The shipping market is one that is constantly changing, whereby the economy that surrounds merchant based shipping is considered a cyclic market. This cycle occurs through four stages; the trough, recovery, peak and collapse.
Shipping Market: Cycle – Trough
This stage of the cyclic market of shipping shows signs of capacity surpluses, and freight rates plummeting to meet the operating costs of ships that the least efficient. This would in turn lead to lay-ups and financial pressures because of the negative cash flows due to the lower freight rates.
Shipping Market: Cycle – Recovery
This stage of a shipping market cyclic state is called the Recovery due to the fact that it will attempt to make a comeback. You will find that freight rates increase slightly higher than that of operating costs as well laid up tonnage falls. However, the temperature of the market will remain somewhat uncertain but confidence will gradual grow.
Shipping Market: Cycle – Peak
At this point in the cyclic nature of the shipping market, the rates for freight shipments will rise (close to two or three times above that of the operating costs). This will lead to an eventual over trading. Furthermore, this will lead to new building orders increasing as well.
Shipping Market: Cycle – Collapse
This stage brings the cyclic market full circle, with supply overtaking demand. This will cause the market to collapse with freight rates plummeting.
The following chart, courtesy of KPMG, breaks down the stages.