Convergence
Back in the Dark Ages, I wrote my PhD thesis on the ocean shipping industry. Specifically, I applied core theory to explain the diversity of organization across different sectors of the shipping business, with collusion in the liner (container) business, and competition in the bulk sector. Not long after going into academia, I realized that the core theory thing was a dead end professionally, so I remade myself into a derivatives scholar.
Well, reading the Economist this week, I had a peanut butter-chocolate Reese’s moment: the magazine ran an article about derivatives on container shipping rates:
Clarksons, the world’s biggest shipbroker, which pioneered derivatives for dry-bulk cargoes like iron ore and coal in the early 1990s, made its first container-derivative trade in January this year. Since then two other London-based brokers, ICAP and Freight Investor Services, have also started to offer derivatives settled against the Shanghai Containerised freight index, which is based on per-box rates on the world’s busiest container routes. Alex Gray of Clarksons admits that the market is tiny at the moment. But he reckons that container derivatives may be worth 5-10% of the physical market by the end of 2011.
One interesting sidelight in the article:
Half the container fleet runs like a bus network with regular sailings at set times. With these ships, prices are set under long-term contracts. But the spot market, where vessels are chartered for specific trips or time periods, is very unpredictable, particularly since regulators put a stop two years ago to an arrangement between shipping lines (the top 15 of which control 80% of the market) to manage overcapacity by co-operating on routes and rates.
If this is an accurate description of the business, it’s changed a lot since I studied it in any detail. The most interesting feature is the statement about regulators. My thesis argued that the cost and demand structures in liner shipping (cost indivisibilities and highly divisible demand) made competition unstable, and that collusion (shipping conferences–“an arrangement between shipping lines . . . to manage overcapacity by co-operating on routes and rates”) was an efficient response. If collusion is no longer permitted, then some alternative, e.g., more long term contracting, should develop. (I also showed that long term contracts can mitigate the inefficiencies that exist with spot contracting.)
Anyways, it’s interesting to see the convergence of the two seemingly divergent issues that have defined my professional career. Maybe it’s time to take another look at the shipping business. (Don’t worry: I’ll still have time for you, Gary and Bart.)
