Signs of recovery in 2015
Renewed optimism in the shipping industry has given a solid base to meaningful recovery in 2015. With confidence up, wide expectations of higher freight rates and a re-alignment of supply and demand, hopes are that this time projections will pan out.
Brokers and charterers have likely grown weary of talk of the timing of a predicted upturn in shipping. Indeed, even the economists seem to be shying away from any firm projections having been burnt by the double dip, and virtually incomprehensible talk of ‘u’, ‘v’ and ‘w’ recessions.
Moore Stephens’ partner Richard Greiner is one such brave soul. He describes shipping as in a “different space to that which it occupied a year ago”. He bases his optimism on firm freight rate predictions, renewed interest in investment by shipping companies and respite from the economic and political issues that have landed a number of blows on the shipping industry over the past seven years.
“Generally speaking, it is wise not to make the [New Year] resolution too ambitious; American troubadour Woody Guthrie had the right idea when he settled for, ‘Wash teeth, if any’,” says Mr Greiner. “But the shipping industry can afford to be a little more bullish than previously in its aspirations for 2014.”
This is supported by confidence levels in the shipping industry that rose to their highest in over three years in 2013. Average confidence levels hit 6.1 out of 10.0, compared with 5.9 for the previous quarter, in Moore Stephens’ quarterly Shipping Confidence Survey from late last year. This confidence translated into bullishness in investment trends, with 5.8 out of 10 – against 5.5 – stating that they would likely make a major investment or significant development in 2014.
The Confidence Survey also found that there was an “increased expectation” of higher freight rates in the tanker and dry bulk trades in 2014.
Backing Moore Stephens’ optimism, the British Chambers of Commerce expects the UK economy to surpass its 2008 pre-recession peak in the second half of this year. It also says that the UK’s GDP is set to grow by 2.7% in 2014, an upgrade from a previous prediction of 2.2%.”
Funding and overcapacity are seen as key issues but the shipping sector also faces wider ranging challenges, such as the need for investment in the skills and size of its workforce to ensure that there are enough suitability qualified people to support the safe growth of the sector and the increasing environmental regulation of shipping which will continue to require new solutions and funding.
Operating burden
However, there remains fragility to these positive indicators. There is no respite for ship owners from punishing operating costs, which are expected to rise in 2014. And the requirements of the Maritime Labour Convention coupled with fuel quality and ballast water management regulation will pile the pressure on operators this year.
But concerns on a lack of available financing should be shelved as Mr Greiner expects to see more shipping money raised in the public and private equity markets in 2014. In fact, he predicts that we may see more non-shipping money invested in shipping than “for some time”, although “not necessarily by dentists”.
While not the most secure candidate for private equity investment, it seems there are still investors out there looking to fund this capital-intensive business. “Private equity has made a significant move into shipping over the past two-to-three years, and seems likely to continue to do so, at least in the short term,” adds Moore Stephens colleague Phil Cowan.
“There are a number of reasons for this,” explains Mr Cowan, “not least the fact that a lack of opportunity in other sectors has driven private equity investment into ‘real’ assets such as shipping.
“Also, shipping has been languishing at the bottom of the cycle, so investors can reasonably expect rates to rise and asset values to recover, producing above long-term average returns in the next few years.”
Shipowners have helped themselves by opening up to joint ventures with private equity investors, allowing the new investor a say in the management of the business.
That said, Moore Stephens expects the involvement of private equity in shipping to be short-term in nature. “As the incipient upturn in the shipping industry takes a stronger hold, we may well see a wave of investment exits, with the result that shipowners will be called upon to buy out equity partners and to restructure vessel ownership. There will also be the usual issues regarding valuation of the private equity holding in vessel-owning companies,” says Mr Cowan.
But even taking account of those investors implementing their exit strategy, the turning market is still expected to generate a flurry of financing activity, both from banks and private investors.
“Over the next twelve months, assuming the fortunes of the industry continue to improve, we may have a situation where ongoing private equity investment and a renewed willingness on the part of the banks to underwrite shipping ventures will provide shipping with its most promising finance scenario for some years.”
Balanced out
These positives are backed up by an anticipated re-alignment of supply and demand levels.
“Consequently, freight rates are likely to rise and, with them, vessel values,” says Mr Greiner, adding that increased levels of demolition will be required to offset new tonnage. Here, Chinese subsidies to encourage operators to scrap ships before their time to make room for eco-ships flying the Chinese flag could help.
In summary, Mr Greiner says that everyone appears to be happy – “owners, shipyards, environmentalists and politicians alike. It is to be hoped that the industry can sustain the upturn which began in 2013. If it can, we may see a return to rude health by 2015 although, as John Maynard Keynes warned, ‘The market can stay irrational for longer than you can stay solvent’.”
Moore Stephens Shipping Confidence Survey: www.moorestephens.co.uk/confidence