Shipping industry could be affected by changes to accounting practices

Accountant and shipping consultancy firm and Maritime London member Moore Stephens says the shipping industry should respond to an International Accounting Standards Board paper on the accounting treatment of leased assets, including time and bareboat charters. The firm warns the deadline for replies is approaching.

Moore Stephens' Richard Greiner said: "Although it is likely to be at least two years before any new standard comes into effect, the big decisions on what will constitute that standard will be made now. For that reason, it is important that shipping makes its voice heard before the discussion paper deadline, and it is encouraging to see that the Chamber of Shipping, as the trade association for the UK shipping industry, has canvassed its members about the possibility of making a submission to the IASB."

The discussion paper, which deals primarily with leases from the perspective of the lessee, has been prompted by the IASB view that operating leases, using the existing definition, give rise to assets and liabilities which are not currently reflected in financial statements. The IASB also says that the differences between operating and finance leases are often quite small, yet the accounting treatment adopted for each is fundamentally different. It also notes that, as a result, it may be possible to structure a lease so that the underlying financing obligations are not recorded as a liability on the balance sheet.

Richard Greiner says, "The most significant change in the proposals is the removal of the distinction between finance leases and operating leases. It is important to note that the IASB proposals may refer to leases, but the definition of a lease also includes bareboat charters and time charters. The proposals would mean that all chartered-in tonnage would appear in a company’s balance sheet, together with a liability for the obligations under the lease. This could have a major impact on gearing, and then of course on any financial covenants linked to gearing."

"A discussion paper is a long way from a revised standard, but is nonetheless a good indicator of future developments. The impact of the proposals on individual entities will very much depend on the nature of their operations, but it is important that the shipping industry moves quickly if it wants its contribution to this important debate to be heard."

Barclays Capital, part of Barlcays Bank Plc, has moved into shipping over the past six months. So far, it is understood, the bank has taken six trading tankers on long term charters, but its shipping-related activities were picked up by the press only last week when it emerged Barclays had also fixed a VLCC on a voyage charter, apparently carrying gas oil from the Far East to Europe.

Contrary to some reports it is believed that Barclays is not using the vessels for storage but for transportation. A Barclays Capital spokesman declined to comment. However the spot charter has been widely reported as involving the 314,000 dwt Tai San, owned by Singapore-based Ocean Tankers.

Sources say that it makes sense for banks to move into trading in oil and other commodities as they have the necessary financial strength while others are pulling back. Transportation of cargoes is a logical extension of this.

The Baltic Exchange has made changes to the way it calculates the Baltic Dry Index in a move it says is designed to help boost derivative trading. The new BDI calculations will now be made by taking the average time charter rates only of the Baltic's capesize, panamax, supramax and handysize indices. Voyage routes will no longer feature in the calculations.

Baltic Exchange chief executive Jeremy Penn said the change was a significant one as it will enable financial market players to develop and trade derivative products on the index with greater ease and understanding.

"There has been considerable interest from the wider investment and commodity trading community in the BDI in recent years. Mutual funds, hedge funds and traders have an interest in exposure to dry bulk freight and may also wish to trade it in conjunction with shipping company equities. However, their interest is often in a more general exposure to dry freight rather than in the very specific existing liquid derivative contracts. By re-selecting the index so that it consists entirely of components which are already relatively liquid in the derivatives market, we believe we are making this process considerably easier. It will enable market-makers to offer pricing and hedge resultant positions easily."

John M Lyras, chairman of The London P&I Club, has welcomed amendments to legislation proposed by governments, making shipowners liable for the abandonment of crew, following bankruptcy.

Writing in the London P&I Club’s 2009 Annual Report, Mr Lyras says that, as originally proposed, the government initiatives, including compulsory insurance, would effectively transfer the cost of caring for crew from “less responsible owners to those who take their obligations more seriously.”

He adds that the compulsory insurance would effectively be designed to cover a credit risk – “a type of risk transfer that has always been very difficult to price properly and fairly.” Pointing out that The London P&I Club, together with other members of the International Group, felt it would be inappropriate for clubs to insure and certify cover against uncontrolled obligations incurred prior to abandonment, Mr Lyras says, “It was reassuring to hear from the most recent International Labour Organisation and IMO joint meeting in Geneva that pre-abandonment liabilities to be insured and guaranteed would be limited to those accrued during the final four months of employment. It was more reassuring to learn that the guarantor would be subrogated to the rights of the abandoned crew.”

A need to take decisions on the Rotterdam rules and piracy is one of the main drivers of interest in the International Union of Marine Insurers' annual conference in Bruges in September according to IUMI president Deirdre Littlefield. She says that the overriding concern for insurers is how to cope with "the economic storm that has devastated shipping operations."

She notes: "Although we have seen some recovery in the financial markets and in the value of certain bulk commodities thanks to renewed Chinese demand, the world is still in a deep recession and shipowners face the deepest slump they have ever experienced. Economic indicators seem to fluctuate almost daily, and there is widespread scepticism about whether any turnaround can be sustained or when world trade will bounce back.” She said: “Of all the world industries grappling with overcapacity, none is in such dire trouble as shipping. Too many ships chasing too little cargo, and a huge amount of new tonnage still on order despite cancellations."

The IUMI president went on to say that while underwriters’ claims exposure is reducing because of the increasing number of ships lying idle or going into lay-up, the plunge in cargo volumes and vessel values is hitting marine insurers hard.

Ms Littlefield notes that underwriters will soon have to make vital decisions on matters such as the Rotterdam Rules where a new convention is scheduled for signing in September that will radically affect the cargo liability regime, proposed changes in salvage arbitration procedures due to take effect in October, and how to deal with the piracy menace that escalates day by day, now in several parts of the world.

