Investigation into the optimum acquisition and employment strategy with the concentration on the vlcc east of Suez market

Abstract

Risk is present and inevitable in every business venture but the impacts are more pronounced in the shipping market, especially in the Very Large Crude Carrier (VLCC) sector. Using quantitative analysis of historical data and utilizing Markowitz’s Portfolio Optimization Model, this paper aims to determine the optimum employment strategies to be adopted for a fleet of 10 VLCCs from year 2000 to year 2011 such that returns are maximized while risks are minimized. In the experiment, 17 combinations of acquisition-employment strategies were constructed and tested. As opposed to conventional logical thinking, it was found that Newbuidings are not favoured by ship operators. Instead, the primary form of acquisition switches as cost of capital increases, from Bareboat Charter, to Secondhand Time Charters, and then to 3-Year Time Charters. On the other hand, 1-Year Time Charter and 3-Years Time Charter were found to be the optimum employment strategy regardless of the cost of capital of ship operators. This research is of high commercial significance as the findings demonstrate how diversification can help manage risks, thereby providing a valuable reference for the ship operators.