By Foluke Akinmoladun
The different stages of the shipping cycle affect ship owners, shippers and ship builders in different ways. For the ship owner, the major financing concerns are those of how to manage cash flow for operations, the ship and third-party claims.
For the shippers, financing is utilised with respect to the acquisitions, transportation and discharge of cargo. For the ship builders, the availability of funds based on the demand for ships, which is derived from the demand for freight movement, is of particular importance.
A shipping market cycle or shipping cycle is a peculiar type of economic cycle. These cycles correct markets when supply and demand are out of balance. Shipping markets are driven by freight rates, which can move up, move down or remain unchanged.
Shipping cycles are therefore determined by the fluctuations of these freight rates. Shipping cycles may be classified according to the time interval in which the alternating movements of freight rates are observed: Seasonal cycles (fluctuations occurring within one year) Short cycles (ranging from 3 to 12 years) Long cycles or trends (approximately 50 years).
There are other ways to categorise the shipping cycle. This includes defining the cycle by the shipping markets involved, namely; the freight market: provision of ships for cargo transport; the sale-purchase market: provision of an avenue for trading second hand ships; new building market: the platform for dealing in freshly built ships; and the demolition market which takes care of ships that can no longer run or trade profitably.
Each market can also be categorised based on the factors that can affect supply and demand and thus create highs and lows in the factors of production that are utilised in the shipping industry particularly from a trade perspective.
The stages of the shipping cycle can also be analysed from the perspective of the major factors that affect it, namely freight demand, availability of funds for shipbuilding, availability of funds to finance ship acquisition, ship mortgages and the supply of tonnage. Other factors that may affect the demand and supply forces in the shipping market include, trade growth, threat of wars, piracy, storms and hurricanes, access to and suitability of other modes of shipment, geographical concentration of trade and government sanctions on shipment.
The factors that drive supply on the other hand are the demand for oil and dry bulk, climatic conditions (rains, storms and tides) and government restrictions on shipment.
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.