Although shipping companies are starting to tackle the risks their businesses are exposed to, more still needs to be done for the sector to adequately mitigate ever-increasing risk
Too many shipping companies are ineffectively managing and mitigating risk in their businesses, according to specialist accountant and adviser Moore Stephens.
A new survey launched by the group asked owners, charterers, brokers, advisers, managers and others to rate the extent to which enterprise and business risk management currently contributes to the success of their organisation. Respondents returned a rating of an average 6.9 out of a possible score of 10.0, with over a quarter of respondents returning a rating of 8 and almost three-quarters putting the figure at more than 5 out of 10.
“Shipping cannot afford to under-estimate its exposure to risk”
Michael Simms, a partner in the group, said it was “good to see” an average figure of nearly seven out of 10, but added: “The figures need to be higher still for shipping to be able to claim that it is effectively managing risk to the best of its ability.
“You cannot take the risk out of shipping,” he commented. “It is part of the tradition of the industry, and one of the factors which attract investors. For too long, however, too many companies have failed to follow a joined-up risk management process, and insufficient resources and time have been devoted to risk management, creating difficulties and increasing the risk of business failure.”
Mr Simms warned that risk is “only likely to increase” in the shipping industry and while some of the risks are well-recognised and traditionally well-handled – such as those related to competitive pressures – emerging risks – such as cyber-security – and others related to the financial stability of counterparties, fraud and money-laundering, are often overlooked.
“Shipping cannot afford to under-estimate its exposure to risk,” he said. “The banks, who are now starting to show a renewed appetite for shipping finance, and the private equity investors who have over the past two years or so filled the investment void created by the exit of more traditional shipping finance, will be looking to work with risk-aware shipping businesses, to ensure that their money is in safe hands. So, too, will counter-parties and other third-parties.”
Last year’s bankruptcy filing of Denmark’s OW Bunker served as a timely wake-up call for the industry, demonstrating the importance of adequate risk management and exposure to risk. Many shipping companies were left out-of-pocket after OW’s demise as they dealt with unrecoverable credit and the theft of double payments.
Moore Stephens also singles out IT-related risk as a significant area of vulnerability for shipping, as well as “increasingly stringent regulatory controls” and related costs concerns.
“Given the level of accumulated knowledge within the industry, and the continued increase in technological innovation, there is no excuse for shipping not to manage its exposure to risk,” said Mr Simms. “Companies which fail to monitor risk intelligently and systematically, to oversee the effectiveness of risk controls, and to embed risk management into their daily activities, are likely to pay a high price.”
In a breakdown of responses, a third of respondents to the inaugural Moore Stephens Shipping Risk Survey felt that enterprise and business risk was being managed effectively by their organisations, while 37% confirmed that such risk was managed by means of discussion without formal documentation. A total of 42% of respondents noted that risk was documented by the use of spreadsheets or written reports. Internally developed software was employed by 13% of respondents to manage and document risk, as opposed to the 6% who used third-party software. Other methods cited by respondents as a means of managing risk ranged from “industry data” to “hope”.
One respondent commented: “We are highly focused, but a shipowner can only evaluate closely up until the moment when the ships are ordered or purchased. Once the bet is placed, Lady Luck takes a hand. The three most important things are timing, timing and timing.” Another said the best way to minimise risk was to “avoid known high-risk clients who could seriously affect the rest of your business”.
Respondents identified ‘demand trends’ as posing the highest level of risk to their organisation, followed by competition, cost and availability of finance, operating costs and then tonnage supply.
“Other factors cited as posing a high level of risk included political and economic developments and international sanctions, cyber security, counter-party creditworthiness, and technical breakdown. One respondent was convinced that demand for shipping would increase, but another was far less confident about the availability of competent crews to man the ships,” said the report.
There was an expectation that the level of risk would remain “largely unchanged” over the next 12 months, with the exception of demand trends, the supply of competent crew and tonnage supply, which were perceived to have the potential for increased risk.
“Issues beyond the control of shipping also figured in the replies from respondents, one of whom emphasised, ‘Geopolitical issues will keep influencing the market economy, which will make business unstable and lead to lack of sustainability’,” said the report.