Using system dynamics in maritime economics: an endogenous decision model for shipowners in the dry bulk sector

References and notes

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• The model was built in close cooperation with the Delft University of Technology, Ship Production Section. The shipbuilding model was developed by the University of Delft, whereas the market and shipping model was developed by the University of Antwerp. The original aim of the cooperation was to create a Maritime Business Game 8
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• For a discussion concerning the use and added value of system dynamic models, see DIKOS, G. and PAPADATOS, P. M., 2005, Busdyn@: a case study of tanker freight rate dynamics, Proceedings of the IAME 2005 Congress, Cyprus and 10
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• All modelling is done in a system dynamics environment. We used the Vensim programming package (http://www.vensim.com) to build a model of approximate differential equations to represent the dynamic changes occurring in the shipping business. An important benefit of this tool is the possibility of a very detailed treatment of ‘time’. The model we developed takes steps of one month, while the calculation step used is 1/32nd of a month or almost a day. The detailed manner of time calculation is important because, among other things, it allows one to follow the cash flows properly
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• Strandenes , S. P . 1999 . Is there potential for a two-tier tanker market? . Maritime Policy and Management , 26 ( 3 ) : 249 – 264 .
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• Lloyd's MIU and Lloyd's Register/Fairplay
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• Vessels are not only laid up because operating costs exceed rates. Moreover, the dry-docking, the repositioning or the slow steaming of vessels also distinguishes the active from the existing fleet. This is adjusted for in the number of round trips a ship can make on a monthly or annual basis. See also Ibid. 15 for further analysis
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• Ibid. 17
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• Alizadeh , AH and Nomikos , NK . 2002 . “ The dry bulk shipping market ” . In The Handbook of Maritime Economics and Business , Edited by: Grammenos , Th . 227 – 250 . London : LLP .
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• Ibid. 12
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• However, this is integrated into the shipping model. Shipowners wanting to carry different loads need to pay a switching (cleaning) cost in order to make the ship ‘ready’
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• Empirical evidence can be found in: ALIZADEH, A. H., 2001, An econometric analysis of the dry bulk shipping industry; seasonality, market efficiency and risk premia. PhD, London, City University Business School
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• Drewry Shipping Consultants Ltd and Silberston , A . 2001 . The European and worldwide shipbuilding market: an economic analysis of the comparative strengths and weaknesses of EU and Korean shipyards , London : Drewry Shipping Consultants Ltd .
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• Although system dynamics is continuous in time, the simultaneity problem can be resolved by means of the tedious simultaneous equations available in the Vensim package
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• Adland , R and Strandenes , S . 2004 . “ A discrete-time stochastic partial equilibrium model of the spot freight market ” . In Discussion paper 11/2004 , Bergen : Norwegian School of Economics and Business Adminstration .
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• This assumption is motivated by the discussions we had with two undisclosed shipping firms. These rates seem to contain enough information to assess the decision of whether or not to order
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• This implies we assume the ‘Efficient Market Hypothesis’ to hold, meaning among other things that short-term and long-term freight contracts should be related in such a way that any opportunity to generate excess profit by switching between different contracts is eliminated. Failure of this relationship may be due to a bad model, inefficiencies in the freight markets or incorrect expectations 24. We adjusted for the simple smoothed approach by integrating a dynamic expectation model
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• Ibid. 10
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• Note that, during the first 20 or so months, the model is in a transient phase, as the order book is being filled up. The steady state phase is initiated, so to speak, as the first vessels are delivered. For more information on the initiation of model behaviour, see LAW, A. W. and KELTON, W. D., 1991, Simulation Modeling & Analysis (New York: McGraw Hill)
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• Dikos , G . 2004 . New building prices: demand inelastic or perfectly competitive? . Maritime Economics & Logistics , 6 ( 4 ) : 312 – 321 .
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• Zannetos , Z . 1966 . The Theory of Oil Tankship Rates , Massachusetts, MI : MIT Press .
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• Strandenes , S . 1984 . “ Price determination in the time charter and second-hand markets ” . In Discussion paper No. 0584 , Bergen : Norwegian School of Economics and Business Administration . See also ibid. 12. and 15
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• The asset pricing models provide a way of mapping from abstract states of the world into the prices of financial assets like stocks and bonds or even ships. The ship prices are then conceived of as endogenous; that is, the states of the world, i.e. freight rates, cause them, not the other way around, in an asset pricing model
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• This technique is, among others, used by shipping firms to evaluate an investment opportunity in a new or a second-hand vessel
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• In the shipbuilding model, the MC pricing was used for stipulating the building price of a ship. The situation where the endogenously determined yard prices approximate to the market prices fixed by asset pricing is interesting. This might be an indication of market efficiency where the MC pricing of the freight rate mechanism works out with the MC pricing within the shipbuilding sector. Discrepancies in one sector, like depressing rates level, explain the correcting factor in shipbuilding (e.g. subsidizing) and the freight market (e.g. pooling, selling vessels, …). In the maritime game 8, as in reality, shipowners and shipyards therefore negotiate over the new-building price. This not only explains the differences in market prices and business prices, but also demonstrates the added value the endogenous business models can offer
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• Ibid. 15
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• Ibid. 6. and 12
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• Fearnleys . 2003 . Annual Review Oslo February 2003
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• Ibid. 17
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• This is a safe proposition, as we have yet to see that a ship offered for sale for scrap cannot find a buyer—this is only a matter of price. Apart from economic drivers, the imposed regulation may also result in a quicker demolition of vessels. The phasing out of single-hulled tankers is a case in point
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• Ibid. 10
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• There is always uncertainty in the scrapping process, as shipowners might want to wait until the market recovers. The herding behaviour reaction 29 or the strength of a firm can motivate the differences in scrapping decision among firms
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• We can distinguish operational costs, voyage costs and capital costs. Data from DREWRY, 1999, Ship Costs: Issues, Developments and Prospects to 2003
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• Quite recently, other tax regimes, such as the tonnage tax have been introduced, in order to cope with the outflagging of vessels to open registers or flags of convenience. The aim is to re-inflag the fleet to the domestic country so as to identify the flag state with the domestic state. The choice of the tax scheme is linked with the market prospects, as the sale of a vessel may influence or be influenced by the designated tax regime due to the triggered shock in profits or cash
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• For more information on the price matching process, see STRANDENES, S., 1999, The shipbroking function and market efficiency. International Journal of Maritime Economics, 2(3), 17–26
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• Thus far, the scope of the proposed model has been restricted to the dry bulk market. The next step is the integration of the tanker sector into the model. This will go in tandem with the development of a time charter market, as many tankers or bulk ships are hired for a certain period of time rather than for a single voyage on the spot market. Other enhancements concerns the shipowners’ model and consist in the modelling of a port-auctioning process, the possibility of computer-guided negotiations between charterer and shipowner, and the possibility of hedging with respect to oil prices. The latter seems necessary, given that oil prices and fuel costs are quite significant in the shipowners’ business
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