shipping market research
TRANSCRIPT
SHIPPING MARKET RESEARCH
By
Umenwa, Olisaemeka EmmanuelB.Tech
A term paper submitted in partial fulfillment of the requirements forthe degree of Master of Science
at The Federal University of Technology Owerri, Imo State Nigeria
August, 2012
Introduction
Market research studies play an important role to decision-makers in every
business. The case is no different for the shipping industry. Given the international
nature of the industry and the high complexity of its operations and economic
structure, the maritime researcher is usually faced with the task of preparing
forecasts and market research reports in order to extract better information that can
help to reduce the risk of making a bad investment.
Shipping market research is concerned with a specific commercial decision. This
means studying the prospects for a specific type of ship, trade flow or business unit
(Stopford, 2008). In studying the prospects of a particular decision, the market
researcher’s bias is more towards technical and behavioural variables, which are
less easily represented in statistical terms – models can be used to establish the
framework, but the central issues are questions like: How will competitors or
charterers react? Which are best dealt with by research into the current views and
behaviour patterns of the relevant business decision.
A technical variable is such that estimates the rate at which innovation could be
introduced in response to a major price change in the world economy or a variation
in volume of raw materials previously used as input caused by changing trade
pattern. For instance, will automobile industry be able to manufacture engines that
will run on LNG pursuant to the “green energy and zero emission initiatives”
making waves in the global economies?
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The changes in technical variables are usually followed by behavioural
relationships as people would tend to seek alternatives where conditions are stiffer
than their expectations. The aim of the prediction so made is to be able to form a
reasoned view because determining particular rates of change and corresponding
consequences are difficult in themselves.
In this paper, we shall try to expound the methodology of conducting shipping
market research. To achieve this, illustrations shall be drawn from typical decision
making scenarios as posed to the shipping market researcher or decision maker and
built into a suggested procedure for market research studies which is enumerated in
the sections that follow.
Markets: Shipping Markets
Economists understand by the term market, not any particular market place in
which things are bought and sold, but the whole of any region in which buyers and
sellers are in such free intercourse with one another that the prices of the same
goods tend to equality easily and quickly (Cournot, 1838). The central point of a
market is the central exchange, mart or auction rooms where traders agree to meet
and transact business but the distinction of locality is not necessary. The traders
may spread over a whole town or region of country and yet make a market if they
are in close communication with each other (Jevons, 1871).
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In shipping, there are four markets trading in different commodities. The freight
market trades sea transport, the sale and purchase market trades second-hand ships,
the new building market trades new ships and the demolition market deals in scrap
ships. These markets shall be discussed further but it is worthy of note that due to
the decision facing the market researcher, judgments must be based on an
understanding of market dynamics, not economic principles taken out of context.
Market research does not in any way centre on the four shipping markets however,
waves of cash flowing between these four markets drive the shipping market cycle
and greatly affects the outcome of the investment being considered such as
described in the next section. In essence, the ship owners are part of a process
which controls the price of the ships they trade and the revenue they earn.
Markets Research Methodology
As stated earlier, market research studies focus on particular part of the market,
usually in connection with some specific commercial project involving investment
in fixed assets or in the development of new products or services. For instance, a
banker deciding whether to finance a fleet of crude oil tanker; a bulk operator
deciding whether to order a 60,000 dwt Panamax bulk carrier or 45,000 dwt ultra
modern bulk carrier with the ability of switching cargoes; a shipyard interested in
entering the product tanker market; a port management team deciding how much to
invest in upgrading container handling facilities; a new investor in the form of
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banking institution considering provision of transport to cater to continental shelf
oil and gas operations which include but not limited to rig operations and supply
services using offshore support vessels.
For each of these decision-makers, better information can help to reduce the risk of
making a bad investment. The banker will be interested in the commercial future
for crude oil tankers of specific size, age and design so that he does not end up
financing a fleet of ships which turn out to be very difficult to charter. Similarly,
the bulk operator needs to evaluate details such as size trends, fuel economy, the
options for automation, cargo handling gear, prices on offer, charterability of the
vessel, resale value and what his competitors are doing. The port authority needs to
know what aspects of a container terminal are most important to operators, the new
investor needs to know factors which offshore rig operators consider necessary
before they embark on hiring a vessel or entering into a contract.
