Regulatory-related financial burdens, overtonnaging, a ‘directionless’ market and a rise in operating costs have dragged down confidence levels in shipping, with little hope of improvement in the short term
Concerns about the rising cost of meeting incoming regulations have pushed confidence levels in shipping to a two-year low, according to Moore Stephens.
In its latest quarterly Shipping Confidence Survey, the specialist accountant found that average confidence levels expressed by respondents in the markets in which they operate was 5.7 on a scale of 1 (low) to 10 (high), down from the 6.1 recorded in August 2014. This compares with the record high of 6.8 when the survey was launched in May 2008.
Charterers and owners were particularly downbeat with confidence levels falling from 6.7 to 5.3 and from 6.2 to 5.5 respectively in just three months. Brokers slipped from 5.3 to 5.0.
The supporting comments given by respondents to the survey reflect the renewed pessimism. One described the market as “directionless”, while another complained of “still too much capacity and an unreasonable expectation of performance levels, given all the new ordering that is taking place”.
Regulatory related costs continue to be a large concern, with the ballast water management convention singled out as one that will place significant pressure on operators. “The ballast water treatment legislation hangs like a dark cloud over all technical ship managers,” comment one respondent. Another said: “Regulation is becoming stricter, and now accounts for a greater slice of operational expenses than it did a few years ago. This is bad. But it is the only way to push older tonnage out of the market.”
Commenting on the report, Moore Stephens shipping partner Richard Greiner said: “Confidence in the shipping industry is at its lowest level for two years, just nine months after reaching a six-year high. The main reason for this may well be the one advanced by the respondent to our survey who complained of ‘too much competition, too many ships, and not enough cargo.’ Add to that the adverse effect which those three factors have on freight rates, and you have some measure of the problems currently facing the industry.
He continued: “The cost of existing and impending regulation in shipping is another problem which is international in nature. Such costs were a recurring theme in the responses to our survey. Sulphur emissions regulations will make shipping an even cleaner and greener industry than it already is, and will encourage the development of more eco-friendly tonnage, but they come at a hefty price. Even that, however, may be small change compared to achieving compliance with the BWM convention which is now very close to ratification. To all this must be added a predicted rise in operating costs of almost three percent this year and next.
“Shipping confidence began 2014 on a high. It is evident that, for now, some of that confidence has been rendered fragile and replaced by a degree of uncertainty. Some of that uncertainty may be resolved in 2015 as the extent of regulatory costs becomes clearer, and the success of recent attempts to reduce overtonnaging can be reassessed. Nevertheless, the market is likely to remain volatile in 2015 as shipping attempts to meet the challenge of finding the right balance between risk and reward.”
There still remains hope, however, among survey respondents that the shipping markets will pick up next year, but that recovery is largely dependent on increased scrapping of older ships. “The road to recovery is very long and very hard,” said one respondent. “Europe is still struggling and it seems unlikely that things will improve soon, even if demand for shipping increases in other parts of the world where the economy is faring better.” Another said: “We are heading for a low level of activity in all markets. With sanctions on Russia and Iran, and fighting in Iraq and Syria and elsewhere, people are spending less money, which results in fewer cargo movements.”
Overtonnaging is still a concern with survey respondents warning that there are still too many ships available for the cargoes on offer. “Given the overarching fundamental problem of overcapacity, every new ship entering the market will add to the lingering fear of a collapse in freight rates,” said one.
The evident rise in pessimism has led to an inevitable fall in confidence of freight rate improvements. “The number of respondents overall expecting higher rates in the tanker sector over the next twelve months fell by one percentage point to 40%,” said Moore Stephens. “The views of owners (up 10% to 51%) differed greatly in this regard from those of managers (down 7% to 36%), charterers (down 5% to 33%) and brokers (down by 28% to 30%).”
In the dry bulk sector, the prospects for increased dry bulk rates were down in Asia by 17% to 38%, and in Europe, from 47% to 35%. Such prospects in North America, meanwhile, were unchanged at 14%.
“There is oversupply in the world bulker fleet for the available cargo supply,” noted one respondent. “If demand for raw and or semi-raw materials does not increase, we can write off another year.”
In the container ship market, meanwhile, the number of respondents expecting rates to increase over the coming twelve months was down by 6% to 25%. The number of charterers anticipating higher rates was down by 15% on last time to 25%, while for owners the drop was from 42% to 40%. Managers (up from 18% to 22%) were the only category of main respondent more confident this time than in August 2014 of higher container ship rates over the coming year. Geographically, expectations of improved container ship rates were unchanged in Asia at 32%, but down in Europe from 34% to 23%.