Moore Stephens: Opportunity Still Knocks for Shipping

Shipping accountant Moore Stephens says that, despite the current economic downturn, shipping is still a good business to be in, and that resourceful investors will find opportunities to expand, or to get back into shipping, over the next twelve months.

Julian Wilkinson, head of the Moore Stephens shipping team, says, “Shipping enters 2009 with at least one certainty – the good times are over for now. The easy money has dried up, the old ships have been scrapped or are laid up and there are no prospects of markets going up any time soon. But, in a cyclical industry, sensible players make money whichever way the market moves. For many people in shipping, a sharp downturn in freight rates and ship values is the sound of opportunity knocking, rather than the prospect of a knockout.”

Writing in the firm’s Bottom Line newsletter, Wilkinson explains, “Newbuilding order cancellations are growing quickly, so it is certain that some shipyards will never be built, and others will take a hit. Even the major yards are struggling with finance, and smaller yards trying to get into the market cannot secure guarantee finance. So although steel prices are falling, energy prices are falling, wage expectations are falling and interest rates are falling, it looks like a tough time for shipbuilders in general. The exception will be the major groups and yards in niche areas such as cruise ships, LNG and more complex vessels, which will emerge from the trough having seen lower cost competition die before it could grow.

“Shipping banks are short of cash to lend and that doesn’t seem likely to change. Although shipping is still a solid big-ticket business, many banks that came into shipping in rosier times will not relish the workouts they will face in 2009, and will walk away. So we can expect to see fewer banks in shipping, lending more carefully, at higher margins and for shorter tenors. Shipowners who have been around for a while will recognise this as a good thing, especially as higher margins will be offset by lower interest rates as interbank rates come more into line with central bank rates.

“Every sector will find cashflow a problem. Every sector will struggle with ship valuations and loan covenants. And, inevitably, there will be casualties. But look again and you can see why there is still considerable optimism amongst owners. The lower markets should rein in spiralling crew costs. Scrapping of old tonnage is increasing and will increase faster as the year progresses. And owners have made a lot of money in the last few years, so they are sitting on a lot of equity. Interest rates everywhere have plummeted. Put companies and newbuilding orders in trouble together in the same room as an owner with equity and access to low-rate finance and you see assets moving from an over- exposed and perhaps inefficient owner to a more prudent, solid operator.

“Yes, 2009 will be a rough ride for everyone. But those who watch their cashflow and who have not over-extended themselves in the boom, or who sold out before the peak (and there were a lot who did) will see this as a chance to expand, or to buy back into shipping. Whatever is happening in the world, shipping is still a good business to be in.”