A combination of commercial and economic knowledge is required in order to
conduct this sort of market research. The emphasis is on identifying the factors that
will significantly influence the success or failure of the commercial decision,
gathering information and assessing how these may develop. A major part of the
task in carrying out the market research study is therefore deciding what the scope
of study should be (Stopford, 1997). For example, a shipowner thinking of buying
a bulk carrier for agricultural trades apparently needs to consider the future growth
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and development of commodities, but he must also look at a wide range of factors
such as the commercial strength and plans of existing operators in that trade.
In order to carry on with the major aim of the paper, some of the following
procedures for conducting a market research study as suggested by Stopford is
adopted as summarized below;
1. Establish terms of reference – this covers a discussion of the decision to be
made which the study is to facilitate and the identification of the information
type required for the study.
2. Analysis of past trends – here, we define the applicable market
structure/segmentation, identify competition, estimate trends and analyze
their causes based on compiled database.
3. Survey of competitors’ plans and experts’ opinions - having identified main
competitors in step two above; proceed to survey plans of companies
operating in the market as well as opinions of experts on future
developments.
4. Identification of key variables that will influence future market development
and prioritize variables in terms of their potential future impact on the
market.
5. Results presentation.
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As stated in previous sections, various cases and illustrations shall be used to
examine how each step in the procedure will be developed for a shipping market
research study. So far we have tried to cite cases involving the bulk market
operator, the banker with interest in oil product tankers, an investor with the
prospects of purchasing an offshore support vessel and a pending port management
team’s decision for investment in container handling facilities.
Terms of reference
Under the terms of reference, we define what decision is to be made in concrete
terms which is executed based on the outcome of the study or is terminated for an
alternative. The extent of contribution which the study will make is dependent on
the stage of thinking that has been reached. At this point, we also identify the type
of information required to carry out the study. In order to achieve the above aims,
we consider the following for the chosen market;
a. Accessible market size and the possible share that can be won;
b. Freight rate development;
c. Most cost effective ship type in providing the chosen service,
d. Probable competitors’ reaction to a new entrant to the trade.
If we consider the case of a banker with interest in financing oil product tankers,
the accessible market size is such that can be evaluated by considering the global
tanker fleet whose capacity-building still continues due to the delivery of
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newbuildings and only minor scrapping of old tonnage. According to Clarkson
(2011), the number of tankers worldwide greater than 10,000 dwt was increased by
1888 to 5,629 units with a total carrying capacity of 470 million dwt during last
twelve months. The fleet’s average carrying capacity therefore is 83,700 dwt.
In terms of deadweight tonnage (dwt) the tanker fleet breaks down into the major
types as follows:
Source: Clarkson Shipping Intelligence Network, November 2011
The chart shows that crude oil tankers account for 65% of the total tanker fleet
tonnage while oil products and oil/chemical tankers are about the same at 17%.
For the purposes of this study, we define the oil products tanker fleet being our
focus as all non-specialized tankers below 60,000 dwt, as well as coated tankers
above this size. These ships carry a spectrum of cargoes, ranging from relatively
unsophisticated dirty products such as fuel oil through to clean products such
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as naphtha. Vessels that trade at one end of this spectrum are unlikely to be able to
switch easily to the other end, and “last cargo” regulations ensure that dedicated
fleets become established for some cargo types. At the most sophisticated end of
the fleet there is an overlap with the chemical sector, with a significant volume of
“swing tonnage” that can operate in either “CPP or easychems” depending on
market conditions (CRS, 2004).
The ownership structure in the market is relatively diverse and capital costs are
relatively low compared with larger crude oil sectors. Several major pooling
arrangements are in operation. Shipping pools operate in every sector of the tramp
shipping business. A "pool" is a collection of similar vessels, under different
ownerships, operating under a single administration. The pool managers market the
vessels as a single, cohesive fleet unit, collect their earnings and distribute them
under a pre-arranged "weighting" system. Pools are generally developed for two
reasons. Firstly to allow participants to provide the service levels required by their
major customers.
