source: www.pexels.com
Last time...
...we talked about how unique and peculiar the ship finance industry is. We said you cannot really use the same tools and models in this industry as you would in the retail and real estate industries, for example. But there is also a specific case study that proves this peculiarity.
The response of bankers...
...to the 1980's shipping crisis also shows how unique the industry is. Bankers generally did not know how to handle the situation. In many cases they had to abandon their career paths. This is probably because these bankers tried to handle the shipping industry the same way as the would handle other industries. Few banks would have been specialized enough to deal appropriately with the situation.
Yet finance is finance...
that is also true. Independent of the underlying industry. And especially in today's extremely global networks of industry, a slight lack of confidence in a particular industry's ability to make good on repayment promises can easily snowball. Before you know it you have increasingly negative sentiments. Eventually the result can be an almost complete breakdown of the entire system.
When this happens...
...in a particular industry, such as happened in the 1980's in shipping, it could take decades for the industry to recover. A general stock market crash, such as what occurred in the 1920's is probably easier to recover from! Why? Because no particular industry is singled out and it may be easier to restore confidence.
Only mature industries...
...can handle these heavy supply- and demand fluctuations. When it comes to the ship finance industry in particular, the development of the derivative market in shipping may provide the necessary risk mitigation tools. When used correctly, these may be able to smooth out returns and alleviate fears. The market needs such mechanisms. In future, the appropriate use of derivatives may help protect the industry from another devastating crash.
References:
Stopford, Martin, 2005. Marine Investments Financing Forum. Shipowners versus capital providers "a tango for two" 31st October 2002 the Grand Hotel, Amsterdam Setting the Scene, Identifying the Objectives, Fifty years of ship finance
Swart, Petrus, 2007. Masters Dissertation. Hamburg School of Logistics.
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