Shipping

Optimism growing in shipping sector but overcapacity and funding concerns persist

The shipping sector is anticipating a recovery with two-thirds (66 per cent) of respondents to a survey by law firm Norton Rose Fulbright expecting freights to rise.

In addition, almost half (45 per cent) are expecting the allocation of available funds to investment rather than operating costs to increase.
 
The firm’s fifth transport survey, Where Next?, reveals that 48 per cent believe new opportunities are emerging for shipping, with investment in additional vessels seen as the most popular investment opportunity. China is viewed as the market offering the greatest investment opportunities, cited by 18 per cent of respondents, followed by North America (13 per cent) and Western Europe (12 per cent).
 
Respondents are also anticipating further consolidation and new investors entering the shipping sector. Almost a quarter (24 per cent) believe that the most significant change in the participants in the shipping sector will be the increased dominance of larger owner operators and a further 24 per cent anticipate increased joint ventures, alliances and pooling activity. Over one-fifth (22 per cent) believe alternative sources of funding will bring new players into the sector.
 
The survey also suggests that shipping is now drawing on a wider range of sources of funding. Just one-fifth (21 per cent) believe bank debt will be their primary source of funding for the next two years, followed by 19 per cent who anticipate it will come from shareholders, 18 per cent from private equity and 16 per cent from the capital markets.
 
While 66 per cent of respondents believe that current market conditions are positive for their business, the shipping sector is less optimistic than aviation (75 per cent) and rail (81 per cent).
 
For the shipping sector, overcapacity is seen by 40 per cent of industry respondents as the greatest threat to a successful recovery.  As a result, shipping is far less enthusiastic about the introduction of new high capacity assets than the aviation or rail sector with 30 per cent of shipping respondents considering that such initiatives will simply exacerbate the overcapacity problem. This compares with only 11 per cent of aviation respondents and 6 per cent of rail respondents (who are also considering the impact of the introduction of high speed rail) who fear the introduction of new high capacity and high speed assets from an overcapacity standpoint.
 
The availability of funding is also a concern. Just 21 per cent of respondents are satisfied with their current access to funding, and the sector would welcome a more beneficial view of asset values for risk weighting purposes, with 23 per cent of the belief that this would help to increase the amount of funding for their sector.
 
Just six per cent believe that investing in their workforce would be the investment opportunity most advantageous to their business but 13 per cent highlight a lack of suitably qualified people as hampering the future efficiency of the sector.
 
Harry Theochari, global head of transport, Norton Rose Fulbright, says: “New and exciting opportunities are opening up for the shipping sector and it is encouraging to see the sector planning for recovery, albeit more cautiously than the aviation and rail sectors. China, which has stated publicly its ambition to create the world’s largest maritime centre, is seen as a key market, and the sector is looking also at a diverse range of markets for growth.
 
“However, overcapacity is an issue and it remains to be seen whether enthusiasm for investment in new vessels could create the overcapacity issues we have seen in the past.”
 
Philip Roche, co-head of shipping, Norton Rose Fulbright, says: “The impact of the global financial crisis has caused a great deal of pain for shipping but there are now real signs that the industry is beginning to rally. Funding and overcapacity are seen as key issues but the shipping sector also faces wider ranging challenges, such as the need for investment in the skills and size of its workforce to ensure that there are enough suitability qualified people to support the safe growth of the sector and the increasing environmental regulation of shipping which will continue to require new solutions and funding.”
 
According to the survey, Asia presents the greatest investment opportunity for the aviation sector in the next two to five years. Some 16 per cent of respondents from the global aviation sector believe China offers the best prospects for future investment, followed by South East Asia and the Middle East and North Africa (both selected by 11 per cent of respondents).
 
The survey also reveals that while various forms of government support would be welcomed by respondents in order to help unlock funding for the aviation sector, a more beneficial view of asset values for risk weighting purposes is viewed as the most effective way of increasing the availability of funding, by 15 per cent of respondents.
 
The aviation sector continues to call for state support in the form of investment in infrastructure, with 40 per cent of respondents of the belief that this would be the most helpful form of government support for their sector. Despite this just 52 per cent expect investment in infrastructure to increase, compared to 60 per cent of respondents from the rail sector and 62 per cent from the shipping sector.
 
While concerns over funding and infrastructure persist, 75 per cent of respondents believe current market conditions are positive for their aviation business. Almost half (46 per cent) believe new opportunities are emerging and investment in additional aircraft and in the development of new markets are seen as the most promising investment opportunities by 25 per cent and 22 per cent of respondents respectively.
 
Further consolidation within the aviation sector is also anticipated. Almost a third (31 per cent) of respondents are planning a strategic alliance or joint venture in the next 12 months, and 18 per cent intend to make a strategic acquisition. In line with this, over a quarter (26 per cent) expect the most significant change in the participants in the aviation sector to be the increased dominance of the larger owners and operators.
 
Almost half (43 per cent) of respondents from the aviation sector have sought or offered funding in the past year but just 16 per cent are satisfied with their current access to funding. The survey indicates that the sector now draws on a more diverse range of funding sources, with 20 per cent anticipating that their primary source of finance will be shareholders over the next year, in comparison with 15 per cent who expect it to be the capital markets, 13 per cent to be bank debt and 11 per cent to be private equity.
 
Ralf Springer, head of aviation, Norton Rose Fulbright, says: “While concerns around the provision of infrastructure, rising fuel costs and access to finance remain, the majority of the aviation sector believe current market conditions present opportunities for their business. Demand for air travel is growing, particularly in Asia, driving many of our clients to look at opportunities for investment here while at the same growing their fleet of aircraft.”
 
Duncan Batchelor, deputy head of aviation, Norton Rose Fulbright, says: “Funding for the aviation sector will be crucial if it is to take advantage of improving sentiment. The sector is eager not only for governments to step in by providing support but also for a more favourable view of aircraft asset values to be taken in order to release additional funding from those financial institutions now subject to more stringent regulation. Increased investment in infrastructure to support the growth of the aviation industry would also be welcomed.”

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