A Dynamic-Economic Model for Container Freight Market

This paper presents a dynamic-economic model analyzing the fluctuation of container freight rate due to the interactions between the demand for container transportation services and the container fleet capacity. The demand for container transportation services is derived from international trade and is assumed exogenous. The container fleet capacity increases with new orders made two years ago, proportional to the industrial profit. Assuming the market clears each year, the shipping freight rate will change with relative magnitude of demand and supply shifts. The dynamic model is estimated using the world container shipping market statistics from 1980 to 2008, applying the three-stage least square method. The estimated parameters of the model have high statistical significance, and the overall explanatory power of the model is above 90%. The short-term in-sample prediction of the model can largely replicate the container shipping market fluctuation in terms of the fleet size dynamics and the freight rate fluctuation in the past 20 years. The prediction of the future market trend reveals that the container freight rate would continue decreasing in the coming three years if the demand for container transportation services grows less than 8%.