July 1, 2016 Leave a comment
It is no exaggeration to say that in most boardrooms of any major institution in the City of London there will be an ancient lithograph or painting of the River Thames in its heyday as a major shipping port. Commercial shipping was fundamental to the development of the City of London, and while it is rare to see a cargo vessel as far up river as London Bridge anymore, providing services for the global shipping industry is still one of the main activities in the City. Therefore, it is reasonable to expect the vote to leave the EU, known as Brexit, would have an impact on shipping in the UK and beyond.
A week after the Brexit vote to leave, it is still difficult to quantify what Brexit means in the short-term, the medium-term and in the long-term. I have created this Brexit and Shipping Frequently Asked Questions (FAQs) document as a way to try and answer some of the questions.
Brexit and Shipping FAQs:
- Did you vote Remain or Leave? Sorry, I can’t comment on personal matters. However, the latest polls show that the main reason the vote to leave won was due to the desire for laws applicable to the UK to be made in the UK, and not by the EU. The immigration issue was secondary.
- What was the immediate impact on shipping? There was not direct impact on shipping. No French warships blockaded English ports. The Honda car factory continued to produce cars in the UK for export, and no shipping company declared it was moving its HQ to inside the EU. One or two shipowners have been quoted as saying that they move headquarters out of London, but no one has physically done so yet.
- Which sector is likely is gain the most from Brexit? The immediate fall in the value of sterling would have benefitted those who had guessed the correct outcome and had traded cargoes that ultimately would have to be paid from sterling funds. This would have been traders in the oil sector, so probably the tanker sector. The losers are likely to be the liner sector, which has multiple cargoes / boxes sourced in the UK, but pay freight in US dollars. According to a report in Tradewinds, James Frew, senior analyst at MSI, expects worsening consumer sentiment and currency depreciation post-Brexit. This could lower MSI’s container vessel earnings forecast by 20%, according to Tradewinds.
- Did ship values change? No, there have been no changes in value, as vessels are valued in USD. Of course, converting the value into sterling would produce a significant change. However, most publicly quoted shipping companies operate in US dollars and produce their accounts in US dollars.
- Was there a short-term impact on shipping companies? Yes, in that there was an immediate worldwide speculation in shares, even though nothing had fundamentally changed. Some shipping companies share prices fell despite the lack of direct link to Brexit. In Europe, Euronav took advantage of the fall in its own share price to buy-back shares.
- Is there a medium-term impact on shipping companies? In the medium-term, it is likely that Asian shipping companies, and other publically traded shipping companies will return to pre-Brexit levels (unless other factors cause investors to divest shares). Some shipping-related public company CEOs have already announced that Brexit only has a secondary economic impact, and they will not change company strategy. However, according to a report in Tradewinds, one South Korean shipyard executive suggested that the pattern of previous financial crisis was for investors to flee to the Yen. This would push up Japanese ship prices, which would be an advantage for South Korean yards. Of course, given the financial turmoil in South Korean shipbuilding, it is questionable if owners would risk placing orders in South Korea until financial stability returns.
- Will Brexit trigger a Grexit? At Posidonia earlier this month, Greek ship owners were vocally opposed to the EU plans to tax their offshore earnings. Brexit is a good opportunity for the UK to provide the conditions for Greek shipowners to operate in the UK free of EU laws. Therefore, should Greece not leave the EU, there could be an increase in the London-Greek population, unless a new UK Government chooses to tax non-domicile high net worth individuals.
- Will London lose its pre-eminent status as a maritime capital? If the Brexit process stalls, then the lack of certainty may cause brokers and shipping companies to switch operations to their overseas offices in the short to medium term. However, Brexit is an opportunity to by-pass restrictive EU laws, and create a special environment for the shipping industry. This could include lower company tax to 10%, government subsidies for a shipping hub including seaman training and incentives for shipping companies to locate in the UK from Singapore.
- Brexit and shipping inoact analysis from UK-based law firms:
- What is the worst Brexit scenario moving forward? The worst scenario is the UK failing to form a coherent government and stalling the negotiation process. However, shipping needs to learn from the Brexit situation. There were only two Brexit choices, in or out. The political world, and the financial and shipping markets seemed to have assumed the vote would be to Remain. From the reaction to the vote, there appears to have been no strategic planning for the alternative Leave vote.
- What is the next big external event that could impact on shipping? Shipping is a US dollar denominated industry, and anything that impacts the US dollar has massive repercussions on shipping. Therefore, shipping companies need to start planning now for the impact of the US elections in November. Again, there are only two alternatives, but at the moment, most commentators feel the country will not choose Trump. But what if Trumps wins? There is always a reaction in the markets to a Presidential election, but a Trump President could cause a run on the US dollar as investors flee the currency, fearing he will invoke some of his wilder vote winning promises. Shipping needs to learn from the unexpected reactions to the Brexit vote, and start planning for a possible crash in the US dollar, if Trump is elected.