Vessel operating costs expected to rise

Vessel operating costs are expected to rise by 3.8% in 2011 and by 3.7% in 2012, with lube expenditure and crew costs identified as the categories most likely to produce the highest levels of increase, according to a new survey by international accountant and shipping consultant Moore Stephens.

The survey is based on responses from key players in the international shipping industry, predominantly ship owners and managers in Europe and Asia. And those responses identified lubricants as the cost category likely to increase most significantly over the two-year period – by 3.6% in 2011, and by 3.1% in 2012.

Crew wages, meanwhile, are expected to increase by 3.1% in both 2011 and 2012, while the cost of spares is expected to escalate by 2.7 % and 2.6 %, respectively, in the two years covered by the survey. Expenditure on stores, meanwhile, is expected to increase by 2.5 % in each of the two years. The cost of repairs and maintenance is expected to increase by 2.8% and 2.6 % in 2011 and 2012 respectively, while the increase in P&I costs for those two years was estimated by respondents at 2.4 % and 2.3 % respectively. As was the case in the previous survey, in 2010, management fees was identified as the category likely to produce the lowest level of increase in both 2011 and 2012, at 1.8 % and 2.0 % respectively.

“Bunkers and lubes are our biggest cost,” said one respondent, while another observed, “The cost of bunkers is unrealistically high. There is no reason for that. If the price of bunkers remained at a reasonable level, shipowners would not be struggling in the way they are at the moment.” Another still said, “There will be an inevitable cost consequence of implementing fuel efficiency measures at the request of charterers, while the benefits of such measures will not be seen in terms of operating costs”.

One respondent expected dry cargo crewing costs to increase more than tanker crewing costs, while another noted, “The Manila amendments to STCW will result in significant increases for ‘other’ crew costs, especially in respect of training.”

A number of respondents expressed concern about overtonnaging and the weakness of rates in the freight and charter markets, “Overcapacity and newbuilding deliveries involving larger tonnage on the main routes will maintain downward pressure on rates,” said one. Another maintained that there was “no sign of resolving the overtonnaging problems in the dry bulk sector”, arguing that this, together with unpredictable trade volumes, would lead to pressure for cost increases and for reflagging as a means of driving operating costs down. Another respondent pointed out, “Depressed charter rates will lead owners to seek in vain to minimise operating costs.”

Predictably, worldwide economic and political problems were uppermost in the thoughts of some respondents, with one commenting, “World financial conditions will depress shipping revenues, and this will impact on ship requirements and charter rates.” Another respondent felt, “China’s effective control of the market, together with inflation, will make shipping markets difficult for most people involved in the business.” Yet another said, “It all depends on whether the global economy – and particularly that of the US – can recover, and whether the US dollar continues to be the only currency for oil trading.”

Moore Stephens also asked respondents to identify the three factors that were most likely to influence the level of vessel operating costs over the next 12 months. Overall, 26% of respondents identified finance costs as the most significant factor, followed closely by crew supply (25%). Demand trends were in third place, with 14%. In last year’s survey, 30% of respondents identified crew supply as the most significant factor, followed by finance costs, at 28%, and demand trends at 16%. “Finance costs and potential interest rate hikes will be key factors for the market,” said one respondent.

Labour costs, competition and raw materials costs were other significant influencing factors which featured in the responses to the survey. One respondent said, “Raw materials will increase in cost, so there will be upward pressure on stores, spares and repairs.”

Moore Stephens shipping partner Richard Greiner says, “Ship operating costs increased by an average of 2.2% across all the main ship types in 2010. And it is no surprise that our latest survey anticipates that costs will rise in both 2011 and 2012.

“These projected increases are nowhere near the increases we saw in the 2000s. They point to a less volatile period for operating costs. But any increase in costs is going to be a problem for a shipping industry struggling with overtonnaging, declining freight rates, and the cost of regulatory compliance and environmental accountability. Add to that the continuing economic and political problems which form the background to shipping’s operating arena, and you can see that the industry is not going to be for either the faint-hearted or the short-termist.”

Bone fide journalists can request an electronic copy of the Future Operating Costs survey by emailing john@merlinco.com

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 638 offices of independent member firms in 97 countries, employing 20,588 people and generating revenues in 2010 of $2.151 billion.

