Risk and Return Trend. It is absolutely key to manage risk versus return parameters in the fast-moving shipping markets that commonly display high levels of volatility, arising from rapidly-changing freight / daily hire rates. Volatility is a measure of the degree to which price moves, primarily measured via standard deviation (the average amount price differs from its mean over a period of time). Freight rate volatility is broadly driven by the balance that exists between existing and near-future shipping demand (commodity-cargo volumes / ship sailing distance – measured by tonne-miles) and shipping supply dynamics (fleet size / age profile / ship new-build prices / fleet growth rate), that prevail in each shipping sub sector (eg in the case of Drybulk: Capesize / Panamax / Supramax / Handysize).
Cyclicality also generates a profound influence on the level of freight / daily hire levels, where demand and supply can remain out of balance for extended periods of time – be it from reduced cargo flows (economic stagnation) and an over-tonnaged supply side (giving rise to “low value” pricing), or from increased cargo flows (economic growth) and an under-tonnaged supply side (giving rise to “high value”” pricing), where the long lead time between the placement of new ship orders and their subsequent physical delivery into the marketplace (that can be as much as 2-3 years, for instance, during “boom” times) serves to exacerbate any supply shortage even further.
