Vessel operating costs expected to rise in 2019 and 2020

International accountant and shipping adviser BDO says total operating costs in the shipping industry are expected to rise by 2.5% in 2019 and by 2.7% in 2020.

Responses to the firm’s latest annual Future Operating Costs Survey revealed that insurance is the cost category likely to increase most significantly in both 2019 and 2020. In the case of protection and indemnity insurance, the predicted increase is 2.0% for each of the years under review, while hull and machinery insurance costs are expected to rise by 1.9% in both 2019 and 2020.

The cost of both dry docking and of repairs and maintenance is expected to increase by 1.8% in 2019 and by 1.9% in 2020, while expenditure on crew wages is predicted to rise by 1.9% in 2019 and by 1.8% in 2020. Other crew costs are expected to increase by 1.8% and 1.7% respectively.

The increase in expenditure for spares is expected to be 1.6% in 2019 and 1.8% in 2020. Meanwhile, projected increases in lubricants are 1.6% in each of the two years under review, while those for stores ae 1.3% and 1.4% respectively.

The predicted overall cost increases for 2019 were highest in the container ship sector, where they averaged 3.7%. These are heavily influenced by expected increases in both protection and indemnity and hull and machinery insurance costs. Predicted cost increases in the bulk carrier market in 2019, meanwhile, were 2.3%, as opposed to 2.5% in the tanker market and 2.6% in the offshore sector.

A slightly different pictured emerges in respect of 2020, where the highest operating cost increases are those amounting to 3.8% which are expected in the offshore sector. Operating costs for container ships, meanwhile, are expected to rise by 3.0% in 2020, and for bulk carriers and tankers by 2.7% and 2.1% respectively.

The cost of regulatory compliance was high on the list of concerns cited by respondents to the survey. One respondent said 2020 is “all about environmental regulations and the demand for - and cost of – fuel.” Elsewhere it was noted, the shipping market “will be dominated by the cost of new regulations, not least that relating to compliance with the IMO Sulphur 2020 regulation”.

Crew costs were the other factor uppermost in the minds of respondents. “Manning will continue to be a painful area for ship operators,” said one commentator. Another respondent observed that rising wage costs now represent a real threat to business models, while another anticipates a stronger dollar in 2019/2020, which will affect the main cost of paying seafarer wages.

The cost and availability of finance was another issue raised by a number of respondents, one of whom said, “finance – or a lack thereof – is driving consolidation as part of a trend towards creating mega-companies”. They added: “The market is being eroded by capital providers and hedge fund managers who shun efficiency in favour of scale.”

Overall, 25% of respondents (up from the figure of 23% recorded in last year’s survey) identified the cost of new regulation as the most influential factor likely to affect operating costs over the next 12 months. Finance costs featured in second place at15%, compared to 18% last year. In third place was crew supply at 14% up from 12% last year. Next came competition, down from 15% to 13%, followed by demand trends (12%) and labour costs, (11%), compared to last year’s figures of 10% and 8% respectively. Raw material costs, meanwhile, were up by one percentage point to 8%.

Richard Greiner, Partner, Shipping & Transport at BDO, says: “The predicted 2.5% and 2.7% increases in operating costs for 2019 and 2020 respectively compare to an average fall in actual operating costs in 2018 of 1.8% across all main ship types recorded in the recent BDO OpCost study.

“There were some interesting predicted cost increases in the individual market sectors. The increases in the container ship sector for 2019, for example, were the highest in every single individual category of expenditure with the exception of dry docking and management fees. The cost of hull and machinery insurance for container ships is predicted to increase by 4.8% in 2019 and by 3.3% in 2020. For protection and indemnity insurance, the comparable predicted increases are 4.1% and 3.3% respectively. By way of comparison, increases in protection and indemnity and hull and machinery insurance costs in the tanker sector for 2020 are predicated at 1.3% and 1.2% respectively.

“One year ago, overall expectations of operating cost increases for 2019 averaged 3.1%. The fall now to an estimated 2.5% must be regarded at first blush as good news. But this must be tempered by the knowledge that some significant items of big-ticket expenditure – notably those relating to the cost of complying with new regulations - are waiting in the wings.

“It is clear that shipping is well aware of the need to achieve regulatory compliance on a scale not previously envisaged or encountered by previous generations of the industry. This is only the third time that the cost of new regulations has been included in our Future Operating Costs Report, but for the second successive year it has emerged as the factor deemed most likely to have a significant influence on operating costs.

