Overall confidence levels in the shipping industry fell in the three months to November 2015, according to the latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens.
The average confidence level expressed by respondents in the markets in which they operate was 5.6 on a scale of 1 (low) to 10 (high). This compares to the 5.9 recorded in August 2015. The survey was launched in May 2008 with a confidence rating of 6.8.
All main categories of respondent recorded a fall in confidence this time, most notably charterers (down from 6.5 to 5.5). The confidence of managers was down from 6.4 to 5.8, that of brokers from 5.2 to 4.6, and that of owners from 5.8 to 5.7. Geographically, confidence was up in Asia, from 5.8 to 6.0, but down in Europe from 5.9 to 5.4, and in North America from 6.3 to 5.7.
Many respondents expressed continuing concern about overtonnaging and excess shipbuilding capacity. One observed, “The over-ordering of ships by investment funds, together with the huge shipbuilding capacity created by China, are not conducive to an orderly market, with the result that shipping investments remain very risky.” Another noted, “As a result of excess shipbuilding capacity and the low cost of finance, shipping markets have been suffering from over-supply for years. We can only hope for strong growth in demand to improve the situation.” The cost of regulatory compliance, meanwhile, was referenced by a number of respondents, with one commenting, “Environmental regulations will continue to drive costs and uncertainty.”
Looking ahead, one respondent said, “2016 and 2017 are going to be tough,” while another remarked, “Unless and until the global economy starts to improve, things are unlikely to change significantly.” Elsewhere, however, it was noted, “Major economies are stabilising and improving, so global trade will respond, which will lead to an improvement in the shipping markets.” In similar vein, another respondent said, “Shipping will always be a major part of world business, and will retain its importance as a result of recent political developments.”
A number of respondents commented on the effect of current low oil prices, with one emphasising, “The precipitous fall in oil prices has poured cold water over LNG-fuelled ship design. While the application of LNG makes sense from an environmental point of view, the additional capital expenditure is not justified unless oil prices go up to previous levels.”
The likelihood of respondents making a major investment or significant development over the next 12 months was down on the previous survey, on a scale of 1 to 10, from 5.3 to 5.2. Charterers, managers and brokers were less confident in this regard than they were three months ago, but the confidence of owners was up, from 5.5 to 5.7. One respondent said, “The sooner funds that have no clue how shipping is run leave the market, the better. Shipping should be run by shipowners and not fund managers.” Elsewhere it was noted, “A lot of shipowners are like investors in the stock market. Even though common sense tells them they may be making a bad investment, they would rather take the risk than miss out on a possible upturn in the market.” Yet another respondent said, “Smart owners wait until rates are low and buy used ships at low prices.”
The number of respondents who expected finance costs to increase over the next 12 months was down by one percentage point on last time, to 47 %. The number of owners anticipating dearer finance fell by 18 percentage points to 35 %, but the number of charterers of like mind rose to 67 %, from 50 % previously. One respondent said, “We need a more realistic approach from those banks which are helping to keep zombie companies afloat.”
Demand trends, competition and port congestion featured as the top three factors cited by respondents as those likely to influence performance most significantly over the coming 12 months. The numbers were down by four percentage points (to 21 %) for competition, which was pushed into second place by demand trends, where there was a one percentage point increase, to 24 %, in the figures. Port congestion, up 15 percentage points to a new survey high of 17 %, featured in third place, followed by finance costs, in respect of which there was a four percentage point drop to 14 %. Regulation (up five percentage points to 9 %) featured in fifth place, followed by operating costs (down five percentage points to 6 %). Fuel costs featured as a significant factor for just 4 % of respondents, compared to a survey high of 16 % in May 2011.
One respondent said, “Excessive regulation makes control of costs even more difficult. Furthermore, what is the point of creating rules when international authorities cannot agree how to apply them, such as in the case of ballast water management?”
There was a fall in the number of respondents anticipating higher freight rates in the tanker, dry bulk and container ship sectors compared to the figures for August 2015. The net sentiment was nevertheless positive (+7) in the tanker market and in the dry bulk sector (+16), although negative (-5) for container ships.
One respondent said, “Many tanker owners are guided more by hope than by economics. When statistics indicate a tonnage shortage in two years’ time, they order ships now in the hope that freight rates will be higher once the ships have been built. But if other owners do the same, overcapacity will result in low rates and a fall in vessel values – a lose-lose situation.”
Elsewhere, it was noted, “Overall confidence in the state of the dry bulk market is currently very low, and any hope of the start of a recovery is at least 12 months away.” In the container ship sector, meanwhile,
one respondent commented, “Many owners of container ships seem to order new tonnage whether it makes economic sense or not, just to maintain market share.”
Moore Stephens shipping partner Richard Greiner says, “The inherent volatility of the shipping industry is part of its appeal to investors, for whom there is seldom any reward without risk. But confidence historically fluctuates more in a volatile market than in a stable one, and shipping is nothing but volatile at the moment. The small drop in industry confidence levels over the three months to end-November is therefore not a great surprise.
“Global unrest in general, and in particular the crisis involving Syria, does nothing to help confidence in industries such as shipping, which operate across international borders. Neither does the migrant crisis in Europe, which has escalated significantly in recent months, nor the Paris bombings. Shipping must expect to suffer the downside of such incidents just as, in better times, it can expect to benefit from positive geopolitical changes.
“Informed awareness and the ability to react in a timely manner are the best defence against external influences on the industry. But what of those other inhibitors of shipping confidence, which might be said to be of the industry’s own making? Firstly, there is the over-arching problem of excess tonnage. There are too many ships to carry the available cargoes. Doubts also persist about the level of newbuilding orders at a time when the market does not look to be in a good position to sustain them.
“Only increased ship recycling and rationalisation of business plans can effectively address these issues, and the need to take a proactive approach is borne out by the current state of the markets. The tanker market is producing comparatively good earnings at the moment, but its fortunes are too closely linked to the price of oil for anybody to accurately predict how long this will last. Expectations of improved rates over the next 12 months in the three main tonnage categories covered by the survey are down. In the case of the dry bulk sector, such expectations are at their lowest since August 2012, while in the container ship market one has to go back to October 2008 to find a lower figure. Indeed, our respondents recorded an overall negative sentiment in respect of the container ship market.
“This paints a rather austere picture for the immediate future of the industry, which is also facing the burgeoning challenge of funding regulatory compliance with the imminent entry into force of the Ballast Water Management convention. But it is by no means all bad news. Operating costs fell in both 2013 and 2014, which is evidence of the application of a measure of control which shipping has not been accustomed to seeing in recent years. Meanwhile, 50 % of those shipowners who responded to our confidence survey rated at 7 out of 10 or higher the prospect of making a major investment over the next 12 months. Owners were also much more confident than they were three months ago that ship finance was going to be cheaper over the coming 12 months.
“Well-informed owners and investors are not in the habit of throwing money away on lost causes. Shipping remains a good business to be in, its continued existence assured by its singular capabilities. The outlook remains volatile, but exciting.”