Dry Bulk Shipping

Dry bulk trades have been transformed over the past three decades. The average size of ships engaged in dry bulk trades has doubled in size. Dry bulk trades have in fact evolved from the tramp shipping market. Tramp markets were served by small, general-purpose ships. Historically, general-purpose ships were steaming the ports in search of business, spot market cargoes. Shipowners use a global network of shipbrokers to seek cargoes for their ships. Shipbrokers perform a fundamental function in providing information to both shipowners and charterers. As cargo lot sizes and ship sizes have increased, there is a tendency for significant charterers to use long time charters, consecutive voyage charters, and contracts of affreightment. Despite the growth in these types of contracts, there is still a huge volume of spot charters and spot ship chartering is a very competitive market.

The dry cargo market can be defined using two basic methods:

  • Tramp Ship
  • Tramp Market Characteristics

Tramp Ship

In 1959, Hector Gripaios defined the tramp ship as a “deep-sea tramp ship carry any cargo between any port at any time, always providing that the venture is both legal and safe”. In 1972, Prof. Metaxas’ book “The Economics of Tramp Shipping” was published. Prof. Metaxas defined the tramp ship as “ship with a tonnage of 4,000 DWT or above, which in the long-run does not have a fixed itinerary, and which carries mainly dry cargo in bulk over relatively long distances and from one or more ports to one or more ports is an ocean or deep sea tramp”. Both tramp ship definitions emphasize the fact that tramp ships have no fixed pattern of employment. The minimum ship size and deep-sea nature of the tramp ship is introduced by Prof. Metaxas.

Tramp Market Characteristics

Defining the dry cargo market with specific ship characteristics have some drawbacks. In the dry bulk shipping market, cargo volumes and average lot sizes have increased since the 1970s. Hence, the average size of most ship types dramatically increased. Modern dry bulk ships are more specialized than the old tramps and dry bulk ship size reached up to 400,000 DWT. On the other hand, larger ships require larger capital requirements, shipowners are only prepared to risk the commitment to such large ships if shipowners have long-term contracts. Handysize, handymax, panamax, capesize bulk carriers are more specialized and are often employed on contracts of affreightment (COA). Contracts of affreightment (COA) permits the shipowner to meet the charterer’s requirements by using more than one ship. The modern definition of the dry bulk market would need to include the development of these long-term contracts. Freight rates for these long-term contracts are still influenced by the spot market. Dry cargo definition that is based upon market characteristics might be more applicable.

In dry cargo markets, most shipping contracts between charterers and shipowners become well known to all the market participants through shipbroking companies. Therefore, all participants in dry cargo markets know the prevailing levels of freight rates and can make decisions accordingly.

Dry cargo markets include many types of contracts such as spot fixtures, consecutive voyages, contracts of affreightment (COA), time charters. Dry cargo markets’ clearest definition may be found in the market characteristics rather than in the particular specification of the ship.

The dry bulk freight market is a very competitive market and very close to the perfectly competitive market model. Important features of a perfectly competitive market model:

  1. Every supplier seeks to maximize profits
  2. Numerous buyers and sellers in the market
  3. The service offered by each shipping company is exactly the same as every other company
  4. Easy exit from and entry to the market.
  5. Full information is available to all participants in the market place

The dry cargo market fulfills all of the features of a perfectly competitive market model. Shipowners and charterers seek to maximize their profits. A large number of shipowners and charterers in the dry bulk market. No single shipowner or single charterer of the dry bulk market can influence the behavior of freight rates. Dry bulk freight rates cannot be fixed. Dry bulk freight rates are driven by overall demand and supply conditions. All shipping companies in the dry bulk market offer the same service, same cargo space, and safe transportation of cargo in a timely manner. Assuming that the analysis is based on ships of an acceptable standard. Entry and exit from the dry bulk market are fairly easy. Easy does not mean costless. A person can enter the dry bulk market by buying a secondhand ship or by ordering a newbuilding ship and becomes a shipowner. New shipowners would not suffer a cost disadvantage from entering the dry bulk market. On the other hand, if the shipowner earns unsatisfactory profits and sees no long-term prospects for recovery, then the shipowner can put the ship up for sale and exit dry bulk market. If the shipowner would incur a loss when selling the ship, this could be a barrier to exiting. If many shipowners cannot make profits, and buyers are few, shipowners can either lay up or scrap the ship. If the ship is scrapped, a dry bulk market exit occurs. Entry and exit are easy in dry bulk market because existing shipowners have no way of preventing such a process. In the dry bulk market, full market information is available to all participants by Baltic Exchange. Shipbrokers act as information transmitters. Shipbrokers ensure that all dry bulk market players are kept fully informed of any event that might affect the market.

