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Determinants of Vessel Speed in the VLCC Market : Theory vs.practice

Maanum, Mathias Owing; Selnes, Henrik Prøsch
Master thesis
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http://hdl.handle.net/11250/300532
Issue date
2015-09-17
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  • Master Thesis [2465]
Abstract
A widely accepted relationship in optimal speed theory is that speeds of vessels respond

positively to changes in freight rates and negatively to changes in bunkers. In this thesis we

analyse how this hypothesis corresponds to what is actually practiced by market participants.

In addition, an important contribution of this thesis is to examine how vessel specific and

operational specific variables affect speed in practice. The analysis is based on the

theoretical speed optimization models of Ronen (1982), and utilizes a comprehensive panel

dataset with observed average daily speed of 607 VLCCs1 in the period from Jan 2013 to

Feb 2015. By applying a random effects panel data model, we are not only able to explain

the variations within one vessel over time, but also variations between vessels. The empirical

analysis shows considerable differences in how speed responds to changes in explanatory

variables for the laden and the ballast leg. For the ballast leg, we find significant

relationships between freight, bunkers and speed, in line with theory, but less in magnitude

than theoretical models suggest. Conversely, for the laden leg we find no evidence for any

relationship between speed and macro variables. Our analysis suggests that financing costs

and the cost distribution among charterers and owners create split-incentive problems for VC

contracts, leading to the discrepancies between theory and practice. The findings can also be

caused by a larger share of the fleet sailing on TC contracts than first anticipated. Further, we

find only slight evidence that vessel specific factors may have an influence on the speed

decision. Cargo owners with operational control of the vessels are shown to have other speed

incentives than traditional shipowners, with more emphasis on cargo value and the sourcing

of cargo. Our findings substantiate that before introducing market-based measures to reduce

emissions, regulating authorities should fully understand the true speed incentives of the

market participants.

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