Shipping shows surprising optimism

JUST as the world was getting used to relatively gloomy news about China's economic growth, international accountant and shipping adviser Moore Stephens was carrying out its regular Shipping Confidence Survey.

So surely responses would reflect a strongly pessimistic outlook. Wrong! As it happens, the firm has just reported that overall confidence levels rose in the three months to August to their highest level this year.

Apparently, the average confidence level expressed last month by respondents in the markets in which they operate was 5.9 on a scale of one (low) to 10 (high). This compares to the 5.3 recorded in May 2015, which equalled the lowest figure recorded in the life of the survey, launched in May 2008 with a confidence rating of 6.8.

Geographically, confidence was up in Asia from 4.9 to 5.8, in Europe from 5.3 to 5.9 and in North America from 6.0 to 6.3.

There were of course concerns, mainly about low freight rates and overtonnaging, with continuing doubts also expressed about private-equity funding.

One respondent said: "The shipping markets have been over-stocked, and there has been far too much interest from non-traditional shipping sources with no real clue how these intricate markets work. Once built, the ships are there! The low oil cost means the drive for alternative fuels and cheaper propulsion is not being followed as diligently as one might have expected."

Others expressed concern about the potentially harmful effect of the entry into the market of non-traditional shipping sources, while there was the usual level of concern about too many ships and too little scrapping. Increased regulation was another recurring topic, with one respondent complaining: "Regulations are going to kill us!"

Another respondent emphasised: "Current market conditions realistically reflect tonnage oversupply in all sectors. Until this corrects itself, global trade patterns will skew supply over demand. Shipping decisions are very often made on sentiment, but current confidence cannot be based on this." Another still said: "Expect a static trend for the next few years. It might require a major conflagration to kick-start the industry. That may sound unpleasant, but without it we are in for a lengthy stay in the doldrums."

Given these comments, you would reasonably ask yourself why anybody in shipping should feel more optimistic than they did a few months ago. And even more to the point, why invest in shipping?

Investing is, though, precisely what a significant proportion of respondents intend to do. Those making a major investment or significant development over the next 12 months were up on the previous survey, on a scale of 1 to 10, from 5.0 to 5.3, equalling the highest figure over the past 12 months. Charterers were particularly bullish, which is perhaps easier to understand, at least in those sectors where freight rates remain low.

Why anybody should want to be a shipowner has long been a mystery to me. One owner seemed to be coming round to the same point of view, saying: "Although we look for a stable long-term charter, it is unlikely that charterers could commit themselves to a term longer than three years. We are trying to decrease our exposure to shipping assets."

Another remarked: "There is concern about over-investment in tonnage in the wet trades by private-equity houses, which has the potential to create a significant drop in rates and a further long run of below-opex returns for owners." Again, why do it?

Not so long ago, the high price of oil was the main factor affecting just about everything to do with shipping. Now competition, demand trends and finance costs featured as the top three factors cited by respondents as those likely to influence performance most significantly over the coming 12 months. Operating costs were in fourth place, ahead of tonnage supply. Only after those factors did the cost of fuel get a mention.

So how do industry players see the main markets developing. From comments published with the survey, it would seem the tanker market is expected to remain stable while continued oversupply causes concerns for the dry bulk sector. Meanwhile, less ordering in the container sector as a result of mixed/weak results "will help to balance supply and demand going forward".

Moore Stephens' Shipping Industry Group partner Richard Greiner has a stab at explaining the renewed optimism, saying: "Perversely, the main reason for the improved level of confidence revealed by our latest survey may be the same as that which saw the industry's perceived fortunes equalling a seven-year low in May of this year. Volatility works both ways."

He also explains that the respondents to the survey are asked to comment on their industry expectations over the coming 12 months. "Many of them,however, are also interested in the longer-term view, and the portents here are generally encouraging."

Mr Greiner says that world population is growing, and has been since the end of the Black Death. At the end of 1970, it stood at 3.7 billion. The United Nations predicts that the global population will reach between 8.3 billion and 10.9 billion by 2050. This creates and sustains demand for shipping services, and that is good news for the industry.

He also notes that the World Trade Organization forecasts that growth in the volume of world trade will rise from 2.8 per cent in 2014 to 4 per cent in 2016. "Again, that is good news for shipping. World trade carried by sea is also on the increase and, despite the current difficult economic climate, the longer-term outlook for the industry remains positive as emerging economies continue to increase their requirements for seaborne goods and raw materials," he says.

He ends on a bright note: "So the long-term outlook for shipping offers encouragement to existing and new investors alike. Those who are not attracted by the longer-term prospects, meanwhile, will doubtless exit the industry, and in the process may help solve some of its problems."

Well, up to a point. It is very optimistic to see overtonnaging disappearing in most sectors. That means freight rates will at best stay volatile and generally not bring in profits commensurate with the investment and risk involved. It is lucky for those very large sectors of the industry that provide services ranging from crewing to insurance that there are still, apparently, plenty of shipowners willing to take an optimistic view of the future.