One crucial characteristic of a competitive dry bulk market is that shipowners have no individual influence over market freight rates. Profit is made in the margin between revenues and costs. The only element that shipowners have control over cost. Competitive markets tend to be driven by cost trends, rather than by demand features.

Dry Bulk Market Trends Over the Past 30 Years

Over the past 30 years, the total volume of cargo has more than doubled at an annual average compound growth rate of 4.5% per year. Demand growth is much more uneven on a year-to-year basis over the past 30 years. The highest rate of growth to be observed occurred in 2010, at 12.1%. 2010 growth rate is about three times the long-term average. Since 1995, ship tonnage growth rate has fluctuated between -2.8% and 12.1%. Over the past 30 years, shipping demand growth tends to move in cycles of good years, medium years, poor years, and back again. In other words, freight rates rate peaks, declines, becomes negative, recovers again. Shipping cycles exist around a rising trend in the total volume of cargo moved.

In the period 1999-2015, the growth rate of tonne-mile demand has varied between -2.7% and 13. 1%. In the period 1999-2015, tonne-mile demand increased by 5.2% per year compound, on the other hand, cargo tonnes moved grew by 4.5% per year. Differences in the growth of tonnage demand and tonne-mile demand imply that journey distances have fluctuated. The average haul has declined from 5,508 miles in 1999 to 5,437 in 2015. In the period 1999-2015, the growth rate of the dry bulk fleet has averaged 5.7% per year. In sum, between 1999-2015, supply capacity has exceeded demand. Ship supply capacity should properly be measured in terms of tonne-mile. Furthermore, the laid-up fleet has been steadily declining since 1992.

Cost Structure of Tramp Ship Operators

Tramp ship operators have to identify and split their costs between fixed and variable costs in the short run. In the shipping business, most variable costs related to producing shipping output, in other words undertaking a voyage. The distinction between avoidable (variable) and unavoidable (fixed) costs is also useful when making operational decisions.

Ship Lay-up Decision

Tramp ship operators to lay up a ship or to continue to trade is a complex decision. If the trip loses money i.e. freight revenues are less than the total costs, then the ship could not be laid up. Because lay-up is not a costless activity, lay-up costs money. During the lay-up, some costs will be reduced. On the other hand, the ship has to be maintained, provided with some power, anchored safe lay-up position, and skeleton crew provisions must be provided. Unavoidable (fixed) costs will be incurred by the shipowner whether the ship trades or lays-up. Fixed costs are common in both situations whether the ship trades or lays-up. Hence, fixed costs cannot affect the outcome of the lay-up decision. For example, the shipowner estimates that daily operating costs are $12,000 for a ship in a trading condition and $5,000 in lay-up. $4,000 of this cost is assumed to be the capital cost of owning the ship. Capital cost is a fixed cost and unavoidable. Therefore, capital costs can be canceled out. Relevant costs become $8,000 per day when trading and $1,000 per day when laid up. Assume that the shipowner is now offered a voyage business which takes 40 days and voyage-related costs of $400,000 in the period. On a total cost basis, the owner will require $880,000 in revenues. If the ship has a 44,000 DWT carrying capacity, this implies a rate of $20 per tonne of cargo delivered. But suppose the market rate is only $18. Should the shipowner lay up the ship?. If the shipowner lays up the ship, the shipowner faces extra costs of $40,000 (40 days x $1,000 lay-up costs per day). If shipowner takes business, shipowner gain $792,000 ($18 x 44,000 metric tons ) in extra revenues . But they spend operating costs of ($8,000 x 40 days) + $400,000 = $720,000. Therefore, the shipowner gains $72,000, compared to the loss of $40,000 resulting from lay-up. Shipowners should take a voyage charter business, even though the rate is less than the full cost of the trip. On the other hand, the same conclusion would be reached if the capital costs of $4,000 per day had been included. Here above example ignored any additional lay-up costs itself. Including lay-up costs would emphasize that trading will often take place at market rates which are less than the long-run costs.

In order to decide to lay up a ship, the shipowner should develop a model of the breakeven level of freight rates needed to maintain trading. Here above hypothetical lay-up example has implicitly assumed that the shipping company has one ship in operation. On the other hand, a large number of dry shipowners operate large fleets. As the number of ships operated by a company increases, unit costs decrease. Tramp operators tend to have a higher proportion of their costs as variable costs when compared to liner ship operators.

