity. Furthermore, the use of fixtures information also provides insights on the spatial chartering pattern of market participants.
Building on this paper, future research might look at the interplay between freight rates and AIS based measures in longer sample periods and other commercial shipping segments.
The paper has been published in Transportation Research. A copy may also be requested from City Research Online.