Secondly to improve transport efficiency by special investment and increased ship
utilization e.g. by arranging backhaul cargoes more effectively than a small group
of ships could do. The oil products tanker fleet sector has received a massive
amount of investment in the past few years and the order book for delivery over the
next couple of years as of 2011 stands at 37% of the fleet. In the wake of the Erika
and Prestige there has been a growing focus on modern, quality ships. Demand is
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typically short-haul, matching refinery production with intra-regional demand.
However, some longer-haul routes serve major refining regions such as the Middle
East and the Caribbean. A wide range of cargoes (fuel oil, gas oil, gasoline, jet,
naphtha, mtbe) are available and long-term contracts, period charters and spot
chartering are all widely used. The biggest charterers are the major oil companies
and oil traders. From the ongoing overview, an opinion of what size of market is
obtainable for an individual or institution with interest in entering the oil product
tanker market could be generated. The issue of market share that might be won is
insignificant because of the presence of pooling. In essence, the market is highly
competitive, and satisfies many of the characteristics of the perfect competition
model. The commodity is homogeneous; entry costs are very low; many
companies are competing for business (arguably each ship is a separate
competitive unit); and information flows make the markets very transparent.
The next question is concerned with freight rate development in the market. As
explained earlier, product tankers are specialized cargo-carrying vessels which can
carry – for example – naphtha, clean condensate, jet fuel, kerosene, gasoline, gas
oil, diesel, cycle oil and fuel oil. Unlike the other tanker markets which primarily
transport cargo from its origin to the point of refinery, this sector handles the
processed cargo that leaves the refinery destined for its point of consumption. For
the market under review, freight rates on all routes declined by between 22 and 40
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per cent in 2009, with the Caribbean to the East Coast of North America/ Gulf of
Mexico route declining the most. The lowest point in the year occurred in April for
both tanker sizes on the Persian Gulf to Japan route. Thereafter, on the Persian
Gulf to Japan route, freight rates increased exponentially from May 2009 until
January 2010. In 2009, average earnings for product tankers continued their
downward slide. Whereas average time charter equivalent earnings on the
Caribbean– East Coast of North America/Gulf of Mexico route had been $17,567
per day in 2008, in 2009 the rate was $9,467 per day. The low point was reached in
October 2009, when the rate on this route declined to a mere $5,800 per day.
However, by February 2010, rates had recovered to $11,000, which offered some
respite to concerned ship-owners (RMT, 2010).
Similarly, in the first months of 2011, the charter market was characterized by
strong fluctuations. From January to May, it was initially possible to achieve
charter rates of USD 15,000 per day in comparison to the low results in February
of USD 10,000 per day. The higher winter demand for mineral oil products led to
an increase of charter rates in April to USD 17,500 per day as well as to rates of
approximately USD 14,000 per day in May.
As a result of the crisis in Libya the oil export in this country collapsed from
March and came to a complete standstill from July to September. The former
integrated tonnage led to additional transport capacities on the tanker markets. The
mineral oil export from Libya has been starting since October and could already be
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increased from former 0.54 million bpd to 0.75 million bpd until November. This
development nearly led to normalization and increased demand for tanker tonnage
in this trade. From June until October it should be noted that in the Panamax tanker
segment only charter rates between USD 6,900 and USD 8,800 per day could be
earned and in November earning of approximately USD 10,000 per day could be
reached (Hanseatic Lloyds Report, 2011).
The most cost effective ship in providing the service under consideration should be
based mostly on the decision maker’s financial strength. Assets cost depend on the
size of vessel and are relatively low compared with large crude oil sectors. More
sophisticated ship types carry clean products while most products tankers can
switch between clean and dirty products when the tanks are carefully cleaned.
Older products tankers gravitate to carriage of dirty products. The ability to switch
between products presents the ship with more efficient backhaul cargo
opportunities which means better profits. These among other considerations
account for effectiveness measures in the product tanker market.
