Over-Tonnaging Fears See Confidence Dip Again As Shipping Finance Costs Rise

Overall confidence levels in the shipping industry dropped for the third successive quarter in the three months ending February 2011, to reach their lowest level for fifteen months, according to the latest survey by leading accountant and shipping adviser Moore Stephens.

Over-tonnaging and the uncertainty created by political unrest in the Middle East and North Africa were the dominant themes running throughout the responses to the survey, which also revealed an increase across all categories in the number of respondents who expected finance costs to rise over the coming year.

In February 2011, the average confidence level expressed by respondents in the markets in which they operate was 5.8 on a scale of 1(Low) to 10(High), compared to 6.0 in the previous survey in November 2010. Confidence over the three-month period covered by the latest survey fell most noticeably on the part of brokers (down from 6.1 to 5.2), followed by charterers, down from 6.1 to 5.8, and managers (6.1 to 6.0) Confidence on the part of owners remained unchanged from the previous survey, at 5.8. Geographically, confidence on the part of respondents in Asia was down from 6.2 to 6.0, and in Europe from 5.7 to 5.6.

Although confidence levels were down on the previous survey, a number of respondents felt that the prospects for improvement were reasonably good. “Although we are not truly out of economic recession,” said one, “we have effectively weathered the storm and are now in an advantageous position for future growth.” Others were more pessimistic, however, typified by the comment that, “Most shipping markets are over-supplied to such an extent that even good incremental demand will not strengthen them”. A number of respondents were convinced that there was worse to come, with one pointing out, “Western governments are still spending far more than their income and, when the crunch comes, there will be a knock-on effect for shipping”.

Political developments were uppermost in the minds of many. “Political and economic developments in countries like Egypt, Tunisia, Yemen, Jordan and Libya over the next few months mean that prospects for shipping and world trade in this part of the world are likely to be very uncertain for some time,” observed one respondent, a sentiment echoed by another who suggested, “The problems in Egypt could affect the smooth flow of cargo through the Suez Canal”.

Concerns about over-tonnaging and the effect of a glut of newbuildings coming on to the market dominated the responses. “The amount of new tonnage due for delivery this year in all three major vessel categories will continue to depress the markets,” said one respondent, while another observed that the industry is facing a ‘wall’ of newbuildings yet to be delivered. Others took the thinking a stage further. “You get the impression,” said one, “ that, unless rates improve, owners are not going to generate sufficient reserves to cover drydocking, maintenance, surveys and the like. It's a ticking time-bomb”.

Expectations of making a major investment or significant development over the next twelve months showed a small increase in the latest survey - up, on a scale of 1 to 10, from 5.6 to 5.7. Owners were most bullish (up from 5.6 to 6.0), and charterers remained unchanged at 6.1, but the expectation on the part of managers was down from 5.9 to 5.7. The biggest regional increase was recorded in Europe (up from 5.3 to 5.6), while Asia was unchanged at 5.9.

Demand trends, competition and finance costs - at 22 per cent, 18 per cent and 16 per cent respectively – were once again the three factors which respondents expected to influence performance most significantly over the next twelve months. Tonnage supply was also a significant factor, cited by 14 per cent of respondents, the same number as in November 2010. In October 2008, it was a major factor for only 9 per cent of respondents – an all-time low. Unlike last time, however, tonnage supply did not feature as a top-three performance-influencing factor for charterers, being replaced by fuel costs (19 per cent).

There was a 15 percentage point rise (from 44 per cent to 59 per cent) in the number of respondents who expected finance costs to rise over the coming year - the highest figure recorded since October 2008. The biggest increase was recorded by brokers (up from 39 per cent last time to 67 per cent), and there were also hefty rises on the part of owners (up from 41 per cent to 59 per cent), managers (51 per cent to 59 per cent), and charterers (up from 48 per cent to 58 per cent). There was a 22 percentage point increase (from 42 per cent to 64 per cent) in the number of respondents in Asia who expected finance costs to rise, compared to a 15 percentage point increase in Europe. One respondent felt that, “For cash-rich owners with finance lines available, this will be a period of opportunity for expansion”. But another complained, “Finance is the major constraint”, and asked, “Which ruined banker or high-level investor is going to pull us out of this one?”

Overall, the numbers of respondents expecting rates in the tanker sector to increase over the next twelve months was down from 47 per cent to 46 per cent. Expectation on the part of owners was down from 46 per cent to 43 per cent, while for managers the fall was from 52 per cent to 50 per cent. There was a 15 percentage point fall on the part of brokers to 33 per cent, but charterers recorded a 14 percentage point rise in expectation from 47 per cent to 61 per cent. Europe was alone in recording a fall in expectation of higher tanker rates, down from 49 per cent to 43 per cent. In Asia, there was a 5 percentage point increase to 50 per cent of respondents.

In the dry bulk sector, there was a six percentage point increase overall – from 32 per cent to 38 per cent – in the numbers of those expecting higher rates, in contrast to the 10 percentage point drop last time to the lowest figure since May 2008. Expectation on the part of owners and managers was up by 10 and 9 percentage points respectively to levels of 43 per cent and 39 per cent. Again, charterers begged to differ, returning a 2 percentage point drop from 33 per cent to 31 per cent. While expectation of higher rates remained unchanged at 42 per cent in Asia, they rose by nine percentage points in Europe, to 36 per cent. One respondent noted, “There will be big problems for the dry bulk market due to the extremely high volume of new deliveries and the relatively low rate of demolition that we are seeing.”

In the container ship market the only way was up, with the single exception of ship managers. Overall, the number of respondents anticipating an increase in rates over the next twelve months rose by 6 percentage points from 43 per cent to 49 per cent – the second-highest level since the survey was launched.  Higher rates were anticipated by owners (up from 45 per cent to 56 per cent), brokers (42 per cent to 48 per cent), and charterers (up by 15 percentage points from 25 per cent to 40 per cent). But the number of managers of like mind was down on last time, from 49 per cent to 47 per cent. There were 10 and 6 percentage point rises, to figures of 47 per cent and 51 per cent, in the numbers of respondents in Asia and Europe respectively who were anticipating higher rates.

Moore Stephens shipping partner, Richard Greiner, says, “Although the small drop in confidence levels is disappointing, particularly since it follows a similar fall in the previous quarter, there are some compelling external factors influencing the current mood of the industry. The political unrest in the early part of the year in North Africa and the Middle East was bound to have had an adverse effect on confidence. When you operate in a global industry, you are susceptible to global influences.

“The continuing concern about over-tonnaging is not a surprise, and will doubtless persist until yards around the world have cleared their orderbooks of the current glut of newbuildings.  More respondents expected the cost of borrowing money to rise over the next year and that must be a concern for everybody. Yet all the available evidence suggests that the banks are increasingly ready to listen to proposals from shipping businesses which have done their homework and their housekeeping and developed a sound business plan.

“In any industry, news of new investment can be something of a double-edged sword. So it was with the recent confirmation of Maersk’s order for a series of big new container ships which, while sending a confident message to the market, will at the same time have done little to ease fears about over-tonnaging, particularly on the part of smaller operators. Yet new investment is undoubtedly good for any industry and, despite the difficult economic climate, our survey still showed an increase in the number of respondents who expected to make a major investment or significant development over the next twelve months. It was noticeable, also, that a large number of respondents felt that shipping had taken the worst that could be thrown at it and was now ready to bounce back. However, it will be interesting to see the impact of events in Japan in our next survey.”