Perspectives on shipping, finance and the environment

BLUE recently held an event with Norton Rose Fulbright that explored how the shipping industry can best meet the challenges that it faces from the twin pressures of historically low rates and limited access to finance, whilst also responding to public and regulatory demands for more environmentally sustainable operations.

Ship owners and operators, financiers, regulators, technology providers and others came together to debate these issues with our panel, comprising Alisdair Pettigrew, Managing Director of BLUE, Philip Roche, Partner at Norton Rose Fulbright LLP, David Balston, Director – Safety and Environment, UK Chamber of Shipping, Alan McCarthy, Consultant with Eurofin International, and Mark Cameron, COO of Ardmore Shipping. The discussion delivered a number of different perspectives on where opportunities lie, the rewards available and the obstacles that lie along the way. Here are a few of those insights.

The Corporate Perspective

“Whilst the challenge of embracing change is not new to shipping, it has taken a very particular form in today’s market, which is centered around the financing challenges facing the industry, particularly when large-scale investment in new technologies is required by the likes of the Ballast Water Convention and future sulphur emission limits, but access to capital is so constrained.

“CSR can deliver a competitive advantage to an organisation and there is a strong case for it to be embraced within shipping. However, whilst larger companies – who also face greater public and investor scrutiny – have the scale and the resources to invest in CSR, the task is arguably harder for SMEs who are less likely to have a voice in the development of CSR and environmental standards, but who must bear the same costs.”

The Ship Owner Perspective

“Companies need to embrace a new culture built upon not just commercial and operational expertise, but also a moral compass that leads them to adopt the right attitude and mindset. Smaller companies can also make a virtue of their size, by moving faster and with greater agility than larger shipping companies and by operating to a lower cost business model. The other ingredient is an unprecedented level of transparency, including vessel performance and efficiency data that crew, technical managers, owners and charterers can all use.

“If asked whether our motives are environmental or economic, the answer is both. We are also exploring ways to provide the right incentives for all parties, which is powered by greater data transparency and technology. We measure the performance of retrofitted technologies, we have invested in flow meters to accurately measure bunker deliveries and we have fuel performance bonuses written into charter agreements. As a result, our eco-efficient vessels can command a premium and fuel savings can be shared.”

The Financial Perspective

“Regulation is having a major impact on the cost of their capital and their risk analysis. Only a limited number of shipping banks are taking positive steps towards the financing of retrofit vessels and the dollars that are available will be earmarked for the largest ship owners. Nor is private equity likely to provide the answer; there may have been a flood of private equity investment, but it is not here for the long term.

“At the present time, SMEs are being frozen out from shipping finance. However, this could change by necessity rather than choice as a result as forthcoming regulations such as SOx limits and ballast water rules. SMEs are likely to tell their banks that without their support in financing the required emissions reduction and ballast water treatment technology, they will not be able to run their vessels or make their mortgage payments. This in turn may force the banks to provide the necessary finance.”

The Environmental Perspective

“The industry lacks any reward for early compliance with environmental regulations. As a result, ship owners have no reason to spend several million dollars to install a scrubber two years before it is required. What’s more, there will not be sufficient confidence in the technology until enough systems have been installed on ships at sea, but costs will not come down until that economy of scale has been reached, as manufacturers are pricing their scrubbers at an unrealistic level in order to claw back their significant R&D costs.”

The Legal Perspective

“The most active area of technological investment that we are presently seeing is investment in LNG infrastructure by energy companies, rather than ship-based technologies. There may also be something to learn by looking into how other sectors have dealt with similar issues, such as the fuel cost hedging and financing in the land power sector.

“We have seen a greater willingness from charterers to take on some risk, which is encouraging. Itis a positive move to tackle the issue of split incentives between charterer and owner, and the availability of greater data can only help. More transparency can only help in reaching agreement on the sharing of the energy saving premium. Technology providers are also increasingly happy to warrant their technologies and to formally share in the risk and reward through a legal agreement.”

Conclusion

Despite the pressures faced by today’s companies, a number of leading owners, operators and suppliers are developing some innovative and forward-thinking approaches to surviving the downturn, encompassing new technologies, greater transparency and a commitment to doing business in the right way.

When lending constraints eventually ease, the hope must be that financial institutions will look to support not the most desperate companies, but the most capable; those with the greatest potential to succeed in shipping’s new era.