Oil product tanker market has relatively few barriers to entry. Information systems
in bulk shipping business are very open, giving buyers and sellers of ships,
operators and charterers a timely flow of commercial data. Information about
revenues and asset prices are published daily and widely circulated in the industry
to both ship-owners and charterers by the shipbroking business and information
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publishers. These information services ensure a high degree of transparency. In
addition the costs of operating different types of ships are well known (several
companies publish reports documenting them) making it easy for potential
investors to estimate prevailing profit levels.
New investors require equity, but commercial shipping banks will provide loans to
acceptable credits against a first mortgage on the ship. There is a comprehensive
network of support services to which new investors can subcontract most business
functions (subject to sound management controls). Ship management companies
will manage the ships for a fee; chartering brokers arrange employment, collecting
the revenues and dealing with claims; sale and purchase brokers will buy and sell
ships; maritime lawyers and accountants undertake legal and administrative
functions; classification societies and technical consultants provide technical
support (CRS, 2004).
Setting out the terms of reference in this way makes it clear that the decision-
maker is seeking more than a simple forecast of the trade on a particular route and
in fact needs advice on how the competitive position is likely to develop and how
the commercial environment in which he will be operating will change (Stopford,
1997).
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Analysis of past trends
Here, we define the trends and applicable market structure/segmentation, identify
competition, estimate trends and analyze their causes based on compiled database,
extract any cyclical effects. This is best done by assembling information that is
readily available on the current position and analyzing past trends. We turn to the
container ship fleet for an understanding of how to proceed with past trends
analysis in the charter market and probable competition in the chosen service.
As a result of the global financial crisis, hardly any notable newbuilding orders for
container ships were placed since the second half of 2008 for the following two
years. In 2010 this changed with the recovery of the global economy and the
resulting positive developments in the container shipping. In 2011 nearly 200
container vessels with a total capacity of round about 1.27 million TEU will be
delivered – 47 vessels of them have a capacity of more than 10,000 TEU and cover
47% of the whole capacities being delivered in 2011 (ISL, 2011).
According to the order book, orders exist for a total of 115 newbuildings for the
segment of 4,000 TEU class with a total capacity of 525,329 TEU. Out of these
orders, eleven vessels meet today’s Panamax-criteria, 70 ships are the so-called
wide-beam-containerships and for 34 orders, the beam is not yet known. In
comparison to existing ships with a comparable size, the wide-beam-containerships
have a bigger beam and can carry more containers.
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Their main advantage is that due to their modified design they have a shallower
draught and therefore consume less bunker at a comparable speed and the number
of ports that they can call at increases since a lot of ports have restrictions
regarding the draught of vessels. At the moment these wide-beam-containerships
of the panama-class cannot yet pass through the Panama Canal. In 2014 this will
change due to expansion. (Alphaliner, 2011).
The following graph gives an overview of the orders placed and deliveries per
quarter in million TEU.
Source: Clarkson, October 2011
Despite the current developments and threatening overcapacities there still is a
small rise of scrapping for container vessel currently even with a declining trend.
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In 2010, ships with a capacity of only 131,000 TEU in total were scrapped. The
figure stood at 46,500 TEU for 2011 and only 38,600 TEU in 2012 (Clarkson,
2011).
In the first quarter of 2011, the charter and freight rates developed in different
directions. Whereas the liner shipping companies had to struggle with falling
freight rates and increasing bunkering prices, the charter rates initially continued
their upward trend because of the good demand. The tramp shipping companies
were able to profit from this new transaction in all size segments, especially in the
case of larger ships as from 3,500 TEU. The short peak was reached in mid-April.
After that the demand declined considerably. Nevertheless the charter rates
maintained at this level till the beginning of June and then decreased severely
within a short period of time (HLL, 2011).
The world’s largest container shipping line, Maersk Line initiated a destructive
competition “Daily Maersk” (daily cut-offs and guaranteed transit times in six
Europe-Asia services with 70 vessels). Because of the “Daily Maersk” service new
vessel could interlope to the charter market since other container lines might not be
able to stand the price competition and might have to deactivate their services.
