Making Waves #6: The shipping cycle and why it’s different this time round (2024)

Does history repeat itself? 📜

As England validated its ticket to the semi-finals of the Euro 2020 I shook my head in despair wishing France had been their next opponent. I truly believe we were the favourites to win this competition, as reigning World Champions, and would repeat our historic back-to-back World Cup and Euro wins in 1998 and 2000. Who better to lead us than the man that participated in both of these victories? Turns out his tactical blunders would help an opportunistic Swiss team seize their chance of a lifetime.

We like to believe that history repeats itself. We look back at past events and see similarities between what is occurring today and what happened yesterday. Or we simply prefer the comfort of patterns and rational explanations. Shipping can be a chaotic place so why not believe in a cycle of sorts? The shipping cycle is the focus of this month’s newsletter. Why? Because it's never been harder to figure out where we are in the cycle.

"A global pandemic anyone?"

Shipping cycles 101 📚

The shipping cycle is an economic cycle that helps to identify the effects of changes in supply and demand on freight rates as well as on shipping assets, in other words the ships themselves. The four stages are rock-bottom (also known as trough), recovery, peak and last but not least, collapse. So let’s take a closer at what each stage entails:

Rock-bottom: at the low point of the cycle freight rates scrape the bottom of the hull. Low earnings force companies into bankruptcy, yet also provide an opportunity for some to snap up assets at low prices, hence we also witness industry consolidation. Paradoxically, with ships taking a number of years to be built, this is also when market participants bank on an upcoming recovery and the number of ships on order tends to increase.
Recovery: the sun starts shining again. A period of potentially negative earnings during the rock-bottom phase has sent older and/or inefficient tonnage to the scrapyards and that helps tighten the supply side of the equation. In the meantime ships were probably slow-sailing to avoid higher bunker costs, keeping ships employed for longer along trade routes that would’ve normally taken less time. Both of these factors support a recovery in freight rates and cash flow improves.
Peak: shipowners are now earning big bucks. Skyrocketing freight rates have also helped the value of ships increase and the second-hand market is active as owners try to buy more vessels in order to benefit from a period of high earnings relative to operating costs. Ideally, newbuilds ordered during the rock-bottom phase are entering the market to grab a slice of the pie.
Collapse: as Barbra Streisand sang, some good things never last. Over-tonnage has now completely flipped the market balance between supply and demand and the increasing amount of ships trying to compete in the market has doomed all shipowners alike. Freight rates tumble and as ships start losing money, their intrinsic value declines as we head towards rock-bottom once more.

The shipping cycle illustrated

Where are we in the cycle? Is it different this time round? 🤔

Technology has made our lives much easier in many aspects. We are used to looking up on our phones where we are on Google Maps, whether there are delays on the London underground, at what exact time our ride-hailing car will arrive. In the shipping industry unfortunately there doesn’t exist a universal dashboard that allows one to figure out exactly where we sit currently on the shipping cycle. Different markets, whether containers, dry bulk or tankers to name a few, can be at very different stages of the cycle at the same time. The above neither takes into account periods of extreme volatility - often driven by external factors - that can disappear as quickly as they arrived, making all analysis into the cycle helpless. A global pandemic anyone? So where are we, in tanker markets specifically?

This time round it is especially difficult to assess our current situation due to a number of factors.Firstly, the current level of freight rates seems to indicate a rock-bottom phase with most tanker rates across benchmark routes hovering at multi-year lows. This is mostly the result of worldwide demand for oil and refined products still sitting far below historical norms due to the COVID pandemic. However, ship orders are equally at yearly lows for tankers and show no sign of spiking. We are facing a very uncertain future when it comes to the regulatory environment, in order to make strides for the decarbonisation of the industry. At the same time, ship values, especially on the second hand market have been increasing and remain very high, especially for tonnage aged 20 years and above. This is the direct consequence of shadow trades involving Venezuelan and Iranian cargoes, the result of U.S. economic sanctions and a handful of evasive market participants seeking to benefit from the adage “high risk, high reward”. The last two factors are keeping scrapping levels in check, while at the same time certain tanker segments are nevertheless showing first signs of a recovery.

