Thursday, 20 December 2012
Overall confidence levels in the shipping industry recovered slightly from their lowest level for over four years in the three months ended November 2012, according to the latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens. The small uptick in confidence appears to be related, among other things, to an increase in scrapping and to the start of a gradual improvement in the overtonnaging crisis which has dogged the industry for several years. Improved confidence is also reflected in a marginal increase in planned investments over the coming year.
In November 2012, 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), compared to the figure of 5.3 recorded in the previous survey in August 2012. The survey was launched in May 2008 with a confidence rating of 6.8. Charterers were the only category of respondent to report a fall in confidence over the three-month period, in direct contrast to the previous survey, when they were alone in expressing increased confidence in the market.
Charterers’ confidence rating this time of 5.6 was marginally down on the 5.7 recorded in August 2012. Confidence on the part of owners, meanwhile, was up to 5.5 from 5.1 last time, while managers (up from 5.9 to 6.0) and brokers (up from 5.0 to 5.3) saw more reason to be optimistic this time around. Geographically, confidence in Asia was up to 6.0 from the all-time survey low of 5.4 recorded in August 2012. Confidence was also up in Europe (from 5.2 to 5.3) and in North America (from 5.5 to 6.6).
A number of respondents saw encouraging signs in terms of a correction in the overtonnaging crisis which has gripped the market in recent years. “Markets will remain low for the next eight months,” said one, “but there are signs of recovery based on a significant reduction in the number of new deliveries.” Another noted, “New orders have declined, and the opportunities envisaged by those owners who ordered newbuildings which are now in service will start to materialise, while older tonnage will disappear as charterers look for newer, more efficient vessels.” Yet another emphasised, “The overhang of newbuildings is shrinking. New orders are drastically reduced, and scrapping is accelerating.”
Scrapping featured in a number of responses to the survey. “New scrapping and recycling initiatives will have a major impact on the market, as will the Ballast Water Management (BWM) convention,” said one respondent, while another observed, “As more and more older ships go for scrapping, and businesses start to recover, freight rates should increase and the market will start to recover.”
Not everybody was convinced, however, that things were moving in the right direction. “More demolition and greater discipline in respect of newbuildings is required before the upturn can begin,” said one respondent, while another emphasised, “Even though scrapping levels are high, the number of newbuildings on the market will continue to result in oversupply and keep freight rates depressed.”
Charterers came in for criticism from respondents. One noted, “Charterers are simply taking advantage of the situation by pitting owners against each other in order to achieve lower than last-done rates, particularly in the case of older vessels.”
Respondents generally remained concerned about the continuing worldwide economic downturn and, in particular, the financial difficulties of the eurozone. One pointed out, “There are signs of a slight improvement in the economic indicators from the United States, and we hope this will continue and serve to trigger some increases in freight rates. It is clear that, at today’s levels, a lot of owners will no longer be around in twelve months’ time.” Elsewhere it was noted, “This is a financial crisis which has taken shipping to the very depths, and the markets won’t start to recover unless some of the bigger nations start investing in weak national economies rather than enforcing austerity measures.”
Finance was on the minds of a number of respondents, with one noting, “The availability of third-party finance will remain very tight, with players obliged to reinvest back into their business whatever slim profits they make.” Another said, “The banking sector seems to be realising that it cannot sit on its hands for ever, and is starting to take a more proactive role in dealing with defaulting owners.” Another still pointed out, “We need some initiatives from the financial sector, otherwise the industry won’t be there in a few years’ time.”
The eyes of a number of respondents were firmly fixed on China. “The markets will benefit greatly from an improvement in the Chinese economy,” said one, while another noted, “China is transitioning into a consumer-led economy.” Not all the comments were optimistic, however. “There are signs in China that the freight market will not necessarily operate in free competition,” said one respondent.
A number of respondents expected to see the start of a recovery in the markets sooner rather than later. “We firmly believe that shipping will boom in the next three months, especially the tanker markets,” said one. Others put a longer timeline on any recovery, such as the respondent who remarked, “2013 is a lost year, but owners, managers and charterers are expecting an improvement in 2014.” Others thought it might take longer still, however, such as the respondent who predicted, “A second crisis is on the way.”
