The impacts of demand and supply shocks in the dry bulk shipping market

The freight rate is a representative variable in the shipping market and is characterized by a cyclical relationship. Even though downturns in the shipping market, such as the shipping industry recession in the 1980s, the global financial crisis in 2008 and COVID-19 crisis in 2020, recur, few studies have analyzed the dynamic relationship between supply and demand in terms of its effect on freight rates. Thus, this study classifies the factors affecting fluctuations in dry cargo freight rates into demand, supply, and freight rate specific demand factors, which play the most important role in managing risk in the shipping market. Based on the recursive structural vector autoregressive (recursive SVAR) model, we analyze the historical contributions of the effects of each factor across different time periods. Two main findings are summarized as follows: first, we identify the dynamic relationship between factors affecting BDI in the shipping market, and reveal that the magnitude and direction of factors are different. Second, we verify that in an extreme situation in which freight rates exceed the normal range, the market is overheated, and freight rates are therefore determined by the freight rate specific demand of market participants rather than by the actual supply and demand.