Managing Financial Resources in Shipping

Abstract

An important characteristic and key feature of the shipping industry is that it is highly cyclical; this cyclicality is particularly apparent in the traditional, less specialized and highly fragmented dry bulk and tanker shipping sectors. Freight rates follow a volatile pattern, due to changes in the industry’s underlying demand and supply forces. As can be observed in Fig. 7.1, volatility of freight rates has a direct effect on shipping assets whose value follows a cyclical pattern similar to that of freight rates. Another important characteristic and key feature of the shipping industry is that it is highly capital intensive. The acquisition, ownership, and management of shipping assets require the commitment of very large amounts of capital. The establishment of a meaningful presence (critical mass) in shipping will typically involve the formation of a fleet of at least 7–10 vessels, and depending on the specific shipping sector, this will require a significant investment amount; e.g., the acquisition of a 5-year old Capesize vessel would require in September 2016 the commitment of about $24 million. As a result of the industry’s cyclical and capital-intensive nature, it is fundamental for the industry’s participants and capital providers to determine if the timing is appropriate for investments in shipping. Furthermore, and in order to ensure the viability of shipping investments, it is equally important to develop an understanding on the different financial sources of capital that are available in the industry and the techniques and strategies that can be employed to manage business risks. This chapter aims to expose the reader to the different sources of shipping finance, analyze each of them, and provide an overview of the present challenges in the sector. A deeper understanding of these ship-financing sources and conditions will assist toward employing these and developing the best possible capital structure for a shipping project and a company as a whole.