The likelihood of respondents making a major investment or significant development over the next twelve months was up on the previous survey, on a scale of 1 to 10, from 5.3 to 5.4 – the highest level since May 2011. Owners (up from 5.3 to 5.7) were more confident in this regard than in our previous survey, while the expectations of managers remained unchanged at 5.5. Meanwhile, charterers’ expectations of making a major investment rose from 5.8 to 6.1, the highest level since February 2011 and equal to the highest score for this category of respondent in the life of the survey. Also achieving their highest score ever in this category were brokers (up from 4.6 to 5.7). Forty-four per cent of both charterers (down one percentage point from last time) and owners (up from 36 per cent) assessed the likelihood of their making an investment at 7.0 out of 10.0 or higher. For managers, the comparable rating was 38 per cent (down from 45 per cent last time). Whereas 35 per cent of owners and 37 per cent of managers rated the prospect of their making a major investment over the coming year at between 1.0 and 4.0, only 16 per cent of charterers thought likewise. Geographically, expectation levels of major investments were up in Asia, from 5.3 to 5.7, static in Europe at 5.2, and down in North America from 5.7 to 5.4.
Demand trends, competition and finance costs once again featured as the top three factors cited by respondents overall as those likely to influence performance most significantly over the coming twelve months. The numbers were up for demand trends (from 22 per cent to 23 per cent) and for competition (17 to 18 per cent), but down in the case of finance costs, from 17 per cent to 16 per cent. Fuel costs (unchanged at 12 per cent) featured in fourth place, followed by operating costs, up one percentage point to 11 per cent. Tonnage supply (down from 14 per cent to 11 per cent), was in sixth place, having featured in fourth place last time.
Demand trends remained the number one performance-affecting factor for owners, up from 24 per cent to 26 per cent. Tonnage supply featured in second place at 17 per cent (down from 19 per cent), followed by finance costs, down 2 percentage point to 15 per cent. For managers, meanwhile, finance costs (up one percentage point to 19 per cent) featured in first place, pushing demand trends (down from 20 per cent to 17 per cent) into second place, ahead of competition, up 1 percentage point to 16 per cent. For charterers, competition was the leading performance-affecting factor, identified as such by 24 per cent of respondents. Demand trends were in second place, down 5 percentage points to 22 per cent, followed by fuel costs, down 2 percentage points to 17 per cent.
Geographically, demand trends remained the most significant factor for respondents in Europe (up from 23 per cent to 24 per cent), Asia (up from 21 per cent to 22 per cent), and North America (up 7 percentage points to 28 per cent). In Europe, finance costs (down one percentage point to 18 per cent) featured in second place, ahead of competition, up from 16 per cent to 17 per cent. In Asia, meanwhile, it was competition which featured in second place, up 3 percentage points to 19 per cent, ahead of fuel costs, unchanged at 16 per cent.
There was a 2 percentage-point fall (from 44 per cent to 42 per cent) in the number of respondents overall who expected finance costs to increase over the next twelve months. This is the lowest level since the same figure was recorded in August 2010, and the lowest figure in the life of the survey to date. Charterers appear to have undergone a complete about-face on this subject since our last survey. In August 2012, the number of charterers who thought that finance costs would increase rose by 18 percentage points to 52 per cent. This time it was down by 20 percentage points to just 32 per cent. The number of owners anticipating dearer finance this time was meanwhile static at 39 per cent (the second-lowest figure since the survey began), but 51 per cent of managers thought that finance costs were likely to rise over the coming year, up 5 percentage points on last time.
While the number of respondents in Asia anticipating an increase in finance costs was down by 5 percentage points to 42 per cent compared to last time, the corresponding figure for Europe was up from 41 per cent to 43 per cent, and in North America from 40 per cent to 43 per cent. In the Rest of the World, meanwhile, the numbers who thought that finance costs were going to rise was down by 17 percentage points to 38 per cent. One respondent noted, “Developments in the shipping industry will depend on the banks’ reaction to the breach of several loan covenants by owners, and also on the way they respond to debt amortization relief requests from owners.”
The number of respondents overall who expressed an increased expectation of higher rates over the next twelve months was down. In the tanker sector, the numbers expecting higher rates fell by 3 percentage points to 31 per cent. Owners were alone in expressing an increased expectation of higher tanker rates, with 34 per cent of respondents (one percentage point up on last time) saying they thought that rates would go up. The numbers of managers of like mind was unaltered at 27 per cent, but the 31 per cent of charterers who though that tanker rates would go up was 16 percentage points down on the previous survey in August 2012. This time, also, 33 per cent of brokers predicted higher tanker rates over the next year, compared to 46 per cent previously. Geographically, the prospects for increased tanker rates were deemed higher this time by respondents in Asia (up from 34 per cent to 35 per cent) and in North America (up 3 percentage points to 47 per cent), but lower in Europe, down from 33 per cent to 28 per cent, the lowest figure for this category of respondent since the 25 per cent recorded in February 2009.
