Dede's Law and Business Series:

Effect of shipping cycle stages on financing options for maritime players (2)

By Foluke Akinmoladun

The shipping cycle can be categorised by the markets and economics that define its movement. A poor market is one where there is an oversupply of ships in the market as experienced post 2008 after the financial crisis. This resulted in low freight rates and less order for new ships and to a poor market.

A poor market usually corrects itself when the demand for freights movement, which is independent of the operation of ships, increases, thus increasing the demand for ships. With less demand for ships from a poor market, the recovery market where the increasing demand for freight is met by the lowered supply of ships would result in increasing freight prices. This increased freight prices then push up the demand for ship acquisition and subsequently, ship building orders.

From the above narrative on the movement in shipping cycles, the most vulnerable group in the shipping cycle is the ship owner. Their business is dependent on freight demand over which they have no control. The shippers on the other hand may be more flexible as, depending on the type of cargo they ship, the market for the cargo maybe seasonal and somewhat predictable. For the ship builders, the effect can be in two forms, demand for ships, and the availability of funds to fund the shipbuilding project.

For the ship owners, banks have been reluctant to lend to them because of capital and liquidity pressures and the poor performance of the shipping industry post 2008. The attitude of financial institutions towards shipping investments depends exclusively on the shipping market conditions. Factors that affect the decisions of financial institutions include world economy and sea borne trade, supply and demand of shipping services and the level of freight rates. As there are inequalities between those factors, the structure of shipping finance that ship owners make use of, tends to change and alternative methods of financing are usually explored to ensure the profitability of their operations and fleet development. The financial crisis of 2008 thus resulted in banks scaling down on their ship finance operations and in some banks such operations were closed down altogether.

For shipping companies, freight rates are the most important factor. The seasonal demand of cargo such as dry bulk cargo of grains that is dependent on the availability of grain affects the need for finance for shipping companies. Shipping companies for grain for instance, may finance their activities at the time just before peak demand so that financial resources are available for shipment.

For ship builders, the demand for freight and government regulations on restriction on ship movements affect the availability of shipping finance and makes the shipping cycle for ship builders a bit more erratic. New ship acquisitions have also explored the use of asset-based financing such as ship mortgages and Islamic finance to ensure profitability and availability of finance.

In summary, the different stages of the shipping cycle can be categorised simply into poor markets, recovery markets and boom markets. The factors that bring about the poor market happen when sustained results in a recovery market is upturned by extraneous forces such as environmental disasters, financial crisis or pandemics like corona virus, come into the mix to complicate the availability of funds and movement in the market. In a poor market, ship owners, shippers and ship builders all bear the pressure on availability of funds for operations while in a recovery market or a boom market like pre-2008, availability of funds actually resulted in an oversupply of ships. This resulted in the poor market that the shipping industry was just about recovering from before the advent of the deadly corona virus which significantly depressed the shipping market.

Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.

She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector.
She can be reached at: Foluke.A@trizonlawchambers.com

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