Shipping Market Cycle

Introduction
Cycles play a central part in the economics of the shipping industry by
managing the risk of shipping investment in a business
When the risk is taken by the cargo owner this leads to an ‘industrial
shipping’ business in which shipowners are subcontractors and cost
minimizers
When the ‘shipping risk’ is left to the shipowner, the business becomes
highly speculative.
 Component of economic cycle

A. Long term cycles: Show the

changes trend in shipping
market (60 years)
B. Short term cycles: Changes
trend in 3 to 12 years
C. Seasonal cycles: Changes
trend fluctuate within a year
 Stage of Shipping Market Cycle
• Stage 1: Trough
• Three characteristics :
 Surplus shipping capacity. Ships queue up at loading points and vessels at sea slow steam
to save fuel and delay arrival.
 Freight rates fall to the operating cost of the least efficient ships in the fleet which move
into lay-up.
 Low freight rates and tight credit create a negative net cash flow which becomes
progressively greater.
 Shipping companies short of cash are forced to sell ships at distress prices, since there are few
buyers. The price of old ships falls to the scrap price, leading to active demolition market.
• Stage 2: Recovery
As supply and demand move towards balance, the first positive sign of a recovery is
positive increase in freight rates above operating costs, followed by a fall in laid up
tonnage.
Market sentiment remains uncertain but gradually grows.
Spells of optimism alternate with profound doubts about whether a recovery is
really happening
As liquidity improves second-hand prices rise and sentiment firms.
• Stage 3: Peak/Plateau
 When all the surplus has been absorbed the market enters a phase where supply and
demand are in tight balance.
 Freight rates are high, often two or three times operating costs.
 The peak may last a few weeks or several years, depending on the balance of
supply/demand.
 Only untradeable ships are laid up; the fleet operates at full speed; the press report the
prosperous shipping business; there are public flotations of shipping companies.
 This lead to over trading as second hand prices move away above their replacement cost
modern ships sell for more than the new shipbuilding price.
• Stage 4: Collapse
 When supply overtakes demand the market moves into the collapse phase.
Although the downturn is generally caused by fundamental factors such as the
business cycle, the clearing of port congestion and the delivery of vessels ordered at
the top of the market, all of which take time, accelerate the collapse into a few
weeks.
Spot ships build up in key ports.
Freight rates fall, ships reduce operating speed and the least attractive vessels have
to wait for cargo. Liquidity remains high.
 Shipping Market
A. Freight Market
 Provides revenue (main source of cash for shipping company)
 Three sector: voyage market, time charter market and freight derivatives market.
B. The sale and Purchase market
 Involved investor and ship-owner. Does not effects cash in industry.
C. The shipbuilding Market
 Cash spend on new ship flows out of shipping industry because cost pay by shipyard for materials, labour and
profits
D. Demolition Market
 Old or obsolete vessels sold to scrap provide a source of cash during recessions.