Consequences of freight rate volatility in liner shipping and the role of strategic alliances

Abstract

The purpose of this paper is to analyze and understand how the infamous fluctuations in freight rates influence (spill over) upstream (shipper and ship-manufacturing) and downstream (ports and ship-recycling) from the perspective of a vertical maritime supply chain. Rate volatility spillovers are examined in the time and frequency domains. As to be expected, the intensity and direction of spillovers differ across time. In general, however, freight rates exert a spillover effect on both the shipbuilding and ship-recycling markets, with a more pronounced impact on the former. We find that the period after 2013 saw a negative impact of freight rates on shippers and ports, primarily due to increased volatility in the global shipping market, which introduced significant unpredictability in shipping costs and operational planning. In the frequency domain, we establish a complex long-term trend and market cyclicality, linked to the general economic cycle. In addition, we calculate industry concentration in the ocean transportation of containers, to understand the impact of alliances and acquisitions (A&A) on freight rates and their spillover effects. Less evidence of industry concentration efforts is observed in prosperous shipping markets where freight rates are sufficiently rewarding. Instead, a higher level of activity towards concentration is observed in periods of market downturns. In such periods, A&As are seen to have a more profound effect on rate spillovers. The study furnishes empirical evidence concerning the spillover effects of freight rates across diverse markets, shedding light on the interconnectedness and dynamics within the various segments of the maritime supply chain. Moreover, we elucidate the significant role played by strategic alliances and acquisitions in the maritime sector, providing a nuanced comprehension of how industry structure influences business behavior and market volatility. The insights garnered from this research hold substantial value for policymakers and business strategists navigating the shipping industry's intricacies, offering them crucial data to support their decision-making processes.