A sharp about-turn in shipping sector confidence levels reveals that the industry is not expecting a return to normality any time soon
A depressed oil price and a backlash in the level of private equity in the shipping sector have pushed confidence levels in shipping to a two-and-a-half year low. This marks a significant swing from confidence levels that reached a six-year high just a year ago in Moore Stephens’ Shipping Confidence Survey.
In the latest survey, the average confidence level expressed by respondents in the markets in which they operate was 5.5 on a scale of 1 (low) to 10 (high), the lowest figure since August 2012.
Charterers experienced the largest slide in confidence levels, down from 5.4 to 3.9. Confidence of owners also dropped slightly from 5.5 to 5.4, while confidence in the broking sector was unchanged at 5.0.
Moore Stephens’ partner Richard Greiner commented: “The current state of the Baltic Dry Index (BDI) tells its own story. Having nudged towards 12,000 in mid-2008, it recently hit a thirty-year low of 509. Lower commodity prices, reduced demand and an oversupply of ships are among the reasons cited for this collapse in the world’s dry bulk freight rates.”
“The current ship finance market is much-changed from the traditional model which many of today’s established players grew up with… but different doesn’t have to be bad and, however volatile the market, new investment is essential to both survival and growth.”
Over the top
Indeed, overtonnaging remains a key concern and this was reflected in the comments of the owners, charterers, brokers, advisers and managers who responded to the survey.
“Dramatic over-ordering in the dry cargo market in the last two years has led to the catastrophically bad market we have today,” said one. “What is now even more frustrating is that those clever guys who thought that dry cargo newbuildings were a good idea are now starting to convert them to tankers. Excellent! Let’s hit another sector that has just found its feet with more unnecessary orders! When will people learn?”
Mr Greiner confirmed: “Overtonnaging is not so much the elephant in the room as the room itself. It is a major factor in the collapse of freight rates.
“A number of respondents to the survey saw a link between what they regarded as easy access to non-traditional ship finance and a failure to improve the level of overtonnaging. There is a certain logic to this argument, but the day when shipping fails to attract new money from both internal and external investors is the time to really start worrying.
“Over the past twelve months and more we have seen the banks start to rediscover their appetite for shipping to some degree, while private equity investors have become increasingly significant players. The current ship finance market is much-changed from the traditional model which many of today’s established players grew up with. But different doesn’t have to be bad and, however volatile the market, new investment is essential to both survival and growth.”
But this sentiment did not ring true with all respondents to the survey. One criticised excessive liquidity from the US markets being invested in Far East shipbuilding programmes, claiming it is “killing any improvement in the market”.
In terms of self-investment, respondents said they were less likely to make a major investment or significant development over the next twelve months. On a scale of 1 to 10, this dropped from 5.3 to 5.1 from the previous survey, the lowest figure since February 2012.
Looking at the freight markets, there was a fall in the number of respondents anticipating improved rates in the tanker sector over the next twelve months, but increased expectation of higher rates in the dry bulk and containership trades.
One respondent commented: “Strong demand driven by the fall in oil prices has strengthened the current crude oil shipping market.” Another noted: “The dry bulk sector is still suffering from overtonnaging in all ship sizes.”
Meanwhile, Mr Greiner commented that continuing problems in the world economy and the imposition of further sanctions have helped “neither the confidence nor the performance of the markets”. And while the fall in oil prices could be viewed as good news for those previously handcuffed by high fuel prices, the slide in oil prices is not positive for all.
On this, one respondent pointed to the trickle-down effect of cutbacks in the oil sector for a decrease in business across the board for companies in the shipping industry. Oil prices are currently at $58 per barrel for Brent crude, down 46% in a year.
In summary, Mr Greiner said: “None of this will be news to those experienced industry players who, to varying degrees, have seen tough markets before and who will find the wherewithal and the patience to ride out the current difficulties.
“It is less certain whether others will be able, or willing, to hold their nerve so well.”
More information on Moore Stephens can be found at www.moorestephens.com.