The distinction between short-run fixed and variable costs is not clear cut. Short-run fixed and variable costs depend on:

  • nature of the problem
  • type of ship
  • time period

Here above lay-up example, some items of daily operating costs could be avoided (variable costs). On the other hand, if the shipowner was considering between two trading options, the entire daily running cost could not be avoided and becomes a fixed cost. Shorter the time period under consideration, the greater the proportion of costs that will be fixed costs. Once a ship is at its loading berth (voyage is commenced), practically all costs become fixed costs (unavoidable).

Breakeven Analysis in Determining Minimum Freight Rates

In order to determine the minimum freight rates, breakeven analysis is a very well-known method to present information on revenue and costs. In the breakeven analysis, the normal procedure is to calculate the load factor (level of utilization) required to breakeven point.

  • Profit: actual load factor (utilization level) exceeds the calculated number
  • Loss: actual load factor (utilization level) below the calculated number

In liner shipping, ships operate on a timetable and liner ships have to sail whether or not ships are fully loaded. Therefore, defining the load factor (utilization level) may well be significant in liner shipping. On the other hand, usually in dry bulk shipping, dry bulk ships are full cargo loaded (high utilization levels). Dry bulk ships do not operate on a timetable and sail whether or not they are fully loaded.

Instead of applying the model to working out the breakeven load factor, it can instead be employed to work out the breakeven rate. The Breakeven rate is the freight rate which will ensure that a full cargo load will generate sufficient revenue to cover costs. Dry bulk freight rates are quite volatile. Therefore, it is useful to calculate the minimum freight rate required to breakeven the point.

Freight Rates Breakeven Analysis is based on the following assumptions:

  1. The basic unit of analysis is the ship
  2. Costs and revenues are assumed to be linear
  3. Plentiful market players. Shipowners and charterers cannot influence the market freight rate on their own.
  4. The actual freight rate is taken as fixed since no individual has any ability to alter freight rates. Market players are price takers

The slope of the Total Revenue line represents the market price; since total revenues rise in line with volume carried, the price is constant all the way along the Total Revenue line. Total fixed costs are the same, no matter what cargo quantity is loaded. Total variable costs are the difference between total costs and total fixed costs. At the cargo quantity level (Q) where total revenue equals total cost (Total Cost = Total Revenue = Equilibrium Point) is the Breakeven Freight Rate. This cargo quantity (Q) is called the Breakeven Quantity because it is at this point that total revenues cover both variable and fixed costs.

In a shipping company, the lower the proportion of variable costs to fixed costs, the greater the scope for the freight rate to fall below the long-run total cost. This is one of the factors that explain the sharp fluctuations that are observed in freight rates in the dry cargo trades when contrasted with liner trades. Dry bulk companies have high variable costs, liner companies have high fixed costs. In depressed markets, dry bulk shipowners may well accept short-run trip charters at rates well below those required to cover their long-run costs, if the proportion of variable costs are low.

Modeling Dry Cargo Shipping Market

The shipping market can be separated into specific segments. During modeling and analyzing the dry cargo shipping market, the following assumptions are made:

  1. Each shipowner is seeking to maximize profits (or minimize losses)
  2. Each charterer is seeking the lowest freight rate (consistent with an acceptable quality of service offered by the shipowner)
  3. A large number of fixtures and all market participants are informed
  4. Perfect competition

There is a downward-sloping relationship between the cargo volumes required to be moved and the level of freight rates, other things being equal. The higher the freight rate, the smaller the demand for cargo movements and vice versa. Demand for dry cargo tonne-miles is a derived demand. Derived demand price elasticity basic principles:

  • Final products’ price elasticity
  • Existence of close substitutes
  • The proportion of transport costs in the final product

Derived demand price elasticity example: grain. Grain movements are driven by:

  • Production trends in different regions of the world
  • Drought, weather conditions, and crop yields
  • Changing patterns of food consumption

Gain is used to making bread, pasta. Furthermore, the grain is used to feed animals to produce meat. Final products such as bread, pasta, meat all have a low price elasticity of demand. Most empirical evidence suggests that bread, pasta, meat are price inelastic. Major grain exporters are located in South America, US Gulf, and Australia. Therefore, grain has to be moved by sea, because air transport is a very expensive alternative and not feasible. Currently, freight rates are about 6% of the final price of most traded commodities. Market demand is likely to be extremely inelastic with respect to changes in freight rates. The shipping demand curve can be represented as an almost vertical line. An extremely inelastic shipping market conclusion is for the shipping market as a whole. In some trade routes, the demand on that route might be more sensitive to changes in that route’s freight rate. Shipowners always seek out trade routes that are more profitable. On the other hand, the ability to switch a ship from one route to another at relatively short notice implies that freight rates should not get too out of line with each other.