“This is not surprising, given that the immediacy of IMO‘s Sulphur 2020 regulation is enshrined in the name of the regulation itself, while the time is fast approaching for owners to make a decision on the respective merits of Ballast Water Management Convention compliance solutions.

“Shipping and its regulators have demonstrated their ongoing commitment to improving the industry’s carbon footprint, but it is clear that this will come at a price, as will the continuing drive towards greater innovation and technical excellence. A cleaner, greener and more efficient shipping industry will ultimately impact favourably on both operating costs and investor appetite. But, perversely, the process of attaining environmental and technical proficiency will add to such costs in the shorter term.

“Experienced owners and managers are well-used to optimising operating cost efficiencies, with one respondent in the survey noting how for some years now the combination of a soft insurance market, cheaper finance and a decline in crew costs had helped to keep operating cost increases below 2% over the past eight years. Current indications are that the influence of such factors is declining and on their own they are unlikely to be enough to stay ahead of the game in the coming years.

“Finance is available for viable projects, but will not come cheap. Crew costs are likely to go up rather than down in the short term. And, perhaps most significantly of all, insurance outgoings are predicted to rise over the next two years at a rate not seen for some time. There have certainly been a number of recent indications that the prolonged soft insurance market conditions in both the commercial and mutual sector may soon start to change. The reasons for this are not entirely clear, but may involve the recent deterioration in technical performance by both the protection and indemnity clubs and hull and machinery underwriters, which could in turn lead to a firming of the rates which owners are required to pay. Then again, we have seen before how difficult it can be to make premium increases stick, particularly in the commercial market.

“Shipping faces some major challenges over the next two years as it seeks to position itself as an environmentally-aware, technically-savvy industry. It must expect fluctuations in the level of operating costs caused by a variety of factors ranging from movements in oil prices to shifts in levels of manpower, from fluctuations in the value of the dollar to the ramifications of geopolitical developments around the world. The movement in some costs is easier to map and predict than in others. The movement in others still, such as the cost of regulation, is becoming easier to predict as implementation deadlines draw ever closer. The movement in yet others, such as the cost of fighting cyber-crime, can only be guessed at for the moment.

“One thing is clear. The cost of operating effectively and profitably in the modern shipping industry must be met chiefly by revenues generated from day-to-day operations. Shipping remains an optimistic industry but, if the evidence of the freight markets is to be believed, it may not be charging enough for the unique service that it provides.”


Note to editors

The BDO (formerly Moore Stephens LLP) Shipping & Transport team has extensive experience delivering accountancy, tax and advisory services to the sector worldwide.

BDO delivers key information and insights to the shipping community, including the annual OpCost report, the quarterly Shipping Confidence Survey and a host of thought leadership on topical issues, such as regulatory developments and market conditions.

https://www.bdo.co.uk/en-gb/industries/shipping-and-transport


BDO LLP
BDO LLP operates in 17 locations across the UK, employing nearly 5,000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network
The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn.
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BDO says shipping must improve its risk management procedures

Sound enterprise and business risk management are making an improved contribution to commercial success in the shipping sector, according to the latest annual Shipping Risk Survey by leading shipping adviser and accountant BDO. But the industry still needs to improve its risk management procedures in the face of a growing level of threat to its security.

Respondents to the BDO survey rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.4 out of a possible maximum score of 10.0, compared to 5.9 in the 2018 survey. The survey was launched in 2015 with a rating of 6.9.

Owners posted the highest score of all main respondents, followed by managers, but the ratings for charterers and brokers were significantly down on last year. Asia was ahead of Europe in terms of geographical sentiment, but both were behind the Middle East.

The cost and availability of finance was cited by 29% of respondents (up from 17% in the previous survey) as the factor likely to pose the highest level of risk. It was the number one risk factor for owners, charterers and managers, and was deemed to pose the highest level of risk in all geographical areas with the exception of North America. Demand trends, cited by 18% of respondents, featured in second place having ranked first at 17% last year, followed by competition (down from 16% to 11%). Geopolitics were ranked in fourth place at 8%, compared to 6% a year ago. There were also noticeable increases in respect of breaches in health and safety (up from 1% to 6%) and fuel emissions (up from 3% to 7%).

Respondents to the survey felt that the level of risk posed by most of the factors which impacted their business would remain steady over the next 12 months, with the exception of fuel emissions, bunker and fuel costs, cyber security and geopolitics, which were all perceived to have the potential for increased risk.

