The shipping cycle is an economic concept that explains how shipping companies and freight charges respond to supply and demand. It examines how and why ships build up in sea trading ports. The cycle also seeks to explain what affects the selling price of ship fleets and what types of ships sell during slow business periods. The four stages of the shipping cycle, all based on customer demand, are trough, recovery, peak and collapse.
The first stage of the shipping cycle is called a trough. An excess in capacity characterizes a trough. Ships begin to accumulate at trading ports, while others slow down shipments by delaying their arrivals at full ports. Ships still carrying goods also slow down to save on fuel costs. In a trough, freight costs tend to start falling. Freight costs will typically decrease to the equivalent of vessel operating costs. Shipping companies start to experience a negative cash flow, which prompts the selling of inefficient fleet. Selling prices for ships tend to be lower, with some fleet exchanged at salvage rates.
Recovery is the second stage of the shipping cycle. In this stage, supply and demand move toward equilibrium, meaning both supply and demand levels match each other closely. Freight charges begin to increase, eventually surpassing operating costs. Shipping containers begin to move out of the trading ports, as demand stimulates new orders. During this stage, optimism about the market remains shaky. The opinion pendulum swings back and forth between optimism and pessimism, resulting in volatility for trade volume. Cash flow tends to improve steadily during the recovery stage.
The shipping cycle's third stage is a peak or plateau. At this point, the shipping freight rates become quite high — often double or triple the amount of fleet operating costs. The levels of supply and demand are almost completely equal. Quite a bit of market pressure occurs between supply and demand levels, which could cause the peak to fall at any time. Most of the shipping fleet is in operation, with only the most inefficient ships left to idle in trading ports. Cash flow for shipping companies is quite high.
The fourth stage of the shipping cycle, collapse, occurs when supply levels begin to exceed demand. Freight rates begin to decline during a collapse. Shipping containers and fleet begin to accumulate in trading ports once again. Although the cash flow of shipping companies may remain at high levels, ships begin to slow down their operations. They may take longer to deliver goods, and inefficient fleets may not ship goods for some time.