In the dry bulk sector, meanwhile, there was a 3 percentage-point fall, to 31 per cent, in the overall numbers of those anticipating rate increases. Owners (down 3 percentage points to 30 per cent), managers (down to 30 per cent from 35 per cent), and charterers (down 2 percentage points to 33 per cent) were united in being less confident of dry bulk rate increases than they were in the previous survey. Only brokers bucked the trend, with the numbers there expecting higher rates up from 30 per cent to 33 per cent. In Asia, expectations of higher dry bulk rates remained unaltered at 33 per cent, but were down in Europe, from 36 per cent to 30 per cent, and in North America (down 15 percentage points to 28 per cent).
In the container ship market there was a 5 percentage-point fall, to 27 per cent, in the overall numbers expecting rates to go up. Indeed, expectation levels in relation to rate increases were down across all categories of respondent, most notably in the case of owners (down 10 percentage points to 27 per cent). Meanwhile, 35 per cent of charterers (compared to 47 per cent last time) and 23 per cent of managers (down 3 percentage points on last time) expected container ship rates to rise in the next twelve months. Geographically, expectations of improved rates were up in Asia (from 30 per cent to 36 per cent), but down in Europe (from 34 per cent to 22 per cent) and in North America, from 41 per cent to 39 per cent.
Moore Stephens shipping partner, Richard Greiner, says, “It is encouraging to see confidence levels once more moving in the right direction. Moreover, as we sit on the cusp of another long, dark northern hemisphere winter, it is very pleasing to see an increased expectation of new investment being made in the industry. This increased willingness to invest is due in part to what many see as the first signs of a correction in the industry’s tonnage overcapacity problems. Scrapping activity has increased, although there is simply not enough demolition capacity in the world for this to be a solution on its own. Some sanity, born of hard experience, has returned to the newbuilding sector following the pell-mell pursuit of new tonnage which characterised shipping’s salad days, which now seem so distant. Opportunities are starting to open up for the savvy and the solvent, and now is a good time to invest in the right deal.
“Our survey revealed a high level of interest in China, with a number of respondents suggesting that the country is a source of hope for restoring the fortunes of the shipping industry. History suggests that such hopes are not always the most reliable foundation on which to build a future, however, and China has its own economic problems to deal with at present. The economic problems of the eurozone, meanwhile, continue to make themselves felt in the industry, and are balanced only slightly by the perceived beginnings of a recovery in the US economy.
“Fewer of our respondents are expecting ship finance to become more costly over the coming year. If that is indeed the case, and if such finance also becomes more readily available, this will help to turn investment aspirations into reality. But it would be wrong to think that we have seen the end of corrective action by the banks. Bankruptcies, Chapter 11, and loan loss provisions are likely to be a regular part of the ship finance lexicon for some time to come.
“Shipping is an expensive business in which to operate. It is going to become even more expensive, with operating costs expected to continue rising over the next two years. Higher fuel costs and more expensive crews, together with increased expenditure in other categories, will keep shipping honest for the foreseeable future – and that is without the cost of having to comply with the BWM convention and other regulatory requirements. If you add to that the expectation that rates in each of the main tonnage categories are expected to remain depressed throughout 2013, the inescapable conclusion is that those companies that emerge intact and profitable from one of the darkest periods in recent shipping memory will be among the leanest and greenest the industry has ever seen.”
The Moore Stephens Shipping Confidence Survey includes responses from key players worldwide in the international shipping industry to a targeted, web-based survey by the Moore Stephens Shipping Industry Group. Responses were received from owners, charterers, brokers, advisers, managers and others. Editors can apply for a copy of the survey by emailing firstname.lastname@example.org
Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 636 offices of independent member firms in 100 countries, employing 21,197 people and generating revenues in 2011 of $2.3 billion. www.moorestephens.co.uk
For more information:
Richard Greiner, Moore Stephens LLP
Tel: +44 (0)20 7334 9191