By Foluke Akinmoladun
The four stages of the shipping cycle, all based on customer demand, are trough, recovery, peak and collapse. The first stage of the shipping cycle called trough is characterised by an excess in capacity. Here ships start to accumulate at trading ports, while others slow down shipments by delaying their arrivals at full ports. Ships still carrying goods also slow down to save on fuel costs. In a trough, freight costs tend to start falling. Freight costs will typically decrease to the equivalent of vessel operating costs. Shipping companies start to experience a negative cash flow, which prompts the selling of inefficient fleet. Selling prices for ships tend to be lower, with some fleet exchanged at salvage rates.
Recovery is the second stage of the shipping cycle. In this stage, supply and demand move toward equilibrium, meaning both supply and demand levels match each other closely. Freight charges begin to increase, eventually surpassing operating costs. Shipping containers begin to move out of the trading ports, as demand stimulates new orders. During this stage, optimism about the market remains shaky. The opinion pendulum swings back and forth between optimism and pessimism, resulting in volatility for trade volume. Cash flow tends to improve steadily during the recovery stage.
The shipping cycle’s third stage is a peak or plateau. At this point, the shipping freight rates become quite high — often double or triple the amount of fleet operating costs. The levels of supply and demand are almost completely equal. Quite a bit of market pressure occurs between supply and demand levels, which could cause the peak to fall at any time. Most of the shipping fleet is in operation, with only the most inefficient ships left to idle in trading ports. Cash flow for shipping companies is quite high.
The fourth stage of the shipping cycle, collapse, occurs when supply levels begin to exceed demand. Freight rates begin to decline during a collapse. Shipping containers and fleet begin to accumulate in trading ports once again. Although the cash flow of shipping companies may remain at high levels, ships begin to slow down their operations. They may take longer to deliver goods, and inefficient fleets may not ship goods for some time.
Challenges with getting bank loans for shipping companies:
Faced with the lack of available funding, a growing number of shipping companies have taken advantage of the low interest rate environment and tapped the debt capital markets. Among the main drivers of the increase in high yield bond volumes coming from the shipping sector is the scarcity of funds from the banking sector.
Regulatory pressures are forcing these institutions to increase impairments associated with shipping loans and thus more and more financial institutions are trying to limit their exposure to the highly volatile shipping sector. International banks with a more diversified portfolio and stronger balance sheet are able to navigate through the downturn and continue to support the shipping industry. However, banking exposure internationally is declining and shipowners are required to adjust in the new environment.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com