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A wintry outlook for shipping

A wintry outlook for shipping

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‘Investors need to understand the workings of the industries they invest in and not attempt to influence the values of the assets that generate the operating revenues’: Paul Slater from First International Corporation.

As we move into winter in the northern hemisphere it is time to reflect on the events of this past year and the results that have emerged from the shipping industry.

Simply put shipping, or that part that is in the public eye, continues to decline as revenues fail to cover costs while the ships age and decline in value.

Much has been written about Brexit and the Trump win in the US election but I suggest neither will have any effect on international shipping.

Shipping is a unique industry in that most of the ships are registered as owned in small nations, open registries, which can process all the shipping paperwork, but are barely involved in the actual trade of the ships.

This has created an enormous efficiency as thousands of ships have been built and are operating with little or no political influence from the nations at either ends of their voyages.

However, some countries have imposed restrictions on their domestic seaborne trade. The largest of these is the infamous US Jones Act that restricts shipping between US ports to US owned companies using ships built in the US and employing US crews.

This has combined to create an enormous surcharge on the domestic shipping trade and has prevented coastal shipping solutions taking cargoes off the clogged highways of the US east coast.

The shipping industry has raised substantial funds through the public stock markets, supported by an equally huge amount of debt from careless banks and export credit agencies in the major shipbuilding nations of Korea and China.

These funds were chasing the illusion that ship values would quickly rise, enabling the ships to be sold for a profit.

The reality is that shipping is a service industry whose assets physically depreciate over a relatively short time and only earn money when they carry cargoes.

The influx of this new money caused a surge of orders for new ships culminating in a huge increase in the carrying capacity of most sectors of the world fleet, at a time when the Chinese industrial boom had stalled and continues to decline.

Thus, the cargo interests have been able to set freight rates at historically low levels, below operating costs in many sectors. This has caused most shipping companies to be unprofitable and unable to generate funds to replace their ageing fleets.

Investors need to understand the workings of the industries they invest in and not attempt to influence the values of the assets that generate the operating revenues.

Shipping will continue to carry the world’s cargoes into the far distant future but as ships physically depreciate so the capital requirements for their replacements will continue. Unfortunately the industry’s present problem, caused by excessive investment in new ships, has created a severe financial recession in the companies that own and operate the ships.

Service industries flourish by meeting the demands of their customers and shipping provides an extraordinary service operating thousands of ships of all types and sizes. However, investors have speculated in building hundreds of new ships without securing their profitable employment.

Investors, who have speculated by funding the construction of hundreds of new ships without securing any profitable employment when they are delivered, have caused most of the shipping industry to languish in losses.

Cargo owners would pay more for shipping their cargoes if there were fewer ships available and the owners were financially able to properly maintain and operate the ships with greater efficiency for their customers.

Surprisingly, a lot of new funding has emerged for some of the public companies but one most hope it isn’t wasted on ordering new ships.

A closer relationship between shipowners and cargo interests is essential for both industries to flourish and continue to carry world trade for the foreseeable future.

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1 Comment

  1. Andrew Craig-Bennett
    December 20, 2016 at 4:56 pm

    I don’t see any coming together of cargo and ship owners.

    If anything, the “industrial shipping” model, which many of us in the shipowning side love dearly is becoming less, not more, common.