For more information:

Richard Greiner
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
richard.greiner@moorestephens.com

Confidence dips to two-year low as concern mounts over rising fuel costs and overtonnaging

The latest Shipping confidence survey from leading accountant and shipping adviser, Moore Stephens, reveals that overall confidence levels in the shipping industry dropped for the fourth successive quarter in the three months ended May 2011, to reach their lowest level for two years.

The threat posed by overtonnaging was the single most dominant theme running throughout the responses to the survey, which also revealed a high level of concern about continuing rises in the cost of marine fuels.

In May 2011, 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 5.8 in the previous survey in February 2011. This is the lowest figure recorded since May 2009, when confidence stood at 5.5.

Confidence fell most noticeably on the part of charterers (down from 5.8 to 5.4), followed by managers, down from 6.0 to 5.8, and brokers (5.2 to 5.1). Geographically, confidence was lowest in Europe, falling from 5.6 to 5.5, but Asia recorded a bigger drop in confidence this time (down from 6.0 to 5.7)

The mood among respondents was noticeably downbeat. “The key word for most companies right now is ‘survival’,” noted one respondent, while another pointed out, “Increasingly, companies would rather shut down operations than risk losing even more money in the current climate.”

A number of respondents expected the current slump in confidence to persist for some time. “The shipping market will be severely depressed for the next three years,” said one, with another predicting that the markets would not pick up “for the next two years”. Neither could respondents see any realistic prospect of spending their way out of the current downturn. “Financing new projects is becoming harder and harder because of the lack of confidence shown by the banking sector,” said one, with another pointing out, “Owners are running out of cash at a time when the markets remain poor, and are likely to weaken further. We can expect to see a rise in bankruptcies and arrests as the ability of the banks to restructure becomes more constrained”.

Not all respondents took such a pessimistic view. One thought that all maritime sectors would start to pick up “in the last quarter of 2011”, while elsewhere it was noted that “shipping freight rates will revive worldwide and regionally, starting in 2012”. But the overall mood was rather less optimistic, with particular concern focusing on overtonnaging. “The severe oversupply of tonnage in every sector is biting hard,” said one respondent, “and supply will remain ahead of demand for at least a couple of years”. Another remarked, “Too much yard capacity will result in an adverse oversupply of tonnage”.

Some respondents concluded that the only viable answer to the oversupply issue was demolition. “Given the current almost stagnant economic conditions in much of the developed world, and the oversupply of tonnage,” said one, “the main hope for any upward movement is the demolition market.”

The survey revealed a high level of concern about rising fuel prices. “Increases in the price of diesel have a very negative influence on our trades,” noted one respondent, “and if they continue the consequences will be catastrophic”. Another emphasised, “Freight rates are low and fuel costs are high, so confidence is low”.

Expectations on the part of respondents of making a major investment or significant development over the next twelve months fell from 5.7 to 5.6. Owners’ expectations held at 6.0 but, in all other categories of respondent, expectations were down on last time – in the case of managers from 5.7 to 5.5, and on the part of charterers from 6.1 to 6.0. The gap between owners and charterers has closed. In May 2008, when the survey was launched, charterers’ expectations stood at just 4.8, compared to the 6.3 recorded by owners. Now, both stand at 6.0.

For the first time in the life of the survey, finance costs were displaced overall as one of the top three factors which respondents expected to influence performance most significantly over the next twelve months. Demand trends and competition remained the top two factors, as they have been since the survey was launched, but this time fuel costs made their debut in the top three, pushing finance costs down to fourth spot. The number of respondents overall who identified fuel costs as a significant performance-influencing factor rose from 11% to 16%. For both owners and charterers, fuel costs figured in the top three and, in the case of charterers, occupied first place. Finance costs, meanwhile, dropped overall from 16% to 14% as a significant performance-affecting factor among respondents overall. Geographically, the most significant movements came in Europe and North America, where demand trends were cited by 27% and 30% of respondents respectively, as opposed to 23% and 24% last time.

Expectations of an increase in finance costs remained unchanged from the previous survey, at 59% overall, but this is nevertheless 13 percentage points up on the 46% recorded in May 2009. While the number of owners anticipating an increase in finance costs rose from 59% to 62%, the reverse was true for managers and charterers, with expectations there falling from 59% to 56% and from 58% to 55% respectively. This time, just 9% of charterers expected finance costs to fall, compared to 13% in the previous survey and contrasting sharply with the 25% of like mind two years ago.

