Concerns about overtonnaging, plunging investments and hopeless freight rates revealed, as shipping industry confidence falls to a record low
According to the latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens, overall confidence levels in the shipping industry fell to a record low in the three months leading to February 2016.
The average confidence level expressed by respondents in the markets in which they operate was 5.0 on a scale of 1, low, to 10, high. This is not only lower than the 5.6 recorded in November 2015, but also the lowest rating in the life of the survey, which was launched in May 2008 with a confidence rating of 6.8.
Almost all main categories of respondent recorded a fall in confidence. Most notably, charterers fell from 5.5 to 3.9, which is the lowest confidence rating by any category of respondent in the history of the survey. Confidence on the part of owners and managers was also down, from 5.7 to 4.8 and 5.8 to 5.5 respectively.
Geographically, confidence was down in all major areas covered by the survey as well. In Asia, for example, it fell from 6.0 to 4.4; in Europe, from 5.4 to 5.1; and in North America, from 5.7 to 4.7.
“Nobody doubts the ability of shipping to bounce back. It has a long history of doing just that. This time, the only question is when.”
A huge number of respondents continued to express concern about the level of overtonnaging. One said: “Newbuilding deliveries for 2016 will increase the total fleet by 10.5%, 7% of the current fleet is older than 20 years and cargo volumes in 2015 were just 4.5% higher than in 2014, so the expected available fleet per metric ton of dry cargo available will be higher at the end of 2016 than it is now. As a result, there will be no chance of freight levels improving.” Another added that there will always be booms and busts so long as shipowners operate based on hope rather than on solid economics.
Others were more concerned about the state of the dry bulk market, noting that it was simply at the bottom of the bottom. “No dry bulk business makes any remote sense. There are too many players, too many operators and too many vessels chasing too few cargoes. Most fixtures are concluded merely to keep the banks happy in the belief that some tiny amount of cashflow is coming in,” said one respondent.
Falling oil prices were also a recurring topic in responses to the survey, as was the need for accelerated recycling. Scrapping activity is far from sufficient to compensate for incoming new tonnage, according to the respondents. While low scrapping prices provide little motivation for owners to recycle ships, doing so may help achieve equilibrium in the dry bulk sector sooner rather than later, they added.
Tighten the purse-strings
The survey also revealed that the likelihood of respondents making a major investment or significant development over the next 12 months was down on the previous survey, especially among owners, managers and brokers. One respondent said: “We are paying for excessive investments over the past five years by speculative funds that would win an Oscar for the quickest/largest destruction of capital in the shipping world.” While others noted that weak demand is undoubtedly undermining confidence and investment.
In addition, the number of respondents who expected finance costs to increase over the next 12 months was down by 5% on the last survey, to 42%; the number of charterers anticipating dearer finance fell by 11%, to 56%; and the number of brokers expecting a rise in finance costs fell by 75%, to just 36%.
“Millions of dollars are lost each day by owners, and soon will be by bankers. We are navigating very risky waters,” said one respondent. “There is no future in this industry unless all sectors, including financiers, take a more in-depth approach.”
Demand trends, competition and tonnage supply were cited by respondents as the top three factors most likely to significantly influence performance in the year ahead. Demand trends, which were up 2% to 26% remained in first place, while competition, unchanged at 21%, was in second place and tonnage supply, at 15%, in third.
There was a 16% increase in the number of respondents anticipating lower freight rates in the tanker markets, and a small increase in the number of respondents anticipating higher rates in the dry bulk and containership sectors compared to the figures for November 2015. The net sentiment in the tanker market was -23, but +22 and +8 in the dry bulk and container ship sectors respectively.
“Tankers should be able to benefit from the lack of market consensus over oil price movements in 2016, with longer-term decisions delayed as operators search for direction, while dry bulk provides opportunities for investment only for cash-rich owners who can afford to lose in the near term,” said one respondent.
A matter of time
It is a real indication of the problems facing the shipping industry when the Baltic Dry Index drops to a record low. Any doubts about the magnitude of those problems would have been debunked over the past three months when reports of the fall in the BDI started to appear in the mass media. Recently, however, the BDI has started to move upwards once again, gaining more than 100 points within six weeks of plumbing the depths.
Moore Stephens also expects the peak harvest season to bolster demand for ships to carry grain and other commodities on international trade routes. “This should boost the BDI further and, while shrinking demand for raw materials from China will continue to have an effect, the world will always need shipping to move its trade staples,” it said.
Meanwhile, Moore Stephens added that overcapacity in any industry will inevitably lead to price-cutting and, eventually, to financial difficulties for the weakest, the least well-prepared, or sometimes simply the unluckiest. “Shipping has had its share of bankruptcies, foreclosures and restructurings during the past few years and it is likely that we will see more over the coming months, with negotiations enlivened by the fact that shipping’s purse-strings today are often controlled by an intriguing mix of private equity and traditional shipping finance.”
The simple answer to overcapacity, according to Moore Stephens, is to reduce the numbers, but ships, it said, “are too big to hide and disposing of excess units is more difficult in shipping than in most other industries, particularly when there are record numbers of new cabs just waiting to come off the rank”.
Nevertheless, in a climate of continuing overcapacity, increased regulation, ongoing political unrest and economic instability, Moore Stephens said that the shipping industry must find a way to supplement the bread-and-butter of its livelihood – the freight markets. “Current indications are not good. The tanker industry may still be reaping a somewhat perverse benefit from low crude oil prices, but that window of opportunity may be starting to show the first signs of closing.
“The dry bulk sector, meanwhile, looks especially troubled, with one respondent to our survey claiming that new historic lows in dry bulk freight rates are being set every day. Reports suggest, however, that more and younger dry bulk vessels are being recycled in spite of weak demolition rates, and contrary to the trend with other categories of tonnage.”
As with any industry, in order to achieve a return on investment, the price of a service or product must exceed the cost of providing that service or product. In shipping, however, this is not happening. Operating costs are going up while freight rates, generally, are struggling to even keep pace. “Nobody doubts the ability of shipping to bounce back. It has a long history of doing just that,” says Moore Stephens, “this time, the only question is when.”