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Applied Economics Letters

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A predictive model of the freight rate of the

international market in Capesize dry bulk carriers
a b a
Ching-Chih Chang , Chin-Yuan Hsieh & Yung-Chih Lin
a
Department of Transportation and Communication Management Science , National Cheng
Kung University , No. 1, University Road, Tainan City, 701, Taiwan
b
Department of Information Technology & Graduate Information Technology and
Applications , Kao Yuan University , Kaohsiung, Taiwan
Published online: 13 Jun 2011.

To cite this article: Ching-Chih Chang , Chin-Yuan Hsieh & Yung-Chih Lin (2012) A predictive model of the freight
rate of the international market in Capesize dry bulk carriers, Applied Economics Letters, 19:4, 313-317, DOI:
10.1080/13504851.2011.576998

To link to this article: http://dx.doi.org/10.1080/13504851.2011.576998

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 Applied Economics Letters, 2012, 19, 313–317

A predictive model of the freight rate

of the international market in
Capesize dry bulk carriers
Ching-Chih Changa,*, Chin-Yuan Hsiehb and Yung-Chih Lina
a
Department of Transportation and Communication Management Science,
National Cheng Kung University, No. 1, University Road, Tainan City 701,
Taiwan
b
Department of Information Technology & Graduate Information Technology
and Applications, Kao Yuan University, Kaohsiung, Taiwan
Downloaded by [134.117.10.200] at 02:01 27 December 2014

This study examines the considerable fluctuations of the world’s dry bulk
shipping market from November 1995 to September 2008. The major
objective is to provide a forecasting model for the freight rate in relation
to the second-hand ship price. The results indicate an acceptable level of
prediction according to Mean Absolute Percentage Error (MAPE), with a
value no more than 20%. It is anticipated that this research will prove
germane to major stakeholders, including owners, charters, investors and
bankers, by forecasting the freight rate and thereby expediting the decision-
making process.

Keywords: dry bulk market; Capesize; prediction model; MAPE

JEL Classification: C52; C53; F20; L91

I. Introduction component parts include the Baltic Capesize Index

Strong growth in seaborne trade has led to increased
investment in sea vessels. The amount of investment hit
a record of $231.5 billion in 2007 and has been pre-
dicted to grow in the foreseeable future. Meanwhile, the
volume of shipping selected for scrapping from 2005 to
2007 was 0.9 million Dead Weight Tonnage (DWT),
1.8 million DWT and 0.4 million DWT, respectively.
The dry bulk market operates with four classes of
vessel: Capesize, Panamax, Handymax and Handysize.
Capesize vessels, with a DWT of about 100–180k,
mainly carry ore and coal on specific routes, while
Panamax bulkers (60–80k) carry cokingcoal and
bauxite and are the largest class able to pass through
the Panama Canal. Handymax vessels with 40–60k
DWT generally transport grain and steel products. In
the global dry bulk shipping market, the freight rate
benchmark is the Baltic Dry Index (BDI). The BDI’s
(BCI), Baltic Panamax Index (BPI) and Baltic
Supramax Index (BSI). Of all these, the Capesize mar-
ket and BCI are the dominant elements, and both show
great volatility (Kavussanos and Alizadeh, 2001;
Clarkson Research Report, 2008).
Freight rates remain dependent on correlations
between patterns of supply and demand (Stopford,
1997). Consequently, any anomalies have the poten-
tial to disrupt the balance between risk management
and the profitability underpinning the shipping indus-
try. This research accordingly develops a novel pre-
dictive model of the freight rate for Capesize bulk
carriers with reference to the price of building new
ships in addition to the other listed variables. Of pos-
sible benefit to ship owners in this instance is a reduc-
tion of their operational risk, premised on the working
assumption that greater access to information will
function as a positional good. Investors may likewise

*Corresponding author. E-mail: chan5305@gmail.com

Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2012 Taylor & Francis 313
http://www.informaworld.com
DOI: 10.1080/13504851.2011.576998
 314 C.-C. Chang et al.
adjust their portfolio and secure in the knowledge that Y
Time charter rate
160 000
they are better placed to estimate a company’s profits. 140 000 y
Nonlinear
Finally, bankers potentially stand to gain when it 120 000
γ
comes to the refinancing of shipping company loans. 100 000
80 000
This research includes four sections. This is the 60 000
introduction and presents the aims of this work, 40 000 c
while the second outlines the methodology. The third 20 000
β
0
section contains the empirical components and the Feb 96 Jun 97 Nov 98 Mar 00 Jul 01 Dec 02 Apr 04 Sep 05 Jan 07 Jan 08 Oct 09
t
fourth section summarizes the benefits of the adopted
methodology before considering its implications for Fig. 1. Nonlinear regression between y and t
academics and practitioners.