Shipping Supply

In the dry bulk shipping business, under competitive conditions, shipowners should never accept a freight rate that is less than the Average Variable Cost (AVC). Furthermore, different ships have different costs, because of different ages, flags, or crew costs. Assume that all average variable costs of all bulk carriers on the market were known and that a ranking could be organized starting with the dry cargo bulk ship with the lowest average variable cost to the highest. If shipping freight rates were high enough and cargo volumes large enough, all these dry bulk carriers would be employed. Now, if the shipping freight rate is steadily reduced, ships with high variable costs (avoidable) will cease trading first. As freight rate is lowered more, more dry bulk carriers are forced into idleness, until none is trading. Capital costs should play no role in the lay-up decision in the short run since capital costs have to be met whether or not the ship is being traded. Older ships will tend to have higher operating costs than newer ships, so the majority of laid-up ships are the older ships of the fleets. In the short-run period, ships’ variable costs can be altered by varying the ship’s speed. Lower ship speed means lower output and lower costs. When demand is low and so freight rates are low, the loss of shipping output is more than offset by the benefits of slow steaming. The shipping supply curve becomes steeper in slope as maximum tonne-mile production is attained. Because:

  • Additional tonne-miles being created near full capacity are being created by the more inefficient ships in the fleet the ones with higher variable costs. High variable cost ships add a lot to costs without adding that much extra to output
  • Speed increases are a limited way of raising output. Extra costs of fuel consumption increase more rapidly than the extra output

The shipping supply curve eventually becomes vertical which represents the notion of full capacity utilization. In the short term, no more shipping output can be obtained from the existing fleet.

Equilibrium Freight Rate

The shipping market is defined as the interaction of supply and demand. Demand and supply both together determine the equilibrium freight rate (P) and quantities (Q) moved at that freight rate. Shipping demand conditions are affected by the volume of world trade, which is driven by overall economic activity, and changing degrees of openness towards trade by individual nations. As demand volumes increase, there is a relatively small rise in the market freight rate and a large rise in tonne-miles produced at the beginning. But, as demand volumes keep increasing, the increase in demand is translated into large increases in freight rates, because supply is very limited supply becomes very inelastic. This model can be used to examine short-run fluctuations in shipping market conditions, but not the long-run period. Because, in the short-run period, the existing stock of ships is limited. But, in the long-run period, altering the stock of ships (newbuilding and scrapped ships) shifts the equilibrium point. In the short-run period, when demand increase, freight rates move up very sharply and supply does not increase much. Existing shipowners make large profits and this situation encourages shipowners to order new ships. In the second-hand market, the value of existing ships also rises. Shipping market players expect that profits are going to be healthy in the future. Increased number of newbuilding orders will translate into a rightward shift in the supply curve in the long term and this will lead to a fall in freight rates if demand remains the same. In the short-run period, when demand decrease, this situation cause reduction in supply and a rise in ship lay-ups. In the short-run period, when some ships will be trading at freight rates which do not cover full costs. Operating slightly below variable costs is acceptable in the short-term, but it is not sustainable in the long-term. Therefore, some ships will be laid up or scrapped. The scrapping of ships leads to help raise freight rates if the supply shifts far enough.

Higher or lower freight rates create incentives to increase or to decrease tonne-miles supplied through the following mechanisms:

  • higher or lower freight rates encourage a higher or slower ship speed
  • higher or lower freight rates will encourage shipowners with high variable cost ships to scrap or lay-up

In the long-run period, fluctuations in freight rates and lay-up numbers encourage shipowners to:

  • Embrace or reject newbuilding orders
  • Progress or delay scrapping ships

Expectation of Shipowners

A key factor influencing shipowners’ decision to scrap or order new ships is the expectations of future levels of freight demand and freight rates. Future expectation is crucial in determining how the shipping market reacts to short-term changes in demand and freight rate levels. If shipowners are optimistic about the future freight rates and demand, falling rates in the short term may not lead to a longer-term reduction in shipping capacity. If shipowners are pessimistic about the future freight rates and demand, any short-term market downturns may lead to a shortage of capacity if demand grows at an unexpected place. Shipowners’ future expectations can be very volatile. Volatility helps to explain the sudden increases and sudden falls of freight rates, particularly when political events, wars, or other events can have strategic impacts on dry cargo markets.

