Norton Rose Fulbright: Sentiment in shipping is deteriorating

A real divide in sentiment is emerging between the shipping industry and the aviation and rail industries, according to the sixth The Way Ahead transport survey from global legal practice Norton Rose Fulbright.

Confidence among respondents from the shipping industry has deteriorated sharply over the past year. Just one third of shipping respondents believe current market conditions are positive for their industry, down from 69% in 2014. Overcapacity is cited as the key reason for this, by 64% of those respondents who rate current market conditions as negative.

In contrast, 88% of aviation respondents and 91% of rail respondents report that current market conditions are positive for their industries, up from 75% and 81% last year. Increased optimism is attributed to more readily available funding for investment and growth, an anticipated return to economic stability in key markets, and the emergence of new opportunities. A reduction in the price of oil and an associated fall in fuel costs are also assisting aviation.

Around half of respondents from aviation and rail and a third of respondents from shipping expect additional funds to be allocated to investment rather than operating costs over the next five years. The survey indicates that funding is likely to come from a wide range of sources, with the proportion of respondents who anticipate that traditional bank debt will become the main source of funding for transport at its highest level since The Way Ahead survey began in 2009.

81% of all respondents expect passenger numbers and freight volumes to increase over the next five years, and around half expect fares and freights to rise over the same period.

Aviation and shipping expect the increased dominance of larger participants to be the greatest change to their industries over the next five years, while rail respondents believe the availability of new funding sources will reshape their industry.

China is the market expected to offer the best investment opportunity for the transport sector over the next five years. As a result, an emerging markets slowdown is viewed as the greatest threat to the transport sector over the same period. The impact of continued political and economic uncertainty and geopolitical events worldwide are also concerns for respondents.

Harry Theochari, global head of Transport at Norton Rose Fulbright, said:

“While the outlook for aviation and rail is increasingly encouraging, many sub-sectors of the shipping industry continue to suffer real pain, primarily as a result of a surplus in supply.”

“Longer term, the anticipated growth in demand, rising fares and freights, and increased innovation and infrastructure investment is expected to create new opportunities for the transport sector.”

“China in particular will be a key market for transport over the next two to five years. Over the course of this year China may well become the world’s top exporter and importer, is increasingly focused on rail through its “One Belt, One Road” strategy, and longer term there is the view that it will overtake the US as the world’s largest aviation market. China provides real opportunities for businesses operating throughout the transport sector.”

“Despite the new opportunities emerging, transport also faces a number of very real challenges. The regulatory burden on the transport sector has been increasing and our respondents are clear that the sector would benefit from greater transparency over regulation, as well as increased investment in infrastructure. The threat of an emerging market slowdown is a key concern for aviation and shipping as they increasingly look to Asia for growth. For rail, continued political and economic uncertainty within the Eurozone presents a real threat.”

Shipping

Challenging market conditions anticipated

Just 33% of shipping industry respondents report that current market conditions are positive for the maritime industry, compared with 88% of respondents from the aviation industry and 91% from the rail industry. This indicates a substantial reduction in sentiment over the past year, when 69% of shipping respondents reported that conditions were positive.

This decline in optimism may be largely attributed to concerns around overcapacity and new ship building orders (64%), followed by global economic uncertainty (27%). Overcapacity was a concern for 40% of respondents in 2014. When asked what the greatest challenge is to the operational efficiency of the shipping industry, overcapacity is again the overwhelming response, with 55% citing supply and demand imbalances, up from 36% in 2014. This is followed by 15% who cite a lack of suitably qualified people, despite just 4% viewing increasing workforce numbers or skills as the optimal investment opportunity for shipping.

Opportunities for investment

In view of challenging market conditions, the shipping industry is looking to China. 37% of respondents believe that China offers the best investment opportunity for the shipping industry over the next two to five years, a considerable increase on the 18% who cited China in 2014. Interest in India has also risen dramatically, to 31% up from 5% in 2014, and South East Asia, to 21%, up from 11% in 2014.

Mergers and acquisitions are also cited as an avenue to growth. 29% of respondents believe that a merger or acquisition is the optimal investment opportunity currently for the shipping industry. This was followed by a joint venture, alliance or pool (28%). Despite significant fears of overcapacity, 9% believe that the acquisition of additional vessels would be an optimal investment opportunity for the industry.

The larger participants in the shipping industry are expected to become more dominant over the next five years (by 37% of respondents) and increased joint venture, alliance and pooling activity is expected to increase (26%). New sources of funding are considered more likely to enter the shipping industry than either start-up businesses new to shipping or start-up businesses as subsidiaries of existing participants. 18% believe that the most significant change to the shipping industry over the next five years will be the availability of new funding sources, compared with 6% who believe it will be more start-up businesses by those new to the industry or as subsidiaries of existing participants in the shipping industry, reflecting the difficulties associated with breaking in to the maritime industry, and the trend for new investors to enter the market via joint ventures with established participants.

20% believe that strategic alliances, joint ventures and pools will form the most important part of shipping businesses’ strategy over the next 12 months, followed by the strategic disposal of non-core assets (15%) and raising equity and debt (also 15%). Despite significant concerns about overcapacity, 7% believe ordering new vessels will be the most important part of shipping businesses’ strategy.

The fall in the oil price has meant that fears over the availability and cost of fuel have been alleviated, with just 2% of respondents viewing this as the greatest threat to the operational efficiency of the shipping industry, down from 10% in 2014.

Sources of funding and government support

There has been a spike in the proportion of respondents looking to bank debt as the primary source of funding for the shipping industry over the next two years. 28% are looking to bank debt, up from 21% in 2014 and the highest level since The Way Ahead survey began in 2009. Interest in capital markets and bonds and in export credit has also increased; 19% of respondents are looking to capital markets and bonds (up from 16% in 2014), and 11% to export credit (up from 6% in 2014).

Respondents believe that the most helpful form of government support for the shipping industry would be infrastructure investment, cited by 52% of respondents. While 32% believe that infrastructure investment should take the form of investment in ports, 66% believe it should address supply chain bottlenecks with investment in a combination of rail, road, port and airport infrastructure.

The weight of regulation

When asked which regulations have had the greatest impact on the shipping industry, 49% cited the introduction of increased environmental regulation. This is followed by 25% who cite uncertainty as to the application and enforcement of new and existing regulations as having the greatest impact. Shipping is more concerned about the introduction of new and extended economic sanctions (14%) than aviation (13%) and rail (0%). Indeed, 49% believe that greater transparency in the application and enforcement of existing and proposed regulations would be the most helpful form of support the government could offer the shipping industry.
Source: Norton Rose Fulbright