II. Methodology
The purpose of this article is to develop a predictive
model of freight rate for the Capesize bulk carriers. A
discussion of the data collection is followed by a brief
Downloaded by [134.117.10.200] at 02:01 27 December 2014
and thus the HP filter (Hodrick and Prescott, 1980,
1997) is deployed in this article to obtain the cycle data
required for data selection.
A novel nonlinear prediction model

overview of the methodology of X-12 Autoregressive

Integrated Moving Average (ARIMA) and the
Hodrick–Prescott (HP) filter. Finally, a regression
model is developed and evaluated in terms of its
robustness by Mean Absolute Percentage Error
(MAPE).
The nonlinear prediction model is developed follow-
ing the concept in Fig. 1, which shows the initial value
(c), the slope (b) and the power of the nonlinearity (g).
The slope of regression in Fig. 1 would be repre-
sented as

Data collection dy
¼ k  tq  ðy  cÞ ð1Þ
dt
The independent variables are the 170k DWT bulk-
carriers building prices (NB; $million), 150k DWT
and 5-year-old second-hand ship prices (SEC) for the where k is the valuation of speed, t the time period, y
same vessels ($million), Capesize/Panamax Indian the dependent variable, c the initial value and q the
subcontinent demolition prices (DEMO; $/ldt) and power of the nonlinear regression.
Capesize bulk-carrier fleet development (FLEET; Let y – c = y0 , then
million DWT). Monthly data were collected from
the Shipping Intelligence Network from November dy0 dy
¼ ð2Þ
1995 to September 2008 (giving a total of 155 dt dt
observations).
dy0
¼ k  t q  y0 ð3Þ
X-12 ARIMA seasonal adjustment and the HP filter dt