Here above fright rate model implies:

  • A strong positive correlation between demand growth and new orders when the present stock of ships is highly utilized with low levels of lay-up
  • Freight rates should be sensitive to short-run market conditions. Freight rates reflect both present market and future expectations
  • Exceptional events such as wars, political event, embargoes, closure of canals generate significant increases in freight rates when the present stock of ships is highly utilized
  • A strong positive correlation between freight rates and new orders, with periods of high rates associated with higher than average orders, lower than average lay-ups, and scrapping

In the period between 1947-1984, based on a notional value of 100 for 1965, without inflation effects, later shipping booms would look larger and the earlier shipping booms look smaller. There are substantial periods of demand growth in which freight rates do not fluctuate all that dramatically. In these flat periods:

  • Plenty of ship capacity available to meet any increase in demand
  • Expansion of demand is matched by the correct expansion of capacity, brought about by accurate expectations generating the correct level of ordering

Shipping spikes are generated by external events that are not completely anticipated by the shipping market. Shipping spikes are generated by external events such as wars or war-related events. For example, the 1973 shipping crises. Growth in demand for shipping services was very high in the late 1960s and early 1970s. Many shipowners ordered new large ships. However, in September 1973, the shipping boom came to a halt with the six-day Arab-Israeli war. Suez Canal closed and the Arab oil embargo on countries seen as pro-Israel triggered a 400% rise in the price of crude oil delivered a huge shock to the Western economies that had been previously growing quite rapidly. Western economies’ growth faltered and income fell in 1974. Lower economic growth means lower growth in the demand for shipping.

Shipping rate peaks of 1970 and 1973 correspond to two of the years of highest annual growth of tonne-mile demand:

  • 1970 Annual tonne-mile demand growth 3%
  • 1973 Annual tonne-mile demand growth 2%

Shipping demand actually fell by 2.3% in 1975. In 1984, demand grew at 10.2%, but there is no peak in the freight rates in 1984. The difference in the two situations is due to laid-up tonnage. In 1970 and 1973, very little tonnage was laid-up. However, in 1984, over 20% of the fleet was laid up. In 1984, an increase in demand was easily met from existing ship capacity and no peak in freight rates.

In 1970 and 1973 peaks, demand is at or near full ship capacity, so further increases triggered to generate large freight rate increases as supply response was very small. But, in 1984, there was plenty of spare capacity and significant increases in demand were met with no corresponding rise in freight rates. The shipping volatility index, based on 1985 = 100, shows that the average freight rate has risen sharply since 2003, and so the volatility of the freight rate. The dramatic change in the shipping market has been since 2003. Since 2003, intra-year shipping volatility jumps from around 3% to figures which range between 14% and 33%.

The dramatic increase in freight rates and volatility between 2003-2008:

  • Tonne-mile demand rose at a remarkable rate between 2003-2008 (over 6% per year)
  • Fleet capacity did not grow as fast, ships have to work harder and freight rates spiked
  • An increase in freight rates did not solve the problem
  • Gross profit margins were very large

Between 2003-2008, such huge earnings caused the scrapping of dry cargo ships to more or less disappear and generated a record number of newbuilding orders. Future freight rates are therefore being affected by the delivery of new tonnage and prospective future demand growth. The dramatic increase in freight rates also affected the price of secondhand tonnage and secondhand prices became very high. Between 2003-2008, in certain cases, a secondhand ship became more expensive than its newbuild equivalent due to delivery time. This is called ready ship premium.

Reasons for a dramatic increase in freight rates and volatility between 2003-2008:

  • In 2001, China entered the WTO (World Trade Organization). China became a major player in international trade. China’s economy has grown at 10% per year compound for many years. China’s demand for steel China became the world’s largest steel producer which increased the demand for steel shipping
  • Production of steel requires iron ore and coking coal. China’s demand for both iron ore and coal rose dramatically
  • Rapid growth in world trade has stimulated increased manufacturing. Manufacturing triggered the demand for raw materials and also trade has been liberalized.
  • Many other economies have grown rapidly such as India
  • Shortages of suitable ships caused to move cargoes into two bottoms. Shortage of ship supply as cargo demand shifted. Transportation costs rose.

