Managing the Shipping Cycle
Whereas a large ship could have been bought for about USD 32 million in late
2001, a few years later, in 2004, a large second-hand large ship could be sold for
USD 62 million (Xinhua Financial Network News 2004). The real money in merchant
shipping in the long term is made not only by people who trade in the freight
market, but also by people who buy and sell ships at the right time. It is difficult to
predict shipping cycles, but it is not impossible to understand the shipping market.
Skilled investors use the principle of buying low and selling high. They acquire
ships at the bottom of the shipping market when ships are cheap. They sell ships
when the peak is reached and take time charters for operations long enough
through the trough.
Nevertheless, shipping cycles are not “regular”. In reality, shipping cycles are
loose sequences of ups and downs. Simple rules like the “5-year cycle” or the
“7-year cycle” are unreliable tools as decision criteria to predict shipping cycles.
There are cyclical booms and busts repeatedly in the shipping market. Careful
study of the variables relating to the economic environment, trade growth, new
ordering, and scrapping of ships can remove uncertain factors in the prediction. In
addition, investors must also consider political issues such as wars, terrorist attacks,
strikes, congestions, and infrastructure developments.
The global economic and political environment is complex. Shipping economists
need to wait months or years for statistical data to predict the market situa-
References 31
tion. Under such circumstances, shipowners are more or less in the same position
as other speculators when they decide to invest in vessels. Investors in the market
must understand the shipping cycle and be prepared to take the shipping risk.
Stopford (2004) observed the following characteristics of risk management in
the shipping market:
• There are both winners and losers in the shipping market. Shipping is not
a zero-sum game, but it is pretty close to it.
• Shipping cycles are not random. Although highly complex, economic and political
forces, which drive shipping cycles, can be analysed.
• Like poker, each player must assess his opponents then work out who will be
the loser this time. In the end, no loser means no winner, especially in the sale
and purchase market, in which second-hand ships are traded.
The job of shipowners is to make the best estimate of the shipping risk that they
can afford. These decisions are complex and require decisive actions. For experienced
investors, their decisions are based on their experience of past shipping
cycles, together with an understanding of the global economic and political environments,
and access to up-to-date market information. A good understanding of
the market mechanism also helps buying and selling ships at the right time. For
instance, vessels aged over 20 years old that were considered for the scrapyard in
2002 were able to earn exceptional money in 2004. The return on one voyage in
2004 could exceed the return from scrapping the vessel 2 years earlier.