Two standard forms were used to decompose the time dy0

series data into three factors: trend-cycle (TC), season ¼ k  tq  dt ð4Þ
y0
(S) and irregular (I) (Butter and Mourik, 1990;
ð ð
Ghysels et al., 1996; Findley et al., 1998; Casals dy0
et al., 2002). One is a multiplicative decomposition, ¼ k  tq  dt ð5Þ
y0
given by Yt ¼ Tt Ct  St  It . The other is an additive
decomposition, shown as Yt ¼ Tt Ct þ St þ It . k  tqþ1 k
Analysts have generally preferred using multiplicative ln y0 ¼ ; is constant:
qþ1 qþ1
decomposition over the additive one to acquire trend-
cycle component (TC), seasonal factor (S) and irregu- k
Let qþ1 ¼ p, where p denotes the number of indepen-
lar component (I) by means of X-12 ARIMA.
dent variables, then
Extracting the cycle component from TC can then
be undertaken using the HP filter, high-pass filter,
band-pass filter, low-pass filter and phase average ln y0 ¼ p  tqþ1
trend. The most widely used approach is HP (Pakko,
0 qþ1
2000; Ash et al., 2002; Johnson and Gerlich, 2002), eln y ¼ ept ð6Þ
 Predictive model of the freight rate of the international market
qþ1
y0 ¼ ept
ð7Þ
Let q + 1 = g and p = b, we get
0 bt
y ¼e ð8Þ
The final nonlinear regression model is shown as
y ¼ c þ a  expðb  tr Þ ð9Þ
where t is the time period; a, b, g and c are the para-
meters of the nonlinear regression; a is the magnitude
value of c, where c is the initial value, when t = 0, y =
c + a; and r is the degree of nonlinearity. The rate of
growth (slope) in Equation 9 is affected by g which
stands for the power of the nonlinearity, and thus a
greater g means greater nonlinearity.
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After developing the nonlinear model, MAPE is
used to examine the fit of the model. MAPE was
developed by Lewis (1982) and is widely used as a
means of explicating errors. Compared with other
measurements, MAPE has the following advantages
when accessing the fitness and accuracy of the predic-
tive model (Tayman and Swanson, 1996): (1) high
reliability, (2) ease of interpretation and (3) clarity of
presentation.
The MAPE formula is as follows:
1X N
jFðtÞ  AðtÞj
MAPE ¼ · 100% ð10Þ
N t¼1 AðtÞ
where F(t) is the nonlinear prediction with time t, A(t)
the actual value with time t and N the number of
observations.
In addition, the value of MAPE can be divided into
four statuses, and any value less than 20% indicates a
good predictive capability (Lewis, 1982).
III. Empirical Analysis
This section utilizes the HP filter and also explains the
variable selection, nonlinear predictive model of
freight rate and significant variable with time period.
Model development
The significant variables in this article are selected
using the criterion of R2a;p , MSE, Cp, AICp and SBC
that have been developed and commonly used to judge
regression models in number of works such as Kutner
et al. (2004). After the calculations, the second-hand
ship prices have the greatest explanatory power. The
315
160
Second-hand ship price ($mil) (x)
140
120
x_pred = 2 + 21.exp(0.0000005.t3)
100
80
60
40
20
0
Oct 95 Mar 97 Jul 98 Dec 99 Apr 01 Sep 02 Jan 04 May 05 Oct 06 Feb 08 Jul 09
Time period (t)
Fig. 2. Nonlinear model prediction of second-hand ship price
Source: Shipping Intelligence Network, November
1995–September 2008.
160 000
140 000
120 000
y_pred = –15455 + 25480.exp(0.0000000•t3)
Freight rate (y)
100 000
80 000
60 000
40 000
20 000
0
Oct 95 Mar 97 Jul 98 Dec 99 Apr 01 Sep 02 Jan 04 May 05 Oct 06 Feb 08 Jul 09
Time period (t)
Fig. 3. Freight rate nonlinear model
Source: Shipping Intelligence Network, November
1995–September 2008.
relationship between the world Capesize freight rates
(y) and the second-hand ship prices (x) is analysed
further, and Fig. 2 shows the function of the second-
hand ship prices, which can be written as
x pred ¼ c þ a  expðb  tr Þ
where c = 2, a = 21, b = 0.0000005 and g = 3. A
comparison of the model’s prediction and the real data
reveals that the MAPE is 13.11%. As this equates to
less than 20%, it may legitimately be construed as a
good prediction (Lewis, 1982). In keeping with the
data on freight rates supplied by the Shipping
Intelligence Network (Fig. 3), the function of freight
rate (y) with respect to the time period (t) can be
written as
y pred ¼ c þ a  expðb  tr Þ
where c = -15 455, a = 25 480, b = 0.0000005 and
g = 3. MAPE is 32.45%, as per Fig. 3. In this instance,
there is a significant correlation between the figure and
drastic market fluctuations between 2003 and 2005.
During this period, China chose to tighten its mone-
tary policy, whilst Brazil increased the prices of its raw
material contracts. In spite of the conceptual challenge
 316
such anomalies present, MAPE retains its capacity to
forecast the freight rate with time period t, as stipu-
lated by Lewis (1982).
After solving both equations we configure the rela-
tionship of freight rate and second-hand ship price as
y model ¼ 0 þ 1  xt þ e; t ¼ 0; 1; :::; n, where 0 ¼
17 768:18; 1 ¼ 1159:091 and e is the constant vari-
able of the equation. Figure 4 demonstrates that the
freight rate is proportional to the second-hand ship
price. The slope is 1159.091 and the intersection is
-17 768.18. The value of MAPE about the prediction
and raw data is 19.59%. The 19.59% value of MAPE
is less than 20% and indicates a good prediction.
IV. Conclusions and Suggestions
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This article obtained 155 observations over the period
from November 1995 to September 2008, and these
were used to inform the development of a model to
predict the freight rates of Capesize carriers. In the
first instance, this necessitated the development of a
nonlinear regression predictive model of conjoined
freight rates and time period. This novel nonlinear
regression model was then able to establish the rela-
tionship between the freight rates and the second-hand
ship price. The value of MAPE is 19.59%, which may
justifiably be regarded as a good prediction with the
benchmark established by Lewis (1982).
Several managerial implications can be extrapo-
lated from this study, and these are detailed as follows:
(1) Insofar as forecasting of the freight rate is condu-
cive to the minimization of operational risk, the chief
beneficiaries of this study would be the owners of
Capesize bulk carriers. (2) The empowerment of ship-
ping owners and managers that this work enables may
become a decisive factor with regard to both buying
and selling second-hand ships. Again, the accurate
forecasting of freight rates is the key to this. (3)
Investors in the shipping industry can use the findings
160 000
140 000
120 000
y_model = –17768.18 + 1159.091•x
100 000
Freight rate
80 000
60 000
40 000
20 000
0
0 20 40 60 80
Second-hand ship price
Fig. 4. The model of freight rate with second-hand ship price
Source: Shipping Intelligence Network, November
1995–September 2008.
C.-C. Chang et al.
of this work to act more prudently with the guidance
of more accurate forecasting. Given the greater under-
standing of the earnings of shipping companies that
this work allows, investors are thus more able to
arrange their portfolios in keeping with patterns of
market profit rather than risk. (4) As a corollary of
the previous point, there is ample opportunity for
bankers to more confidently refinance the loans of
shipping companies.
While these applications are clearly supported by
the empirical evidence, it is perhaps premature to
characterize this study as definitive, in the light of
how the sample was exclusively drawn from Capesize
dry bulk vessels. However, there is a clear scope for
further validation with respect to other kinds of ves-
sels, such as Panamax or Handymax, in addition to
tankers. Although such a task is necessarily reserved
for future researchers, on balance it appears that this
initial step is already a considerable achievement.
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