The ruinous price competition between the three largest liner shipping companies
in the Asia-Europe trade led to the fact that liners like MISC, Malaysia’s biggest
liner shipping company will go out of business and that others like CSAV
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(Compania Sud Americana de Vapores) Chile, ZIM Israel, China Shipping or
NYK (Nippon Yusen Kaisha) Japan are thinking about a venture. In the beginning
of December, MSC (Mediterranean Shipping Company) Switzerland and
CMA/CGM France announced their cooperation which was to start March 2012
for at least two years and include the Asia-Northern Europe, Asia-Southern Africa
and South America trades. Together, the two liner shipping companies share a
capacity of more than 3.9 million TEU which makes them bigger than Maersk Line
who has a capacity of 2.6 million TEU.
The container ship fleet is segmented into Post Panamax, Panamax, Sub-Panamax,
Handysize and Feedermax vessels with each class having a certain range and
number of TEUs it can carry. The development of charter rates for Panamax class
with 3,900 to 5,100 TEUs capability for instance showed that from February 2011,
the demand for tonnage initially rose. Since supply was limited, there were clear
increases in rates starting at USD 24,000 gross per day in February to more than
USD 27,000 gross per day in March. The average periods rose from twelve months
to two-year, sometimes three-year periods. From the end of March the upward
trend stopped. The demand of the liner shipping companies was reduced due to
overcapacities in the Asia-Europe services and surplus tonnage was offered
additionally to the tramp vessels in the charter market. Primarily this led to only
slightly falling charter rates. At the beginning of June, occasionally rate of
approximately USD 25,000 gross per day with a period of twelve months could be
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achieved. In the second half of the year, more and more ships came into the
market. While (Compania Sud Americana de Vapores), Chile practiced an
aggressive charter-expansion-policy- and with that made a strong contribution of
the charter market in 2010 – they did not only reduce this expansion drastically in
2011, but also closed down several services. This affected the container vessels
disproportionately since CSAV took up several ships of this size segment and
offered their redundant panama vessels in the market. Due to the resulting
oversupply, the charter rates declined in the further course of the year. Despite the
tramp shipping companies’ strong resistance, the rates fell below the 20,000 USD
mark in the beginning of August. The waited stronger demand of the liners during
the “peak season” in July/August stayed away and the charter rates fell down
drastically. The market participants undersold each other for the little existing
business. After only a short time a charter level of USD 12,000 per day was
reached and fell to USD 8,000 per day in September. The temporarily lowest was
at USD 7,500 per day by the end of October. At the same time the charter periods
decreased by six to twelve months, ships were often even chartered in for round
tips for one or two months to cover the short term demand.
Currently 709 ships of the size class from 3,900 to 5,100 TEU are in operation
worldwide, of which 3 ships are not chartered out at present and another 32 vessels
are without employment. Of 115 ordered newbuildings which will be delivered by
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the year 2014, 32 are without a charter at the moment (HLL Database, 2011). The
trend differs for other segments of the container ship fleet.
The figure below shows the typical segments of crude oil tanker market.
The crude oil tanker fleet incorporates 1,314 vessels ranging from 60,000-450,000
dwt. It covers four major sectors: Panamax (uncoated, 60-80,000 dwt), Aframax
(uncoated, 80-120,000 dwt), Suezmax (120-200,000 dwt) and VL/ULCC (200,000
dwt+). The size of vessels used on a particular route is usually determined by cargo
size and port facilities, but since these vessels carry only one type of cargo (crude
oil), there can be significant competition between the size ranges, with, for
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example, VLCCs switched into Suezmax trades as long as port facilities can handle
bigger vessels (CRS, 2010) and the question of lateral cargo mobility is not
applicable in this case.