Geographically speaking, the number of respondents in Europe expecting their finance costs to increase remained unchanged at 58%, and in Asia the numbers fell from 64% to 62%. In North America, however, there was a marked fall from 64% to 42%, which may say more about the dollar than anything else.

So far as the markets are concerned, the numbers of respondents expecting rates in the tanker sector to increase over the next twelve months was down overall from 46% to 44%. The expectations of owners and charterers contrasted significantly in this respect. The number of owners anticipating higher tanker rates rose to 50% from 43% last time, while for charterers there was a 31 percentage-point fall, from 61% to 30%. The number of mangers expecting higher tanker rates, meanwhile, also fell, from 50% to 45%.

In the dry bulk sector, the number of those expecting higher rates fell from 38% to 37%. The number of owners anticipating higher dry bulk rates fell from 43% to 41%, while the number of charterers of like mind fell from 31% to 18%. The number of charterers expecting lower dry bulk rates, meanwhile, rose from 26% to 40%, while the number of owners with similar expectations dropped from 26% to 17%. For managers, the expectation of higher dry bulk rates rose from 39% to 42%. Geographically, expectations of higher dry bulk rates were down in Europe (from 36% to 31%) and up in Asia (from 42% to 45%).

In the container ship market, meanwhile, all the indicators were down. Overall, 42% of respondents, as opposed to 49% in February 2011, expected container ship rates to go up in the next twelve months. In the case of owners, the number of respondents expecting an increase was down from 56% to 40%, and charterers were thinking along the same lines (down to 29% from 40% last time). Managers, meanwhile, remained unchanged at 47%. Geographically, expectations of higher box ship rates fell in Asia (from 47% to 41%) and in Europe (51% to 44%), while in North America the numbers were down from 40% to 32%.

Moore Stephens shipping partner, Richard Greiner, says, “It is disappointing to find that confidence in the shipping sector has dropped to a two-year low. The dip in confidence can be attributed to both external factors and to industry concerns.

“Externally, we are seeing a reaction to political unrest in various parts of the world, and to a number of natural disasters. The full impact takes a little time to feed through into our findings. The rise in fuel prices was a major factor in influencing the thoughts of our respondents. Depending on which reports you read, and where in the world you bunker your ships, fuel prices have gone up by around 50% over recent months. It will take a lot of slow steaming – if indeed that is the answer – to address this particular issue.

“Once again, it was the threat to profitability posed by overtonnaging which most frequently exercised the minds of those who responded to the survey. Only time will tell how this will play out, but it was noticeable that a number of respondents referred to the important role that shipbreaking could play over the next couple of years. This is the ultimate extreme solution to the problem but it will never address the true volume of tonnage overhang, especially since demolition prices in Asia appear to be on the slide, to the disappointment of owners hoping to cash in on healthy prices for their old ships.

“Unsurprisingly, expectations of rate increases in the three main tonnage categories covered by the survey are down. And the gap between owners’ and charterers’ aspirations is, in some cases, widening, particularly in the tanker sector where 50% of owners anticipate an increase in rates over the next twelve months, compared to just 30% of charterers. This gap of twenty percentage points contrasts sharply with the situation just six months ago, when the expectations of owners and charterers more or less coincided. This should make for some interesting negotiations over the coming months and, presumably, an increase in work for the broking community.

“One thing that owners and charterers do currently agree on, however, is the likelihood of their making a major investment over the next twelve months. Two years ago, there was big gap between the two, with owners much more confident than charterers. Now the gap has closed completely, and both owners and charterers currently rate the likelihood of spending some money on a new venture at six out of ten.

“On reflection, that is not unduly negative. Now may be a good time to buy for those who can put the finance in place to fund a viable venture. We will see what our next survey brings. Three months is a long time in shipping.”

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.

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 638 offices of independent member firms in 97 countries, employing 20,588 people and generating revenues in 2010 of $2.151 billion. http://www.moorestephens.com

For more information:
Richard Greiner,
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
email: richard.greiner@moorestephens.com