Overall, 67% of respondents (compared to 74% last time) felt that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management. Meanwhile, 18% (up from 16% previously) said that senior management’s involvement was limited to ‘periodic interest if risks materialise’, 11% (up from 10% last time) said that senior management ‘acknowledged but had limited involvement in risk management’, and 4% (compared to 1% last time) said that senior management had no involvement whatsoever.

Overall, 34% of respondents (compared to 36% in the previous survey) confirmed that enterprise and business risk was managed by means of discussion without formal documentation, while 43% noted that risk was documented by the use of spreadsheets or written reports, compared to 48% previously. Third-party software was employed by 10% of respondents (4% last time) to manage and document risk, while 8% used internally developed software, as opposed to 7% at the time of the previous survey.

On a scale of 1.0 (low) to 10.0 (high), changes to legislation (although down to 3.7 from 3.8 last time) was deemed the factor most likely to result in a material mis-statement in companies’ period-end financial statements. Next came non-compliance with existing legislation, estimates of claims and provisions, disclosure of commitments and contingencies, and automated IT processes for financial reporting, all of which recorded a rating of 3.5. The rating for changes in accounting standards, meanwhile, fell to 3.0 from 3.4 last time.

Michael Simms, Partner, Shipping & Transport at BDO, says, “There has never been a more obvious and pressing need for shipping to identify and reduce its exposure to risk. However, the findings of our survey suggest that the industry is still not fully cognisant of the nature and extent of the risks to which it is exposed, and will need to address a number of issues in order to preserve its integrity and to maintain and increase its attractiveness to existing and new investors alike.

“Shipping is a classic risk-and-reward industry, and one which throughout its history has both rewarded and punished those taking the risks. Generally speaking, those who do their due diligence, and who come up with a sound business plan, are the ones best placed to reap the rewards.

“In many respects, today’s industry faces the same challenges that it did two centuries ago, not least competition, tonnage supply and demand, and operating expenses. But there are new problems to be faced now, such as cyber security and the cost of environmental compliance, which today’s industry will ignore at its peril.

“Going forward, it may be expected that further attention will need to be paid by the industry to managing other emerging risks such as the OECD scrutiny of low-tax jurisdictions as well as the increased focus on the ‘greening’ of finance.

“The fact that cyber security and geopolitics were identified by the respondents to our survey as among those issues having the potential for increased business risk over the next 12 months suggests that the industry is well aware of the dangers posed in these two volatile areas. And yet only 2% of our respondents felt that IT and cyber security posed the highest risk to their organisation.

“The cost and availability of finance was far and away the biggest perceived risk, but sourcing finance will no longer be an issue for companies which are hacked out of business because of a lack of IT integrity and security. Meanwhile, given the proximity of the IMO 2020 implementation deadline, it was no surprise to see both fuel emissions and bunker and fuel costs rated as having increased business risk.

“The encouraging news is that the respondents to our survey emerged as significantly more satisfied than they were twelve months ago that sound enterprise and business risk management was contributing to commercial success. However, it was of note that fewer respondents than last year had a dedicated risk committee.

“Although there was an increase this time compared to 2018 in the number of such committees meeting on a quarterly, annual and semi-annual basis, there was disappointment in the shape of a fall, to the lowest level in the five-year life of the survey, in the number of senior managers with a high degree of involvement in risk management. Risk management must start at the top, and be seen to sit there comfortably.

“There was a decline both in the number of respondents who noted that risk was documented by the use of proper written documents, and in the level of undocumented risk management discussions. But whereas last year’s survey revealed a drop in the use of third-party software and in the use of software developed internally, this time the corresponding figures were up.

“Shipping is a highly entrepreneurial business, and entrepreneurialism and risk management can make uncomfortable bedfellows when one or other is hogging most of the bedclothes. Our survey suggests that the industry needs to improve its risk management procedures. Shipping confidence may be holding up reasonably well, but shipping cannot afford to be complacent about its exposure to risk. Awareness of risk should not be confused with risk aversion, which is not - and never will be - a characteristic highly prized in the international shipping industry.”


Note to editors

The BDO (formerly Moore Stephens LLP) Shipping & Transport team has extensive experience delivering accountancy, tax and advisory services to the sector worldwide.

BDO delivers key information and insights to the shipping community, including the annual OpCost report, the quarterly Shipping Confidence Survey and a host of thought leadership on topical issues, such as regulatory developments and market conditions.

https://www.bdo.co.uk/en-gb/industries/shipping-and-transport


BDO LLP
BDO LLP operates in 17 locations across the UK, employing nearly 5,000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network
The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn.