Such information as obtained above is collected and collated for any given market
to analyse major competition and segmentation background before a decision is
reached. Once market segment has been defined, the next step is to identify the
competition, since in the shipping market strongly growing demand does not
necessarily bring commercial success; the ship-owner may find himself squeezed
out of the market by cut-throat competition. In the case of a shipbuilding company,
this may involve identifying other shipyards with a known capability in the market
segment and assembling information about their commercial performance. In a
bulk shipping project, it may involve identifying the fleet of ships able to trade in
this market and analyzing the future order book and financial position of other
operators (Stopford, 1997).
Survey of competitors’ plans and experts’ opinions
While statistics provide an overview of the past, they only often give a little
indication of changes which are too recent to appear as a statistical trend. To avoid
this type of error it is important to survey the opinions of people involved in
business and plans of companies operating in the relevant market segment. This
involves; identifying the relevant experts to question; deciding on a list of the
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questions that need to be answered; selecting the most appropriate method of
surveying opinions.
There are many established techniques for surveying opinions, ranging from the
personal interview to the general questionnaire. For example, an opinion survey of
the ferry market revealed that the commercial trend was strongly towards treating
the ship as a ‘floating hotel’ in order to maximize on-board expenditure by
passengers or that the world business cycle is the single most important factor
which influences trade growth. This will provide the basis for a new line of
investigation about how this trend would develop over the next decade (Stopford,
1997).
Future market outlook and key variables
At this stage of the market research study, we tend to decide what the future
market environment is likely to be and how sensitive the market sector is to these
trends. This according to (Stopford, 1997) involves asking questions like: how
sensitive is this market to commercial conditions in other sectors of the shipping
market? Is there any impact of decisions made in sectors of other markets within
the market of our interest? For example, the great uncertainty which currently
predominates on the financial markets again underlines how unstable the global
economy still is. In the first half of 2011 the surge in oil prices, the political
turmoil in the Arabian region, the earthquake in Japan and the escalation of the
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debt crisis in the Euro-zone firstly influenced the positive development of the
world’s economic situation. The container segment by extension is burdened by a
disproportionate expansion of the capacities in the upper size classes as well as the
ongoing predatory competition between the liner shipping companies in the freight
and charter market (HLL, 2010). The wide beam containerships with the ability of
calling at many ports due to their shallow draughts and less bunker consumption
pose a great challenge to the usual Panamax class.
In view of the discussions above, the next phase of the task is to single out the
factors that are likely to be most important in determining the future outcome for
the project and to examine how these will develop. For example, a study
concerning the purchase of an oil product tanker as earlier discussed in the paper
might identify as a key factor the development of export refineries in oil-producing
countries and look into this.
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Result presentation
Following a thorough analysis of the collated records on the chosen market, the
result is then presented in a format that will make it possible for the decision maker
to understand why a commercial project should be undertaken and why another
option should be considered. A useful presentation technique is to draw up several
alternative scenarios of how the project may develop under different
circumstances. The aim of this approach is to enable the decision-maker to think
through the implications of his decision under a variety of different circumstances.
Given that some of the key influences develop unfavourably, what would be the
level of the company’s preparedness in terms of reaction? Is there an action that
can be taken to guard against such an event? In as much as this may not be easy to
carry out in practice as it sounds, it is more preferable to the ‘spot prediction’
technique (Beck, 1983).
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Summary and Conclusion
In this paper, we have tried to expound the methodology for conducting a shipping
market research. To achieve this, illustrations were drawn from typical decision
making scenarios as posed to the shipping market researcher or decision maker and
built into a suggested procedure for market research studies. The paper proceeded
by defining what a market is and highlighting the various shipping markets in
existence followed by research methodologies in general. The adopted procedure
for market research comprises of the terms of reference, trend analysis, survey of
competitors’ plans and experts’ opinions, identification of key variables and results
presentation. Market data and reports from bulk and liner fleet operations were
reviewed in order to meaning to the paper.
In essence, the complexity of shipping business necessitates the conduct of
shipping market research. At every point in time, be it for a new investor, a
banking institution negotiating a loan deal, parties of interest in shipping and
shipowners as well, better information always tends to reduce the risk of making a
bad investment.
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