JOAKIM HANNISDAHL
Head of research, Cleaves Securities
One of the biggest challenges facing the shipping industry as we head into the 2020s is the uncertainties surrounding new regulations and new technology.
With the maritime transportation industry responsible for around 2.5% of all greenhouse gasses globally, the focus on emissions cuts is growing ever larger.
With the current transparency arguably no more than five to ten years into the future at best, the risk of investing in an asset with a life expectancy of around 25 years has increased significantly in just a few years.
This uncertainty also makes it more challenging to secure financing, which in concert with recent lacklustre earnings has led to a prolonged period of underinvestment in the shipping sector.
However, this underinvestment in the industry also creates a lot of opportunities.
The newbuilding orderbooks are in most segments close to all-time lows relative to the fleet, which gives us at least two years of supply-side transparency and supports our optimism for most shipping segments.
The current investor scepticism towards newbuildings could also prolong the longevity of the expansionary phase of the shipping cycles.
With the recent upsurge in earnings for oil tankers and large LPG carriers, the cash flow generation for more vintage vessels is immense and yields good returns for investors, even on longer charters.
Thus, there are great investment opportunities which mitigates the risks related to changes in regulations and technology.
China has been a key driver for demand growth for shipping in the 1990s and 2000s.
However, we do see the growth rate abating and expect that demand for dry bulk shipping will be relatively low in the 2020s versus previous decades.
For energy, and especially cleaner fuels such as LNG and LPG, we see very strong demand trend in the coming decade which should support shipping.
Considering that the main demand growth of energy is expected to be in the Far East, and that the main supply growth of energy is emerging in the Atlantic, the average sailing distance for marine transportation increases, which adds a multiple to the growth in volumes.
Overall, a low fleet growth in most segments and a strong demand trend for cleaner fuels will likely support shipping in what could be one of the best decades in recent times.
KRISTIN HOLTH
Global head of ocean industries, DNB
When looking ahead, it is valuable to start by looking back. The last decade has witnessed dramatic change in maritime finance, which will only accelerate. Starting with the global financial crisis in 2007, the market for ship finance was dominated by bank lending, smaller companies, less sophisticated capital structures and higher focus on asset values.
Today, investors place a greater emphasis on demonstrating free cash flow and net earnings, as well as securing more-diversified sources of funding, whether it be leasing, bonds, or public equities.
In order to handle this, and the great operational challenges from regulators and the environmental perspective, we expect to see greater consolidation leading to larger more sophisticated entities. So fewer players, but more professional in their funding and operations.
Senior bank debt, much of it from non-western sources, will still play a key role but diversification and institutional capital will be more prominent. Higher compliance and regulatory costs will fundamentally increase the cost for banks to finance shipping.
The industry has awoken to broader governance and green initiatives. This is a paradigm shift as the industry must handle a world less reliant on hydrocarbons. The dramatic need to reduce carbon emissions will drive technological change in vessel design, creating uncertainty around asset values and create new business models.
MARK FRIEDMAN
Senior managing director, Evercore
No doubt, the decade ahead will bring intense focus on the environmental impact of shipping as regulations and users seek “greener solutions”. And ESG will be an important focus of the investor community in the coming decade. Shipping companies will need to be responsive to investors’ concerns.
In the equity capital markets, the trend of investors to favour larger shipping companies with larger market capitalisations will continue. By 2030, each shipping subsector — tankers, bulkers and containers — will likely have a handful of larger-cap “go-to” companies as investors seek outfits with greater scale, trading liquidity and preferred access to debt and equity markets.
Investors will also have greater focus on financial reporting transparency and investor-friendly governance. These “go-to” stocks should be accorded a valuation advantage that will enable them to consolidate the industry through mergers and acquisitions and vessel acquisitions.
Balance-sheet strength will also be viewed as a key differentiator as investors will seek out shipping companies that are strong enough to take advantage of the shipping cycle. Capital allocation will be the key “buzzword” as companies become very tactical on their capital return (dividend and share repurchase mix) and capital-expenditure deployment.
This is part of a multi-sector series on shipping industry outlook for the decade ahead. Read the full report in this week's print edition.