Press office:
+44(0)20 7893 3000
media@bdo.co.uk

http://www.bdo.uk.com/news.html
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Shipping confidence dips as trade wars intensify

Confidence in the shipping industry fell in the past three months to its lowest level for two and half years, according to the latest Shipping Confidence Survey from leading shipping adviser and accountant BDO. Yet owners, charterers and managers were more confident than they were at the time of the previous survey in May 2019.

The average confidence level recorded by the survey in the three months to end-August 2019 was 5.8 out of a possible maximum of 10.0. This compares to the figure of 6.1 recorded for the quarter ended May 2019.

Confidence was highest in the chartering sector (up from 6.2 to 7.0), while the increased ratings for owners and managers were from 6.3 to 6.4 and from 5.8 to 5.9, respectively. The rating for brokers, however, was down from 5.7 to 5.1.

Confidence was up in Asia from 6.0 to 6.8 – the highest figure for this region since the survey was launched in May 2008 with an overall rating for all respondents in all geographical areas of 6.8 out of 10.0. The rating for Europe, however, was down, from 6.1 to 5.7.

According to the BDO survey, the likelihood of respondents making a major investment or significant development over the coming year was up from 5.4 to 5.5 out of 10.0. Charterers’ confidence in this regard was up from 5.6 to 6.8, and owners’ from 6.3 to 6.5. The ratings for managers and brokers were also up, from 4.8 to 6.1 and from 3.9 to 4.4, respectively. Expectations were up in Asia (from 5.5 to 6.6) whilst in Europe they were unchanged at 5.4.

The number of respondents expecting finance costs to increase over the coming year was down from 48% to 25%. The figures for all major categories of respondent were down, and in the case of owners and managers to survey lows of 27% and 20%, respectively.

Demand trends were cited by 23% of respondents as the factor most likely to influence performance over the next 12 months. Competition (20%) and finance costs (16%) featured in second and third place respectively in this context.

In the freight markets, the number of respondents expecting higher tanker rates over the coming year was down by 12 percentage points to 43%, with the rating for charterers tumbling from 75% to just 25%. In the dry bulk sector, expectations of rate increases were down from 48% to 39%, with charterers again recording the most marked decrease, from 80% to 25%. The numbers expecting higher container ship rates, meanwhile, fell from 35% to 19%. Net rate sentiment was positive in the tanker and dry bulk sectors, but negative in the container ship market.

Responding to a stand-alone survey question, 26% of respondents said they expected the price differential between high-sulphur fuel oil and IMO-compliant low-sulphur fuel oil at 1 January 2020 to be between $175 and $249 per metric tonne. This compares to the 23% who thought likewise in November 2018. 24% put the figure at between $100 and $174, compared to 12% previously, while 17% estimated the cost at between $250 and $324 compared to 24% last time.

Richard Greiner, Partner, Shipping & Transport at BDO, says: “Geopolitical uncertainty contributed significantly to the decline in confidence recorded in our latest survey, with a number of respondents expressing concern about burgeoning trade wars and political tension in various parts of the world. Ongoing indecision surrounding Brexit was also a salient factor.

“But it was not all bad news. Confidence on the part of owners, charterers and managers was up in the last three months, as was the likelihood of imminent major investment – in the case of owners, to an all-time survey high.

“Indications from the freight markets were less encouraging, with a fall in expectations of higher rates in all three main tonnage categories. Indeed, net rate sentiment was negative in the container ship sector for the first time in almost four years. But shipping confidence must be weighed against the highly cyclical nature of the industry. Not every reversal in fortunes is a portent of significant decline.

“Major challenges lie ahead, some of which will be beyond the control of the industry itself. But there will always be a role for the shipping industry, and particularly for one that is technically inventive and environmentally compliant and thereby attractive to investors.”

The BDO (formerly Moore Stephens LLP) Shipping & Transport team has extensive experience delivering accountancy, tax and advisory services to the sector worldwide.

BDO delivers key information and insights to the shipping community, including the annual OpCost report, the quarterly Shipping Confidence Survey and a host of thought leadership on topical issues, such as regulatory developments and market conditions.

https://www.bdo.co.uk/en-gb/industries/shipping-and-transport


BDO LLP
BDO LLP operates in 17 locations across the UK, employing nearly 5,000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network
The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn.
Contacts
Press office:
+44(0)20 7893 3000
media@bdo.co.uk

http://www.bdo.uk.com/news.html
http://twitter.com/BDOaccountant