With freight markets currently plagued by unpredictability, is it time to worry less about rate predictions and more about the macroinflection points?
Predicting the direction of the freight markets has long been a thankless task and with so many variables, very few share the same outlook, leaving ship operators with the unenviable task of finding a forecast to peg their future investment and operational decisions on. But have previous forecasts been fatally flawed in their approach, focussing too much on freight rate predictions and not enough on the macro picture?
Tufton Oceanic’s Andrew Hampson believes change in shipping market forecasting is long overdue. Speaking at the 2016 London Marine Money Forum, the managing director of asset-backed investments at Tufton, responded to the influx of analysts’ predictions on forthcoming freight rates and volatile prices by calling for more thorough analysis of the industry.
Pointing out the inaccuracies in previous calculations about certain sectors within the industry, Mr Hampson said that there was “room for improvement” when predicting average scores across dry bulk, containers and tankers, and begged the question as to whether or not analysts should alter their approach.
He said: “We don’t need to put too much effort into trying to predict precise movements in freight rates down to the last dollar per day, or indeed prices down to the last decimal point. What we need to do is predict macroinflection points.
“We don’t need to put too much effort into trying to predict precise movements in freight rates down to the last dollar per day, or indeed prices down to the last decimal point. What we need to do is predict macroinflection points”
“What’s more is that it is then not just an issue of spotting inflection points, but having the courage in one’s convictions, which will often lie in stark contrast to the herd instinct, to follow through into an investment strategy.”
With regard to finding investment, Mr Hampson added that the game was changing. Among some of the long-term players in the upper half of the top 30 banks – who have traditionally shown a much more reserved approach to debt funding – there is a concept of natural selection and survival of the fittest.
The key change is the number of new names climbing into the league table from China and Korea, he said. And while it is good to have new sources of capital such as these, Mr Hampson stressed that those within the industry need to think carefully about why they are attracted to shipping in the first place.
“It’s easy in shipping finance to get blinkered about whether dry bulk is better than crude, for example,” said Mr Hampson. “What they’re thinking though, is whether shipping is better than nursing homes or shopping malls. With that, we have to look at our industry, and make the industry presentable to those sources before the capital becomes available.”
One way in which the industry can make itself more attractive to potential investors is by improving its efficiency.
A sustainable future
Identifying and finding solutions for cost inefficiencies could save companies a lot of money, said founder and chief executive of Navig8, Nicolas Busch, and increase their appeal to investors.
Also speaking at the event, Mr Busch said that he would like to see companies spend “80%-90% more time” on maximising revenues and optimising costs. “Overwhelmingly in shipping, most of the focus is on when and what to buy, and sometimes sell. Very little time is spent on how to operate and manage the investments we end up buying however, and, as a result, we have an industry that is plagued by inefficiencies from an operational standpoint.”
In a recent exercise, Navig8 focused on the inefficiencies on the top line and found that they were purely down to logistics. “Say ship owners own about five to ten ships, and those ships trade globally to hundreds of ports and customers, this lack of scale in itself provides a huge amount of inefficiencies.”
While investors will, in the future, still obsess on what and when to buy, Mr Busch hopes that they will also consider these operational inefficiencies. “For investors, time and asset portfolio purchase is the main priority, but we need an industry that focuses on how to operate. We can’t expect investors to know that themselves but they will gradually start to do due diligence on how to operate assets and who can operate assets on their behalf, particularly if the market stays low for a long period of time.”
Scale and the number of ships managers have under their control, he added, should be the first port of call when dealing with inefficiencies. In terms of information flow alone, Mr Busch said: “The more ships you have, the more information you begin to gather from those ships. From there, you become better at processing the information; your IT skills improve; you make better decisions.”