MARITIME INDUSTRY The Impact of Freight & Crude Oil Rates on the Stock Performance of Shipping Companies. An Econometric Analysis Elisavet Porlida Sotirios Kafaridis SCHOOL OF ECONOMICS, BUSINESS ADMINISTRATION & LEGAL STUDIES A thesis submitted for the degree of Master of Science (MSc) in Banking & Finance November 2016 Thessaloniki – Greece Students Name: Sotirios Kafaridis Elisavet Porlida SID: 1103150009 1103150022 Supervisor: Dr. Panos Pouliasis Co-Supervisor: Dr. Hanno Friedrich We hereby declare that the work submitted is ours and that where we have made use of another‟s work, we have attributed the source(s) according to the Regulations set in the Student‟s Handbook. November 2016 Thessaloniki – Greece Abstract The main purpose of this dissertation, after providing an extensive review with respect to the major characteristics of maritime industry, is to examine the extent of which the freight rates affect the stock performance of shipping companies. In order to do so, we conducted an empirical analysis by regressing the returns of Dow Jones Global Shipping Index (R_DJGSH), which comprises the 25 highest ranked shipping companies by indicated annual yield, on the returns of Baltic Dry Index (R_BDI), a major freight rate indicator. We expected that the higher the price of freights the better the stock performance of the shipping companies. The results that came up after the analysis confirmed the aforementioned positive relationship. Later on, we tried to examine whether the addition of one more independent variable, this of the returns of Crude Oil Index (R_CLC1), will provide a better interpretation to our investigation. Crude Oil is added due to the fact that it is one of most important factors when evaluating the transportation costs of a shipping voyage; It is estimated that almost half of the total cost of a shipping voyage is attributed to fuel costs, thus, the fluctuations of crude oil are likely to have a major impact on the profitability of shipping companies. As expected, the addition of R_CLC1 enhanced significantly the predicting ability of our model. The data have been collected in a time period between September 2006 and September 2016 on a weekly basis and were extracted from Thomson Reuters “Eikon”. We ran econometric tests for stationarity for all the three variables, by using unit root tests, i.e., Dickey Fuller (DF), Augmented Dickey Fuller (ADF) and the stationarity test Kwiatkowski–Phillips–Schmidt–Shin (KPSS). Further on, we estimated simple and multiple linear regression models, and tested the significance of the independent variables by using the Stepwise selection method. Finally, we tested if the five principal assumptions for the use Ordinary Least Squares (OLS) estimators are valid in our regression model and, in particular, we ran statistical tests in order to check the existence of heteroscedasticity, autocorrelation and normality among the residuals, as well as the existence of multicollinearity between the explanatory variables. All the tests have been run in the statistical package of “E-Views”. The conclusion is that both the R_BDI and R_CLC1 are statistically significant, the regression model meets all the assumptions and explains sufficiently the total variability of R_DJGSH at a percent of 20%. Keywords: Shipping, Freight Rates, Stationarity Test, Regression Model, Ordinary Least Squares Sotirios Kafaridis Elisavet Porlida November 2016 Acknowledgments We would like to express our gratitude to our supervisor Dr. Panos Pouliasis and our co-supervisor Dr. Hanno Friedrich for their assistance and valuable advice. We would also like to thank Kühne Logistics University in Hamburg, Germany for their warm hospitality and for accepting us as exchange students in order to conduct our dissertation. Last but not least, a special word of thanks to our parents and siblings for their continuous support and devotion to us. Table of Contents 1. Introduction ............................................................................................................................................. 1 2. Segmentation of Maritime Industry ...................................................................................................... 3 2.1 The Tanker Sector ............................................................................................................................. 3 2.2 The Dry-Bulk Sector ......................................................................................................................... 6 2.3 The Container Sector ........................................................................................................................ 7 2.4 Summary ............................................................................................................................................ 9 3. The Four Shipping Markets ................................................................................................................. 10 3.1 The Newbuilding Market ................................................................................................................ 10 3.2 The Freight Market ......................................................................................................................... 10 3.3 The Sales And Purchase Market .................................................................................................... 12 3.4 The Demolition Market ................................................................................................................... 13 3.5 Summary .......................................................................................................................................... 14 4. The Shipping Business Cycle ................................................................................................................ 16 4.1 How Business Cycles Affect Freight Rates (Example On Historical Data) ................................ 19 5. The Baltic Exchange .............................................................................................................................. 22 5.1 Baltic Exchange & Freight Market Information .......................................................................... 23 6. Introduction to the Econometric Analysis........................................................................................... 24 6.1 The Data Set ..................................................................................................................................... 24 6.1.1 The Dow Jones Global Shipping Index (DJGSH) ................................................................. 24 6.1.2 The Baltic Dry Index (BDI) ..................................................................................................... 26 7. Econometric Analysis ............................................................................................................................ 29 7.1 Unit Root & Stationarity Tests ....................................................................................................... 29 7.2 Regression Model ............................................................................................................................ 33 7.3 Assumptions Diagnostics ................................................................................................................ 37 7.4 Summary .......................................................................................................................................... 43 8. Conclusions ............................................................................................................................................ 44 9. Bibliography ........................................................................................................................................... 45 10. Appendix .............................................................................................................................................. 46 List of Figures Figure 1 Patern of international seaborne trade in major commodities ....................................................................... 2 Figure 2 Historical growth of world tanker fleet by size category ................................................................................ 5 Figure 3 LNG trade, 1984-2006 ................................................................................................................................... 5 Figure 4 Historical growth of world dry-bulk fleet by size category ............................................................................. 7 Figure 5 Historical growth of the world container fleet by size category ..................................................................... 8 Figure 6 World Shipping Fleet ...................................................................................................................................... 9 Figure 7 Newbuilding prices for tankers of different sizes .......................................................................................... 10 Figure 8 Independent tanker fleet trading on time charter and spot ........................................................................... 12 Figure 9 Historical second-hand prices of five years old tanker of different sizes ...................................................... 13 Figure 10 Historical scrap prices for tankers of different sizes ................................................................................... 13 Figure 11 A generic cycle showing frequency and amplitude.....................................................................................