A study of the relationships between the time charter and spot freight rates

Abstract

A time charter contract is a shipping contract that allows for freight rate risk avoidance and hedging. Defining the relationship between time charter and spot freight rates will illuminate the fluctuation mechanism of the spot freight market. In this article, three types of dry bulk ships -Capsize, Panamax and Supramax -are chosen to investigate the relationship between time charter and spot freight rates and to analyse the price discovery function of time charter contracts. A vector error correction model is developed, and an impulse response function is used to analyse the influence of time charter rates on spot freight rates. Empirical studies indicate that there are two-way lead-lag relationships between the time charter and spot freight rates and that a time charter contract has a price discovery function. Smaller ship sizes and longer durations lead to a stronger price discovery function.

Lessons from bankruptcy of Hanjin Shipping Company in chartering

“…Moreover, one of the neglected areas in the study of vessel chartering concerns 'duration of charter', although some studies have used the duration term in their studies. However, these studies tended to focus on: (i) the relationship between long-and short-term charter contracts (Taylor 1981;Kavussanos and Alizadeh-M 2002;Rygaard 2009;Zhang and Zeng 2015); (ii) the relationship between freight rates and laycan period (lead time between the contracting date and delivery time of chartered ships) Talley 2011a, 2011b) rather than focusing on the charter contract period. In this sense, Cariou and Wolff (2013) mentioned additional study on charter contract period is required for further investigation.…”

“…Freight rates 1 such as China Containerized Freight Index (CCFI) and Shanghai Containerized Freight Index (SCFI) are also selected as a variable in our model because they have a relationship in the spot market with charter rate contracts. Some studies (Zhang and Zeng 2015;Kavussanos and Alizadeh-M 2001;Glen, Owen, and van der Meer 1981;Kavussanos 1996) have investigated the correlation between the spot and time charter rate (and time charter period). Zhang and Zeng (2015) examined factors of time charter rates on freight rates in the dry bulk shipping market.…”

“…Some studies (Zhang and Zeng 2015;Kavussanos and Alizadeh-M 2001;Glen, Owen, and van der Meer 1981;Kavussanos 1996) have investigated the correlation between the spot and time charter rate (and time charter period). Zhang and Zeng (2015) examined factors of time charter rates on freight rates in the dry bulk shipping market. Kavussanos and Alizadeh-M (2001) examined the seasonal pattern of freight and charter rates.…”

“…Under these unfavorable shipping market conditions, shipping companies have developed charter/ownership strategies considering their fleet management and financial risk. Optimization of chartering vessels and acquiring shipping space enable shipping companies not only to limit risk through adapting different contract duration of chartered vessels (Kavussanos and Alizadeh-M 2002) but also to avoid risk caused by fluctuation of freight rates (Zhang and Zeng 2015).…”

A multi-stage stochastic programming approach for network capacity expansion with multiple sources of capacity

“…An example of an industry that uses spot market and contract capacities is the liner shipping companies. Their business environment is volatile with seasonal fluctuations in demand and price, so the cargo owner can either hire a ship on the spot to move the cargo between two harbors or sign a contract to own the ship for a particular time with a fixed price .…”