During periods of high demand for cargo transportation and, consequently, rising freight rates, the expectation of higher profits leads shipping companies to decide on new shipbuilding or the acquisition of second-hand vessels. This behavior, namely the endogenous tendency for overinvestment whenever freight markets are at high levels, is considered a structural element of the shipping industry, which contributes to its cyclical nature.
However, as orders for shipbuilding increase, and thus the demand towards shipyards, so do the shipbuilding prices. At the same time, since the production capacity of shipyards can only be altered in the long term, the accumulation of orders leads to the full utilization of their production capacity, the increase in the time between order and delivery of the vessel, and, naturally, the rise in shipbuilding prices even in the short term.
Nevertheless, during the time between order and delivery, market conditions may change. The decision to build a ship therefore entails, to some extent, risks.
For this reason, during such periods, several shipping companies exploit the shipbuilding contracts or order rights (options) they have signed with shipyards in the previous period. They thus enter the market with a speculative intent, offering them for sale and reaping significant profits.
*The information for the above article was sourced from the book «Οργάνωση και διοίκηση ναυτιλιακών επιχειρήσεων» by Prof. Ioannis Theotokas (Alexandria Publications, 3rd edition, September 2019), pp. 58.
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