2015 will be good for the shipping industry with sector specific risks projected to decline and new investment slated to flow in, the investment analyst Zacks predicts.
Cheaper fuel will be a major positive for shipping companies this year, according to Zacks. The slump in crude is expected to significantly reduce costs of bunker fuel prices this year. Despite a rally last week, the specter of a worldwide glut has kept prices nearly 50% lower than the highs achieved in mid-2014.
Zacks believes tanker owners will benefit the most from this development. By the end of last year, very large crude carriers (VLCC) were close to a level of USD 100,000 a day. Their average rates through 2014 were also the best in nearly four years. Low oil prices will increase demand for tankers and could result in higher rates for shipping companies this year.
Another important factor is the introduction of larger vessels and shipping alliances. Opinion is divided about whether these developments will increase profitability or lead to a reduction in rates across the industry. However, Zacks predicts that even though smaller ships will be replaced by larger ones, the total number of ships will come down because of the alliances. This could lead to capacity remaining unchanged or even declining, which could subsequently push up rates.
Ultimately, how the shipping business copes with new regulatory standards could determine its success this year. Conventionally, shipping fuel had 3.5% sulfur content worldwide. This was reduced to 1% in 2012 and has been cut to 0.1% starting this year in the Baltic, North Europe and North American Emissions Control Areas following the approval of the International Maritime Organization.
This has led to an increase in the cost of fuel due to higher refining costs of fuel with low sulfur content. One estimate puts this at an additional USD 300-USD 400 per ton in Vancouver and USD 80-USD 100 in Asia.
The fate of rates will result in whether the advantage gained from cheaper fuel can offset the increase in costs imposed by stricter regulatory standards.
Source: Zacks; Image: LUKOIL