The latest Shipping Confidence Survey from leading international accountant and shipping consultant Moore Stephens records a continuing rise in overall confidence levels in the shipping industry over the past three months. It also reveals a growing awareness of the impact which the growth of China may have on the way the industry conducts its business
The average confidence level expressed by respondents, on a scale of 1 to 10, was 5.7, compared to 5.5 in the previous survey in May 2009. Owners, managers, charterers and brokers all exhibited increased confidence in connection with the shipping markets in which they operate. The increase in confidence was most marked among brokers, rising from 4.9 to 5.6. Confidence was up in all major geographic areas with the exception of Asia, where levels remained unchanged from the 5.9 recorded in the previous survey.
A number of respondents acknowledged that the start of a recovery was under way, and also recognised the opportunity which currently exists to buy vessels at historically low prices. “The shipping market has started to pick up this year after the effect of the global economic crises,” noted one respondent, while another commented, “The recovery of the global economy will result in strong demand for tonnage as delayed projects get up and running again.”
Less optimistic comments included predictions that excessive tonnage oversupply would keep the lid on freight rates, and the catch-all observation, “Hoping for the best, getting ready for the worst.” Another respondent warned, “Because two newbuildings are being delivered for every vessel scrapped, the shipping market will not be able to pick up over the next three-to-four years. And it may deteriorate even further, with a number of owners forced into bankruptcy.”
China was a subject on the minds of a number of respondents, one of whom noted, “China is now the producer, the consumer, the trader, and the transporter, it has got the cheapest and the most plentiful supply of labour, and it is possibly the richest country in the world. None of these things can be good for the international shipping industry.” Another remarked, “China’s influence in the shipping markets is a risk which has not yet been fully factored in. China will control a lot of cheap new tonnage, with the result that a number of independent shipowners will not have the opportunity to compete.”
The survey revealed a slight increase in the number of respondents expecting to make a major investment or significant development over the next twelve months. The overall likelihood of such a development was 5.1 out of 10.0 overall. Charterers remained the most confident in this respect, although they, together with managers, actually recorded a drop in their expectation levels compared to the last survey. Owners and brokers, meanwhile, were more confident of making a major investment than they were three months ago. Geographically speaking, Asia and Latin America led the way in terms of increased confidence in this category, while the levels recorded in the previous survey for Europe and North America were sustained this time around.
For the third survey in succession, respondents identified demand trends as the single most important factor likely to affect their business performance over the coming year, followed by competition and the cost and availability of finance.
There was a one percentage point fall overall, to 45%, in the number of respondents who expected finance costs to rise over the coming year. Having recorded a 13 percentage point fall in this category to a level of 41% in the previous survey, charterers appear to have had a rethink over the past three months, with the result that 50% of them now expect finance costs to rise over the coming year. A number of respondents made reference to the hard-line attitude adopted by the banks and by other lenders, while one made the succinct observation that, “High finance costs and reduced availability have been the cause of many problems for many owners. Today, if you can buy a ship for cash and let it out to a reliable charterer for, say, two years, at least you are making a return on equity of between 10% and 15%, which is better than the 1% you will get from the banks.”
So far as the freight markets are concerned, the most significant shift in opinion took place in the dry bulk sector, where the 41% of respondents who expected rates to climb over the next twelve months contrasted with the 48% at the time of the previous survey. Similarly, the numbers of owners, managers and charterers who thought rates would increase was down and, geographically, Latin America was the only region where the expectation of higher rates was greater than it was three months ago.
In the tanker market, meanwhile, the picture was largely as before, with 45% of respondents anticipating higher rates, just one percentage point up on the June figures. There was a marked difference of opinion, however, between the numbers of owners (46%) and the numbers of charterers (35%) predicting higher rates, the latter figure comparing with the 45% recorded in the last survey. Asia was the only region where the expectation of higher rates was down on the previous survey, from 48% to 42%.
Finally, in the container ship sector, 35% of respondents overall expected rates to rise over the coming twelve months, compared to 33% last time. The 40% of charterers who expected to encounter higher rates contrasted sharply with the 27% who voted similarly on the previous occasion.
Moore Stephens shipping partner, Richard Greiner says, “Although the overall confidence level of 5.7 revealed in the survey is low compared to the 6.8 posted at the time of the first survey in May 2008, it still represents an increase for the third successive quarter. In some ways this mirrors what is happening in the global economy, where there are now very real indications that a recovery is under way, with the likes of France and Germany having recently declared that they have moved out of recession.
“Confidence will return to shipping more slowly than it disappeared. The situation is not helped by the continuing depression in the freight markets, but it should be remembered that today’s rates are often compared to the record highs which the market was enjoying less than two years ago, and this tends to distort the picture.
“It was no surprise to see that China figured in a number of respondents’ comments. This new and still emerging economic giant represents both an opportunity and a threat for shipping. It was no surprise either to see that a number of respondents were critical of the hard line adopted during the crisis by banks and by other financial institutions. But shipping should not despair. The process of lending has inevitably become more selective, and the terms more onerous, yet there are still banks which are lending money. Aspiring borrowers with realistic demands and with well-written, easy-to-understand business plans which plot a clear path to profitability will have the best chance of success.”