The Post-WWII Dry Cargo Tramp Shipping Cycles

The objective of this chapter is to analyse the profitability of the dry cargo tramp business since 1950 and other key features of the shipping cycle. It is found that the average half-cycle is just over 3 years. The average real ROCE since January 1950 to date is 7.1% just above the industry real WACC we have pitched for of 7%. Thus the ROCE versus WACC spread is close to zero, which is consistent with a framework of commoditised industry with weak barriers to entry. The average annual inflation in replacement costs over the entire era reviewed is 2.9% per annum. This implies a nominal ROCE over the entire period of 10% per annum. The average Tobin’s Q since January 1950 is 93.2%, and this is a bit lower than the theoretical value of 100%. This minor discrepancy reflects the prolonged depression of the mid-1970s to mid-1980s and the distortion created by subsidies during that era. The minimum half-cycle should be about 3 years as implied by the shipbuilding delivery lag. However, an empirically fitted econometric model with rational expectations suggests a longer theoretical half-cycle. The discrepancy can be explained by the presence of bubbles in ship pricing.