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Monday, September 07, 2009

Shipping in recession

Monday, 07 September 2009

The shipping industry is “demand-led”, and its prosperity depends directly upon the volume of world trade and the availability of ships. When world trade is depressed and there are too many ships searching for too few cargoes, there are hard times for the industry. The supply of ships, it is often pointed out, is relatively “inelastic”, with the typical life of a ship perhaps a quarter century or more. Once built, they tend to hang around a long time and will inevitably experience periods of both boom and recession in their lives. Such is the cyclical nature of the shipping market.
During periods of recession and shipping overcapacity, which history informs us tend to last rather longer than the periods of prosperity, there are certain strategies which shipowners can adopt in order to survive. In such a cyclical industry, assessing where we are in the cycle is quite important, and timing is everything. Thus an experienced and skilful owner may believe that the market is going to take a turn for the worse and shed some of his ships while there is still a good demand for them, leaving him with cash in the bank, which he can use to buy more ships when prices are very low and in anticipation of better times. In this way he reduces his exposure to the consequences of the downturn, which might leave him making unprofitable voyages.
He might seek to reduce his cost base in a number of ways. He could save fuel costs by seeking to reduce passage speeds through slow steaming, something which is quite effective if he operates very fast ships which use a great deal of fuel. In the prolonged recession of the 1970s-1980s, owners of fast cargo liner tonnage and large tankers actually re-engined many of their ships, replacing the thirsty steam-turbine plants with more economical diesel engines.
If the worst comes to the worst, he can lay up tonnage  in either “cold” or “hot” layup, depending on his assessment of the market prospects. It is a delicate balance, as the number of ships taken out of service through layup will make life easier for those still trading. Other strategies might include a more economic ship register and changing the flag, or perhaps even seeking cheaper seagoing labour or more competitive management. If prospects look poor in the long term, and his ships are elderly, the owner might elect to cut his losses and sell his ships for dismantling. The price he will receive will depend on the demand for recycled steel and the willingness of the cash buyers in the recycling yards to spend. Sadly, in a time of general recession, with a lot of ships being offered for recycling and demand for recycled steel low, the price may be a lot lower than he would like.