Which will be the actual shipping cycle in the future: the traditional or a new one?Containers

Which will be the actual shipping cycle in the future: the traditional or a new one?

Sanchez

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.

Fig1

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:

Slide1

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).

fig3

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

Ricardo J Sanchez is an economist graduated from the University of Salvador, Argentina, in 1983. Postgraduate studies: PhD in Economics (candidate) from the Pontificia Universidad Católica Argentina and MSc in Economics and Administration of Public Utilities from the University of Paris X and University Carlos III in Madrid, Spain. He was born in Argentina, August 28th, 1958. Ricardo is an internationally recognised expert in shipping and port economics, as well as in transport and infrastructure, with special focus on the region of Latin America and the Caribbean. He has worked either professionally or academically in 28 out of the 33 countries of Latin America and the Caribbean along 33 years, as well as in Europe and Asia. His main research interests are shipping and port economics, including the maritime cycle, port devolution, national maritime policies and industrial organization applied to shipping markets. He holds more than 160 publications among books, chapters in books, peer reviewed articles, working papers, etc. He is a Senior Economic Affairs Officer at the United Nations Economic Commission for Latin American and the Caribbean (UN-ECLAC). Currently he is the Deputy Director of Natural Resources and Infrastructure Division; main fields of work of the Division are energy, infrastructure, maritime, ports and logistics affairs, and physical regional integration. Member of the following academic and professional associations: the International Association of Maritime Economics (IAME), the International Navigation Association (PIANC), the Port Performance Research Network (PPRN), and the Argentine Association of Political Economy (AAEP). Between 2006 and 2011 was a member of the Council of IAME. Professional career: both in the private sector with local and foreign companies and in the public sector with international agencies and the Argentine Federal Government. Professional focus: currently devoted to areas of Maritime Economics; Economy of Regulations; Infrastructure and Transport Economics. Research and teaching: former Visiting Professor at University of A Coruña, Spain (Maritime Studies Institute). Previously, he spent ten years at Austral University in Argentina (1997-2007) acting as Research Project Director of Regulation and Infrastructure Area, especially devoted to fluvial, maritime and surface transport, as well as regulations and infrastructure matters. Former Director of Continuous Education at the Higher Institute of Government Economists in Argentina, and member of the Academic Committees of two Master’s Programs in Government Economics, and Director of the Postgraduate Course in Public Economics at the ISEG-Buenos Aires University/San Andrés University. Has also served as Consultant for the Services Division of the Latin American Integration Association (LAIA), The World Bank, for RENFE (National Network of Spanish Railroad), for CEPA (Salvadorian authority for Ports, Airports, and Railways), Latinports, the Mexican Association of Port Terminals, and collaborator of the CAF (Development Bank of Latin America) and the OAS Inter-American Committee on Ports.

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