Is a confident start to 2020 justified?

CONFIDENCE in the shipping industry rose in late 2019 to its highest level for 18 months, according to the latest Shipping Confidence Survey from London-based shipping adviser and accountant BDO.

These quarterly surveys have for several years now provided a fascinating insight into the industry. Unfortunately I haven't made notes on how events have borne out or contradicted the sentiments expressed. This time, though, I do wonder if the industry is taking too rosy a view.

According to BDO, the average confidence level expressed by respondents to the survey was 6.4 out of 10.0, compared to 5.8 in Q3 2019. This was the highest rating since the same level of confidence was recorded in May 2018, and it is necessary to go back to February 2014 in order to see confidence at a higher level.

So shipping seems overall to be in a buoyant mood. Drilling down into the results, confidence on the part of both managers and owners was up to 6.9 out of 10.0 from the levels recorded in the previous survey of 5.9 and 6.4 respectively. But confidence in the broking sector was down from 5.1 to 3.9, the lowest rating for this category of respondent since the survey was launched in May 2008.

Asia's shipping community, however, appears to be more cautious about the future. Confidence was down in Asia from 6.8 to 6.0 but up in Europe and in North America from 5.7 to 6.2 and from 4.3 to 6.8 respectively.

Sustainable returns

In the freight markets, the number of respondents anticipating higher tanker rates over the coming year was up from 43 per cent to 46 per cent, with little or no movement in the expectations of the main respondent categories compared to the previous survey.

In the dry bulk sector, overall expectations of rate increases were up from 39 per cent to 50 per cent, and in the case of brokers alone from 20 per cent to 71 per cent. It would be nice to know quite why brokers simultaneously expect higher freight rates but are markedly less confident than they were.

The numbers expecting higher container ship rates, meanwhile, rose by 10 percentage points, but to a still modest 29 per cent. That tallied with a view expressed recently by a well-placed research source who thought container rates would rise but it would be another year or two before the lines would see sustainable returns.

BDO's Shipping & Transport partner Richard Greiner commented: "It is not far short of six years since confidence in the industry has been higher, and appetite for investment remains steady despite volatile economic conditions. This is despite general ongoing geopolitical uncertainty, and notwithstanding specific concerns about a variety of issues including Brexit and President (Donald) Trump's impeachment inquiry."

He could well have have added the trade tensions between China and the US to concerns unsettling the global shipping sector.

Mr Greiner continued: "Shipping is not for the faint-hearted, and committed long-term players remain the most likely to achieve the best returns. Our latest survey revealed an increased expectation over the next 12 months of dearer finance costs. Such costs remain one of the most significant performance-influencing factors for our respondents. But the cost of regulatory compliance is slowly gaining in importance, and will continue to do so. IMO 2020 was recently categorised by one commentator as a 'perfect storm' for litigators. It is also part of a much-larger commitment by the shipping industry to enhancing its green credentials, and in the process becoming a more technologically advanced and environmentally responsible sector. As such, it should be eminently attractive to investors."

Finance costs are an obvious focus for an accountant. However, Mr Greiner also pointed to the huge environmental challenges facing the industry. The assertion that the cost of compliance is "slowly gaining in importance" has surely got to be an understatement. Environmental regulation is forcing a revolution in shipping and nobody can really predict what the implications will be for this industry.

Huge investments

Shipping is indeed in the "process becoming a more technologically advanced and environmentally responsible sector".

But whether that will make it "eminently attractive to investors" must be open to some doubt.

Ships are huge investments and have, currently, an expected operational life in excess of 20 years. But technological change is rapid and accelerating. So will a ship built now be obsolete before or after it has paid back its capital cost? Making that call is indeed not for the faint-hearted.

Today the International Maritime Organization's (IMO) 0.50 per cent sulphur in fuel regulation comes into force. We will very soon see whether shipping can take this challenge in its stride. And we will also soon have a worked example of how the different technical responses to this challenge, scrubbers, compliant fuel or LNG, perform.

But the challenges involved in meeting this limit are likely to pale into insignificance when it becomes clear just what will be required to meet a zero-carbon target by 2050, or even 2030 or, in reality, whatever politically expedient date is eventually agreed at IMO. It will be interesting to see what happens to confidence within the industry over the coming year as implications of "going green" start to sink in.