"We are facing a very uncertain future when it comes to the regulatory environment, in order to make strides for the decarbonisation of the industry."

Cartoon of the month: "Sailing Around the Shipping Cycle" - Courtesy of Sheridan Hart

To summarise 🤓

A Greek shipowning company has the following statement all over its website: “Shipping is all about the right timing and daring decisions”. I couldn’t agree more. Being not only able to time the market when it comes to freight trading decisions, but also knowing where one is in the shipping cycle when it comes to asset trading decisions, are essential skills to prevail in this industry and the legendary shipowners of our time possessed heaps of both. The last trait that has to be mentioned is optimism; an unwavering optimism that every time rock-bottom is reached, the only way is up, with recovery and peak just around the corner. But I don’t think it is that easy this time round. The outlook has never been so uncertain and maybe it is time we revisit the concept of the shipping cycle altogether, as we may be witnessing the industry entering a new economic paradigm. A paradigm that has to account for a future with very different-looking ships, carrying very different cargoes, at least in the seaborne energy trade.

About Arthur Richier

Arthur is a Senior Freight Analyst forVortexabased in London. Prior to this he was on the freight pricing desk at S&P Global Platts, covering dirty and clean tanker markets.

As part of the conversation around freight markets, and their impact from energy markets to our everyday lives he has been lucky to contribute to Bloomberg, TradeWinds, Al Jazeera, Tanker Shipping & Trade (part of Riviera Maritime Media), Ship & Bunker, The Moscow Times, The Business Times (Singapore), The Houston Chronicle and Gulf News among others.

In his spare time he sits on the board of the Shipping Professional Network of London, where he aims to bring together young professionals from all aspects of the shipping industry to network, socialise and learn more about the industry he proudly forms part of.

I'm Arthur Richier, a Senior Freight Analyst at Vortexa based in London. My expertise in the shipping industry is grounded in hands-on experience and a deep understanding of freight markets. Prior to my current role, I worked on the freight pricing desk at S&P Global Platts, specifically covering dirty and clean tanker markets. My insights have been featured in reputable publications such as Bloomberg, TradeWinds, Al Jazeera, Tanker Shipping & Trade, Ship & Bunker, and others.

Now, let's delve into the concepts used in the provided article:

History Repeating Itself: The author draws a parallel between England's bid for Euro 2020 and historical football victories in 1998 and 2000. This sets the stage for the overarching theme of whether history repeats itself.
Shipping Cycles 101: The article introduces the concept of shipping cycles, which are economic cycles reflecting changes in supply and demand on freight rates and shipping assets. The four stages are rock-bottom, recovery, peak, and collapse.
- Rock-bottom: Lowest point where freight rates hit bottom, leading to bankruptcies but also opportunities for asset acquisition.
- Recovery: A period of improved earnings due to the removal of older or inefficient tonnage, tightening the supply side.
- Peak: High earnings, increased ship values, and an active second-hand market.
- Collapse: Market imbalance, excess tonnage, and declining earnings, leading back to rock-bottom.
Current State of Shipping Cycle: The author discusses the challenges of determining the current position in the shipping cycle. Technological advances in other industries contrast with the lack of a universal dashboard for assessing the shipping cycle. Different markets (containers, dry bulk, tankers) may be at different stages simultaneously.
Tanker Market Analysis: The article provides insights into the current state of the tanker market. Factors such as low freight rates, uncertainty regarding industry decarbonization, increasing ship values, and shadow trades affecting scrapping levels contribute to the complexity of the current situation.
Uncertain Future and Paradigm Shift: The author expresses uncertainty about the industry's future, suggesting a potential paradigm shift. External factors such as a global pandemic, regulatory challenges, and changing ship characteristics contribute to the uncertainty. The need for optimism in the face of uncertainty is highlighted.
Expert Opinion: The article concludes with a quote from a Greek shipowning company emphasizing the importance of timing and daring decisions in the shipping industry. The author adds a personal touch, expressing skepticism about the ease of predicting the current shipping cycle and suggesting a possible need to revisit the concept in the face of industry changes.

In summary, the article weaves together historical references, shipping cycle concepts, market analysis, and the author's expert opinion to explore the complex and uncertain nature of the current state of the shipping industry.