A workman ordered a burger in a Tesco café. The waitress asked, "Do you want anything on it?" “Yes,” he said, "I’ll take a fiver each way". If you don’t follow European news, the joke is about the revelation that beef burgers sold in some supermarkets come with a side order of horse meat (or maybe donkey?). Nobody seems much the worse for the experience, but it’s a reminder that the label does not always match what’s in the tin.
Flogging a Dead Horse
This problem is not limited to processed foods. Statistics also have labelling problems. Like ready-made meals, they are a convenience – a quick check on what's going on. For example, the Clarksea Index gives an idea of the state of the whole shipping market. The graph on the cover shows the index peaked in May 2008 at $50,000/day and this week is down to $7,900/day, as low as it’s been. As a quick overview it does its job.
Don’t Say Neigh
So far, so good. But, the Clarksea index has a label on the tin and users must be clear about what’s in it. Generating earnings from cargo freight requires some heroic assumptions about what ships are actually doing. In a few cases we have trip earnings, but for most routes the starting point is $/tonne or, for tankers, Worldscale rates. To calculate earnings, bunkers and port costs must be subtracted from the voyage revenue and then the earnings spread over the days of the voyage.
Read the Small Print
This calculation is awash with assumptions. Bunkers and voyage time depend on the speed and efficiency of the ship; we use a standard vessel operating at a given design speed and consumption. A sea margin is allowed for weather and a repositioning leg is included. In the dry cargo trades this is particularly difficult, especially for the smaller sizes. Port costs are charged at prevailing exchange rates.
Horse Trading
These assumptions are occasionally adjusted in line with market practice, but two assumptions are less commonly adjusted. The current standard ships are assumed to trade at a given operating speed with no allowance made for waiting. But, with a 15-20% surplus of ships and $650/tonne bunkers these assumptions are less realistic. Ship’s speed is flexible and waiting is rife. Indeed, since 1990, ships have spent a lot of time in weak markets when it paid to go slow, but just as much in strong markets when speed paid dividends.
Horses for Courses
So, there you have it. The Clarksea index and most of the current earnings data are optimal, assuming the fleet trades at normal speed with no waiting. Mostly this is reasonable, but in today’s depressed market the Clarksea Index of c.$7,900/day very likely overstates the “take home pay” of shipowners. We’re working on how best to deal with this, but, in the meantime, users need to read the label and do a bit of horse trading (maybe a 20% cut?). Have a nice day.