Norton Rose Fulbright’s Survey identifies shipping as the least optimistic industry within the transport sector, as it continues to feel the pain caused by overcapacity
The shipping industry is struggling in a market where supply continues to outstrip demand, according to Norton Rose Fulbright’s 2016 survey of the transport sector, The Way Ahead.
According to the survey, shipping is the least optimistic industry within the transport sector by a significant margin; just 15% of respondents believed that market conditions were currently positive for shipping, compared with 77% and 92% from the aviation and rail industry respectively.
Sentiment also appears to have fallen further this year. In 2014, 69% reported that the market conditions were positive for the industry. This plunged to just 33% in 2015. Overcapacity followed by economic uncertainty in key markets were the principal reasons given for this dissatisfaction.
The few respondents who regarded current market conditions as generally positive, meanwhile, attributed their confidence to the emergence of new market opportunities, the impact of infrastructure improvements and improved economic conditions in key markets.
“When asked to identify the greatest threat to the operational efficiency of the shipping industry, 47% considered supply and demand imbalances to be the key threat”
Respondents did become more upbeat when asked about the outlook for shipping over the next five years. According to 67%, freight rates will increase. The same proportion also anticipated an upturn in freight volumes. Seventy-two per cent also expected investment in technology to increase, while 42% predicted increased investment in infrastructure.
What’s more, 35% of the respondents expected the number or routes and services offered to rise. Just 22%, however, believed that funding will become more readily available, and 64% thought that the number of enforcement actions will increase as lenders seek to protect their positions and recover losses. The majority, 68%, also expected fuel costs to rise.
Opportunities for investment
With regard to which countries offer the best investment opportunities for the shipping industry over the next two to five years, the survey revealed that much of the shipping industry continues to look to Asia Pacific for growth. China and India, meanwhile, remain the most popular markets for investment, according to 17% and 16% respectively.
Indeed, consolidation has been a key theme for the shipping industry and the wider transport industry in recent years. Thirty-four per cent of respondents believed a merger or acquisition is the optimal investment opportunity. This is up from 29% in 2015.
A further 13% of respondents favoured joint ventures, alliances and pools, although interest in less formal forms of co-operation fell from 28% in 2015.
What appears to be particularly interesting now is the development of new markets, both sectoral and geographic, as well as the development of new technology. Specifically, the development of low carbon shipping is expected to be the biggest driver of change in the industry over the next five years among respondents. This is followed by predictive analytics.
Interest in low carbon technology is somewhat unsurprising given the extent to which environmental regulation has been felt by the industry. Fittingly, 49% of respondents believed that environmental regulation has had the greatest impact on shipping over the past decade, followed by 25% who believed the most impact has come from trade and financial sanctions.
When asked to identify the greatest threat to the operational efficiency of the shipping industry, respondents once again underlined the pain caused by overcapacity. Subsequently, 47% considered supply and demand imbalances to be the key threat. Other respondents were divided in their views, and pointed to a combination of factors, including a lack of qualified people, emission controls, and an uneven playing field created by state aid and export credit agency support.
In addition, the survey revealed that a global recession is seen the greatest threat to the health of the shipping industry over the next five years, with 68% of respondents suggesting such. Respondents were also concerned, to a lesser extent, about the impact of enforcement by creditors on debt obligations, and continued political and economic uncertainty in the Eurozone.
Sources of support
The survey also asked which form of government support would help the shipping industry most. Despite the difficult markets many sectors of the shipping industry are operating in, the majority of respondents indicated that greater transparency in the application/enforcement of existing and/or proposed regulations would be the most helpful form of government support, more so than fiscal incentives or investment in infrastructure, which appear to have become less of a priority.
In relation to finance, bank debt is, once again, expected to act as shipping’s primary source of funding over the next two years, followed by shareholder support and private equity, revealed the survey. And, despite overcapacity in many sub-sectors of the industry, 11% still believe that export credit agency funding will be the industry’s main source of finance.
Finally, consolidation appears to be the optimal investment opportunity for the shipping industry at present: 22% expect mergers and acquisitions to be at the centre of shipping businesses’ strategy over the next 12 months, while 19% expect a focus on the formation of joint ventures, alliances and pools.
Considering the current market conditions, however, respondents also anticipated that the disposal of non-core assets, and the reallocation of existing capacity from stagnant to growth sectors and clients will form a key element of shipping businesses’ plans in the year-ahead.