The depth of the last round of ship cycle

A look at the historical cycle of ships: How should we view the rise of ships in the early 21st century

When we noticed the wave of container ship orders starting in the second half of 2020, the ship market, which has been quiet for a decade, seemed to stir up a wave. Although more than a decade from 2008 to 2020 will indirectly appear in 2014, 2015 short-lived container ship orders, but the trend is short, and failed to form a strong support for ship prices. The wave of container ship orders beginning in the second half of 2020, however, is significantly better than any time in the past 10 years from the perspective of downstream freight rates or new shipbuilding contract prices. In our last big topic, "Ship Industry Topic: Ten years of the night of the ship market fading, thousands of sails to the sun", it is clear that the mainstream ship type represented by bulk carriers and oil tankers will be significantly higher in the next ten years. So, how we look at the specific direction, twists and turns and height of this round of ship cycle, this issue will be of great practical significance. In this report, we will give an in-depth review of the last great ship cycle (2002~2008).

1. The ship cycle that is getting narrower, but the drop is getting higher and higher

Maritime Economics has made statistics on the trend and duration of ship cycles in the past hundred years, and from this review, we can see that since the 20th century, ship cycles seem to be becoming narrower and narrower, and the gap is getting higher and higher. This is partly due to the rapid development of global economy and global trade and technological changes in the shipping field after the 20th century, but also due to the shift of the center of gravity of global trade and shipbuilding several times after the 20th century (before the 20th century, the Victorian era, Europe almost completely assumed the center of global trade, The rise of manufacturing in North America and East Asia and resource exports from South America and Australia after the 21st century have weakened Europe's trade position.

If we take a slightly shorter view and focus only on the global ship market after the 1970s, we will find three distinct upward and downward periods from the perspective of global new ship prices. The first is from 1976 to 1980, benefiting from the rapid development of Japanese economy and the improvement of global trade environment, global ship prices rose rapidly; Then, from 1981 to 1985, the capitalist countries faced the oil crisis, fell into stagflation, and global trade declined; Then, from 1986 to 1991, despite the lack of actual incremental demand, shipowners began placing orders after the oil crisis, taking into account the rise of large tankers and the need for replacement tankers (at that time, there was a certain miscalculation that the average working life of tankers was 20 years and the global oil voyage distance was likely to increase significantly). However, in the context of relatively weak demand, supply soon overflowed, and fell into a 10-year adjustment period after 1991. Although there was a short-term market for bulk carriers from 1994 to 1995, ship prices still tended to weaken. After 2002, the trauma caused by the United States "911" incident to the global investment confidence is being repaired, and the ship market has also climbed rapidly with China's accession to the WTO, ushering in the historical golden period of the ship market, and hit a record high in terms of order volume and ship price. Another point of concern is that we categorize the drivers of the three upward cycles, among which the first (1976~1980) and the third (2002~2008) upward stages are typical new demand drivers, typical features are the rapid growth of fleet ownership, mass delivery of ships, and shortage of shipyard capacity; The second stage (1987-1992) was typically driven by renewal demand, characterized by high ship delivery and dismantling volume, slow growth in global fleet ownership, and relatively smooth decline in ship prices from the peak of the cycle.

In order to better distinguish between the upcycle driven by new demand and the upcycle driven by replacement demand from a "volume" point of view, we also show the delivery volume of the sub-class from 1960 to 2007. It can be seen that in the two new demand-driven upward cycles, ship delivery increased year by year; However, in the upward cycle driven by replacement demand from 1987 to 1992, its delivery growth was not obvious. On the other hand, before 1987, the volume of ship dismantling reached its peak, so it also better illustrates the upward cycle driven by replacement demand, which is only a one-way force on the supply side, and the global fleet size has not increased significantly, and the height that can be achieved is relatively limited.

If we make a qualitative assessment of the supply and demand conditions of the ship market and the market prosperity of the ship market after 1869, when the trend of the cycle is obviously up and down (excluding World War I and World War II), we find some patterns: 1) The rapid growth of demand does not necessarily lead to market prosperity, nor does the rapid expansion of production capacity necessarily mean market prosperity, only the need for rapid growth and continuous shortage of production capacity can bring market prosperity; 2) A neutral market is usually a transitional stage with a high probability of prosperity or decline; 3) When there is obvious excess capacity or a significant decline in demand, the market will inevitably weaken; 4) The core point is that demand growth may not necessarily be cyclical, but the state of production capacity will lag to adapt to demand and have a more direct link with the market boom.