By Ricardo Sanchez
Lara Mouftier and I recently offered some reflections about the future of ports. Meanwhile, the prestigious shipping analyst Dr. Martin Stopford has done something similar on the future of shipping.
Next figure shows a summary of the main elements and coincidences among those studies.
Source: The Future of Ports by J. Sanchez and Lara Mouftier, and The Future of Shipping by Dr. Martin Stopford.
Note: “International Regulations”, “port design” and “shipping” are free interpretations by the authors.
The economic cycle and the shipping cycle (the micro-economic side of both businesses) play a crucial role on the future of ports and shipping, as it has been in the past. Regarding the latter, Dr Stopford has verified the presence of the shipping (or maritime) cycle along the history of the shipping business for over 275 years.
In this short article, I want to question the functioning of the shipping cycle, that is, I am arguing that while the maritime cycle persists, the mechanism that historically made it work has changed.
Next figure provides a simplified 10-step diagrammatic representation of the shipping cycle:
Source: Ricardo J. Sanchez (2005)
Traditional “shipping cycle” approach softly worked during a lot of time, even at the beginning of the current cycle. But since 2011 demand declined yearly (with a slight rise in 2014), and freight rates sustained a declining trend until the end of 2016. At the same time, all financial results were volatile. 2010 was a critical cornerstone for the shipping cycle. Next Figure shows main variables of shipping cycle: freight rates, nominal fleet for container transport, inter-annual change of nominal transport capacity and the year-to-year change in transport demand (global throughput growth).
Source: Ricardo J. Sanchez & Lara Mouftier, adapted from Alphaliner (2017)
Following the traditional shipping cycle approach, after the crisis started in mid-2008, jointly with a drop on production, consumption and transport needs, freight rates, industry revenues and profits fall; in those circumstances, shipbuilding should have been stopped. Then… what kind of incentives propelled the decision to add tonnage to the fleet (see orange bars)? In fact, initially the demand for shipbuilding fell and an increasing number of ships was scrapped or left idle. Freight rates remained low, confirming that the shipping cycle was in its lower phase. However, shipbuilding never stopped.
Under the ‘shipping cycle’ traditional approach, trade and transport needs fall when a crisis occurs and supply exceeds demand. Consequently freight rates, revenues and financial margins drop and shipbuilding is halted. This is considered as a natural reaction in front of low revenues because there are no incentives to add tonnage to commercial fleets.
However, after the strong drop of 2009 and the 2010 “spring”, bigger liner shipping companies performed for the first time a “trilogy”: increasing number of shipbuilding orders for new vessels, bigger ships and concentrated alliances. The trilogy is a clear detour to traditional shipping cycle approach.
In summary, there is sufficient reasoning in this brief article to support the suspicion that the traditional mechanism of the maritime cycle has changed. The mutation in the behaviour of liner container shipping bigger companies with respect to shipbuilding in periods of crisis supports that notion. The issue needs to be subjected to further discussion: this is my research project currently in progress.
See this short article here