Dynamic Shipping Model

Here above freight rate model concentrated upon demand and supply conditions. The only additional factor is the role of shipowners’ future expectations. Shipowners’ future expectations help to determine shipowners’ ordering, scrapping, and operational decisions. In order to determine the shipowners’ future expectations, we need to look at past events. Historical data and recent trends can be projected forward to estimate the shipowners’ future expectations as to future demand conditions.

Newbuilding ordering in the early 1970s can be seen as a response to the widely-held view that the market was going to continue to grow as rapidly in the second half of the 1970s as it did till 1973.

If a shipowner anticipates a prosperous period, the shipowner needs to order as early as possible, because newbuilding ship construction takes around two years if there is an available slot at the shipyards. There are two possible outcomes:

  • Shipowner’s future expectations are fulfilled, shipping demand grows as every shipping market player is expected it to and the capacity is met
  • Shipowner’s future expectations turn out to be incorrect and the unexpected happens. New ships have been ordered and a large number of them have been delivered. The shipping market is oversupplied.

In 1973, shipping market conditions were a nightmare for shipowners but profitable for charterers. The shipping market was in turmoil with large numbers of ships and little growth in shipping demand. In 2010, a similar situation occurred, following the 2008 financial crisis. Annual deliveries of new bulk carriers continued to increase until 2011 when 97.7 million DWT was delivered. The scrapping of dry bulk ships also increased, peaking in 2012 at 32.5 million DWT. The key difference between the 1970s and 2010s shipping crises is that laid-up and idle tonnage remained at low levels in 2010s, with shipowners opting to slow steam in order to absorb some of the surplus tonnages. Dry freight markets continue to be depressed since 2012, notwithstanding seasonal and other temporary improvements. In both cases, the 1970s and 2010s shipping crises, a contributory factor to the over-ordering of newbuilding ships are that shipping finance was widely available during a period of growth and high freight rates. Estimating demand and supply conditions in the next decade would therefore make very little sense if an analyst just examined demand and supply in the current year.

The current shipping supply available is the consequence of past decisions by shipowners.

Shipping market players never really learn from previous mistakes and keep ordering new ships. Overbuilding will impact on earnings in all shipping markets. The crucial factor is to order early and not to be the last shipowner to order. In the shipping business, once freight rates increase and the shipping market starts to move, other shipowners join in and herd behavior will eventually result in tonnage oversupply. Therefore, the shipping market generates its own dynamic behavior model over time, as the shipping market continually readjusts to new demand conditions. Poor market conditions influence newbuilding decisions and orders became relatively scarce. On the other hand, if demand conditions alter for the better this lack of new investment may itself generate another shipping cycle.

Dry cargo markets appear to move through cycles of boom, recession, slump, recovery, and back to boom again. Shipping cycles are partly generated by the cyclical growth in shipping demand. However, shipping cycles are also a result of the fact that supply adjustment is a slow process. Shipping analysts have suggested that there are cycles of different periods observable in the shipping market. These different shipping cycles are overlaying each other. Seasonal pattern of demand as being the shortest cycle. On top of that, world demand growth appears to cycle over 5-7 years. Ship supply cycles are longer, on average 13 years. On top of that, very long cyclical patterns of around 50 years. Viewing the shipping market as a dynamic model, as a process in which demand conditions and supply responses change over time, gives a much richer picture of the way the shipping market operates. In sum, ship supply responds to a change in demand, often spread out over several periods.

Freight rates are the outcome of a bargaining process, based on their expectations of future demand and supply, rather than simply the balance of supply and demand at a particular place and time. Shipowners and charterers form expectations of future freight rates and bargain over the deviation of future rates from the latest fixture. The final outcome is influenced by the relative bargaining power of each shipowner and charterer. If the charterer has more power freight rate deviation will be lower than latest fixture. If the shipowner has more power freight rate deviation will be higher than the latest fixture. Many factors can affect the relative bargaining power of shipowners and charterers, but economic conditions are the single most important factor in most situations. In improving economic conditions, shipowners have bargaining power. In worsening economic conditions, charterers have the bargaining power. In bargaining power, information is also an important factor especially when information is comprehensive, accurate, timely, and cheap. Therefore, the role of the shipbroker is crucial in central to the discussion on bargaining between shipowners and charterers. Despite all the improvements in communications and technology, shipbrokers continue to have a role in assimilating information for shipowners and charterers.