Deep-rooted depression

 The dry bulk patient continues to suffer, with no sign of a cure in sight for the malaise; depression is deep-rooted in this psyche. So bleak is the prognosis that it has eaten into the confidence levels of those in the shipping sector, according to research from international accountant and shipping adviser Moore Stephens.

Average confidence levels in the shipping industry now stand at 5.3 on a scale of 1 (low) to 10 (high), down from 5.5 in February 2015. This is as low as the levels have ever been in the seven-year history of the survey and is a far cry from the 6.8 rating recorded with the survey was set up in 2008.

Low freight rates, overtonnaging and doubts about private equity funding top the list of concerns of the latest Moore Stephens’ Shipping Confidence Survey.

There was a fall in the number of respondents anticipating higher rates in the dry bulk sector with one respondent commenting: “We are experiencing the worst dry bulk market since the 1980s.” Many respondents saw no sign of improvement, with one commenting: “Boom/bust cycles in the shipping industry usually last about seven years, which is sufficient time for any money lost to return to the market, with interest rates at, say, 6%. But now, because of excess liquidity in the markets and low interest rates, there is a feeling that any recovery will be a very long time coming.”

Confidence levels for owners, managers and brokers all slipped, leaving charterers as the only category of main respondents that recorded an increase to 4.2, but this was from an all-time low of 3.9 and was still the lowest of all categories.

Investment drop

There was also less interest expressed in major investments or significant business developments, with one respondent pointing to the “thin-to-non-existent margins at which Asian yards operate, together with undue concern about the need for new ‘green’ vessels” as encouraging unnecessary investment in newbuildings rather than in existing tonnage. “This would never happen in real estate, for example, where recession precludes additional supply for years,” said the respondent, adding, “We are very pessimistic about shipping investment returns for many years to come.”

A bright spot was picked up by one respondent, who pointed to the remarkable acceleration of scrapping of larger bulk carriers and the conversion of many newbuildings into tankers as having a positive effect on the dry bulk market sooner than had previously been anticipated. But the caveat was that private equity stays well clear and does not latch on to this minor improvement as an opportunity to make a quick fortune.

Another commented: “For as long as there is no correction in the availability of shipbuilding capacity, and for as long as outside money keeps coming in, there is no hope of an improvement in the shipping industry.”

But it’s not all bad news, says Moore Stephens’ Richard Greiner. The Baltic Dry Index (BDI) has started to edge upwards after an “extended period in freefall”, he says. In his view, the tonnage supply/demand imbalance is improving rather than deteriorating, although it is “still unsatisfactory”.

“There will always be a demand for shipping,” he points out. “Moreover, given the high operating and regulatory costs involved, and the fact that the economic and industry downturn has already claimed significant numbers of weaker companies, the shipping industry is likely to be stronger than it has been for many years once the recovery does get under way. In the meantime, it is just a question of holding one’s nerve.”

There was also a rise in respondents that expect improved rates in the tanker trades with one commenting: “Tankers are not bad for the moment, but please stop ordering more ships! Will we never learn?”

Double dip

Mr Greiner commented that the fact that shipping confidence had now touched this low point twice in the seven-year life of the survey underlined both the current volatility of the markets and the fragile nature of confidence itself in an industry where, little more than 12 months ago, it was at an all-time high.

“The nature of the concerns expressed by respondents to the survey comes as no surprise,” he says. “Familiarity in this case breeds continuing uncertainty rather than contempt. There are no quick fixes for the likes of overtonnaging and low freight rates. The solutions, like the problems themselves, are long-term in nature, and will undoubtedly involve some pain along the way. Moreover, there is a not a one-size-fits-all solution for the industry as a whole. What is good news for some sectors is quite the opposite for others.”

Here he pointed to low oil prices as being good for small operators by virtue of reduced bunker costs, but the same can be bad news for the bigger players with whom they are competing. Likewise, access to finance for newbuildings in either the traditional or private equity markets can be viewed as good news for owners with an eye on expansion, but bad news for those seeking investment to upgrade existing tonnage.

Further, unanticipated or unplanned costs also have a part to play. “Shipping has enough problems to occupy itself for the foreseeable future,” said Mr Greiner. “But it must not take its eye off the ball when it comes to the incipient costs associated with achieving regulatory compliance, or indeed of properly managing the increasing risks which it faces on a daily basis, encompassing everything from the financial stability of counter-parties to cyber security threats.”