(1) Martin Stopford's textbook "Maritime Economics" is a good resource to understand basic shipping economics and the various shipping industries.
(2) If you want something shorter and free,
Chapters 6 and
10 of The Blackwell Companion to Maritime Economics are good places to start.
Let me share some personal observations on the shipping industry.
What is shipping?
Shipping is a form of transportation service. Its substitutes are road, rail and air transportation but in most cases it is still the most cost effective mode of moving large quantities of goods around the world. Shipping is also a commodity in the sense that there is little differentiation between one Capesize vessel and another. Cargo owners who wish to move their goods do not really care if your ship is new or old, high-tech or low-tech if you can do it cheaper for them with the same amount of operational risk. There may be certain regulations that need to be adhered to such as double hulls for tankers and washing procedures, but generally the contract for shipment usually goes to the one with the cheapest cost (ignoring human factors like bribery, charismatic charterers/brokers etc.). However, unlike conventional commodities such as minerals and grains, shipping services or freight, is not storable. Prices of conventional commodities are very hard to predict, especially for globally traded commodities. The lack of a cost of carry relationship between spot prices and future prices for freight makes its price prediction all the more difficult.
Freight and freight markets
Let me back up and explain my understanding of freight rates. Freight rates are the revenue received from chartering out your ship. Knowing where freight rates go will have a big impact on the profitability of your shipping investments. However, as mentioned, it is notoriously difficult to predict freight rates. There are five main freight markets that might affect freight rates directly: the market for spot freight, the market for time charters, the market for newbuildings, the market for second-hand ships and the demolition market. Apart from that, given that demand for shipping is derived from the demand of the goods the vessel transport, one has to monitor demand and supply conditions of those goods as well. For example, let’s say freight rates for crude oil tankers have suddenly gone up. To understand why that is and if it will persist, we need to look at the crude oil market and see if demand has sustainably increased or if it is just a short term supply shock. Then we need to look at the spot and time charter markets to see if there are many ships that can be brought out from lay-up or from ends of charters to ease the upward pressure in freight rates. After that look at the newbuilding market and see what the orderbook is like for freight and see if there is a large number of vessels coming online in the near term. If all the tanker shipyards are operating at full capacity with most of the delivery far into the future, this might also mean that high freight rates might persist for a while because it will take a long time for new capacity to come in. You get the drift. The exact implications of movements in each freight market and the market of its cargo on freight rates is too complicated and lengthy to go into here but interested people should definitely read up more about it.
Cyclicality
Having said that, there are some general trends that we can observe from the history of freight rates. Firstly, like GG, Nick, Drizzt and others have pointed out, the freight market is characterized by cycles. The cycles are often between long periods of low freight rates and low volatility and short periods of high freight rates and high volatility. This is due to the shape of the demand and supply curve for freight rates, which are highly inelastic at high freight rates and very elastic at low freight rates (Figure 1). Long term in shipping cycles can be looooong (sometimes lasting decades from peak to trough), much longer than your average business cycle (3-5 years). Secondly, over the long run, say at least 15 years, freight rates exhibit some kind of mean reversion. It cannot explode upwards infinitely or go down to zero. The ceiling is set by the profit margins of commodity producers and the floor is set by the marginal cost of investments in ships. Historically, the mean reversion line is somewhere slightly above the marginal cost. The question is if this marginal cost is on an upward trend due to inflationary pressures or downwards due to advancements in technology. If you look at the Baltic Dry Index, when it started in 1985 the index value was 1000 (Figure 2). Almost thirty years later today, it is still around 1000. So the upwards movement of freight rates is definitely not a guarantee and analysts shouldn’t project increasing freight rates into infinity.
Individual shipping industries
So far, I have talked about the shipping industry as a whole. In truth, there are different individual shipping markets, each with different dynamics. The tramp bulk shipping market operates closer to perfect competition. This means many ship owners with more or less the same ships (cannot differentiate a capesize from another) and no market consolidation by a single player is possible. Like Ow Chio Kiat once remarked, any man and his dog can buy a ship and start a (bulk) shipping company. The barriers to entry are just too low and the only significant barrier is financial capital. However, in the liner market, there is more room for monopolistic behaviour because the routes are fixed, volumes are more consistent and the shipping companies can entrench themselves by buying up ports and logistic service providers for these routes.
Last remarks
Some aspects of the shipping industry remind me of the airline industry and the textile manufacturing industry in US in the early 20th century. Equipment (or aircraft or ship) salesmen will approach one company and tout its new technologically advanced product that will save time, save labour, save operating costs etc. Then they will turn around and sell the same thing to its competitors. In the end, companies are always paying more for their capital equipment but unable to charge their customers significantly more, if at all. All the savings they would have made goes to the equipment (or aircraft or ship) manufacturer. Having said that, I believe it is still possible to earn money investing in shipping, but the fact that most value investors shun it should make us question ourselves more than usual why we think we can do it.