Five kinds of risk: plus ça change, plus c’est la même chose
It’s Marine Money week in New York City. In a year in which capital raising has fallen in most industries, largely because of geopolitical uncertainty, what will be the most common conversations in the lobbies of the Pierre Hotel and the Manhattan restaurants?
The conference agenda lays out an extensive range of discussions for delegates. Reading it, I was struck by how seemingly new challenges actually fall into a traditional range of risks for ship owners and the wider industry to manage.
Perhaps this resonated with me because last week I was in Denmark teaching at the Danish Shipping Academy. I was giving our latest course, “Five types of risk in shipping and how to manage them.” For old hands, there is little here that is new. I hoped that the course would give recent market entrants a perspective on how the industry works via risk management. Our cohort of nearly 30 students spent a lively day discussing risk under these headings:
Physical – vessel operations
Commercial – the freight market
Financial - capital costs and asset prices
Technological – Industry 4.0 and its effects on shipping
Regulatory – Marpol Annex VI, ballast water, engine efficiency, Hong Kong Convention, etc
Navigating through all of these is becoming harder for everyone in the industry, perhaps with the exception of physical risk. Casualty and oil spil numbers continue to decline as the industry maintains a longstanding trend towards better safety performance. The range of physical management solutions available via ship managers and tech start ups gives ship operators ever more tools for keeping seafarers, cargos and the environment safe. The biggest challenge here lies in knitting together all the different safety systems.
One could argue that freight markets are currently the least of our worries. In the major shipping sectors of dry bulk, oil tankers and containerships, the supply of new tonnage is in check, while gas shipping has at least a firm demand outlook to justify all the investment in new tonnage. One session at Marine Money even declares a supercycle in 2020 – something I’ve been talking about since 2016.
The financial environment is one reason why the supply of new tonnage has been held back. As western banks struggle to lend to shipping under the Basel3 regulations, new forms of lease finance and corporate lending are offering innovations beyond traditional vanilla mortgage lending. Citi’s portfolio loan is the latest welcome addition. But the amount of money being offered to the industry overall is lower, as is the amount being sought. Will that change if a 2020 freight spike drives up asset values, or will lenders continue to focus on borrower quality?
One reason why less money is being sought is that ship owners are cautious about what they should be building. What engines should the owner choose, burning which fuel or indeed fuels? How integrated should a ship be in the global supply chain? How interconnected should one owner’s fleet be with those of the competition, either directly or via charterer’s cargo management data? How much data sharing is permissible, desirable, or practicable?
Having decided on a newbuilding, the ship owner faces the question of how long will his vessel last? Will the Hong Kong convention reduce the economic life of a ship? If the ship owner loses his end-of-life cash bonus when selling the vessel for recycling due to stricter recycling conditions, how much faster will the market value of middle aged ships depreciate? And will future climate regulations make the current or even the next generation of vessels obsolete before their time?
If that isn’t enough to keep Marine Money delegates awake at night, there is another risk we all face, and that’s the risk presented by increased political instability around the world. It’s not just the decline of multilateral institutions, the rise of authoritarianism and trade wars. It’s also the depressing development of attacks on non-military vessels in the Middle East and the rising tension within the Western nations and between West and East. If you live in a democracy, you have a change to choose between candidates and policies. Not everyone has that choice, but the authoritarian states still have to provide basic safety and security to their populations and – hopefully – stable and reliable governance in under which business can prosper. Let’s keep hoping for sound government and peace for all our sakes.