Shipyards continue to deliver newbuilds ordered in the boom

The latest confidence survey from shipping accountant and consultancy firm Moore Stephens shows a negligible increase in confidence in shipping and ongoing concern over the glut of newbuildings due for delivery.

The average confidence level expressed by respondents, on a scale of 1 to 10, was 5.5, compared to 5.4 in the previous survey in February this year. Owners, managers and charterers all exhibited a small increase in confidence in connection with the shipping markets in which they operate. Confidence among brokers, meanwhile, was marginally down, and the lowest among all categories of respondent. Geographically, the highest confidence level was recorded by respondents in Asia.

Comments generally reflected the downturn in economic markets worldwide. One respondent noted: "The volume of work is the same, but the payments are late, and that is what is killing us."

But there was also some optimism, with another respondent commenting: "The shipping market will be stable until September, and then should slowly improve."

The most commonly recurring area of concern involved the newbuilding market. "The weight of the orderbook is a serious problem," commented one respondent, while another noted, "There is more toxic debt on the newbuilding front still to be revealed".

Other comments included: "The glut in the newbuilding orderbook exerts strong downward pressure on confidence levels" and "We are doomed by the oversupply of ships".

Moore Stephens partner Richard Greiner said: "The high level of concern expressed by respondents about the effect that the glut of newbuildings may have on the market is not a great surprise. In a way, shipping is paying for the success it enjoyed in the boom years before the markets tumbled, on the basis of which it went on a shopping spree at the world’s shipyards. It is to be hoped that a continuing return of confidence and a resurgence in trade will be instrumental in dealing with a significant part of that glut, while the ingenuity and resources of shipping companies and their financiers will undoubtedly be needed to help ameliorate some of the other more pernicious consequences of an oversupply of tonnage."

A survey by maritime recruitment agency Halcyon and training provider Coracle has revealed that 73% of shipbrokers, traders and charterers are concerned about their positions.

According to the report commercial vacancies at lower levels are in relatively short supply, but there are still opportunities for experienced high calibre candidates. The report found that only 55% of those involved in the legal/P&I and insurance sectors were concerned about their position. Other issues covered by the survey included the factors which made employees most and least happy about their jobs.

The report says: “Most employees seem relatively content with their salaries but would welcome an improvement in benefits.

It adds: “Promotion and training opportunities can add immense value to employees and give them reassurance that you are supporting them in working towards their career, and perhaps personal, objectives.”

Tamiflu in high demand on ships

Supplies of Tamiflu are in short supply as ship owners and managers rush to stock up in the wake of escalating cases of swine flu, according to ship supplier Hutton’s. It says that shipowners trying to protect their ships and crews from a damaging and potentially dangerous on-board outbreak of swine flu are finding it hard to source limited supplies of the anti-viral drug Tamiflu and, when they do get hold of it, are finding prices hugely inflated, says Hutton’s medical general manager John MacDonald.

“There is a UK-wide problem with obtaining stocks of Tamiflu at present because of the quantity being stockpiled by the Government, and stocks in Europe are dwindling too,” he explains.

“There are stocks of Tamiflu which date back to the Bird Flu outbreak two years ago but they are being sold at high prices and have sell-by dates which expire next year.”

Crew health is an increasingly important issue in modern shipping, points out Mr MacDonald. “When you have several thousand tonnes of vessel carrying who knows what you don’t want to risk that coming to grief in the middle of the ocean because the crew is incapacitated,” he says.

In addition, modern comforts such as air-conditioning on ships make it easier for viruses to spread once on board.

He continued: "Although it is not mandatory, larger companies have already done their own risk analysis and decided they need a plan to deal with a flu pandemic. Now smaller companies are starting to follow suit and encountering this supply problem."

Ex-pats' money now goes further in London

The collapse in sterling and a decline in property rental values driven by the recession have sent London tumbling down the list of the world’s most expensive cities for expatriates. London was ranked third out of 143 cities worldwide last year in a cost-of-living list compiled by Mercer, the consultancy — but this year it has plunged to sixteenth place.

The other British cities included in Mercer’s survey, which is used to help multinational companies and governments to determine pay allowances for their expatriate employees, also dropped sharply. Birmingham fell from 66th place to 125th and Glasgow sank to 129th from 69th, making them cheaper locations for expatriate workers to live than the capital cities of Lithuania (Vilnius), Jamaica (Kingston) and Colombia (Bogotá).

In the survey, New York is used as the base city for the index and scores 100 points, with all cities measured against New York and all currency movements against the US dollar. London, which scored a notional 125 when the survey was carried out in March last year, scored only 92.7 this year.

Mercer compared the price of more than 200 goods or services in each location, including the cost of renting a luxury two-bedroom unfurnished apartment per month, a bus or underground ride, petrol, coffee and milk.

With the dollar also having risen against most European currencies this year, including the euro, a number of European cities were deemed to be less expensive than they were in 2008. Paris, Amsterdam, Dublin, Oslo, Rome, Warsaw and Vienna were all ranked lower than last year.

Holman Fenwick Willan Partner James Gosling has been named Shipping & Maritime Lawyer of the Year 2009 in the Who's Who Legal Awards, for a second consecutive year.

Who's Who Legal's editor, Callum Campbell, commented: "In a highly competitive field, retaining the Who's Who Legal Shipping & Maritime lawyer of the Year Award is an outstanding achievement. The consistently positive feedback we received recognises James Gosling's exceptional level of performance and service to clients. We have no hesitation in once again declaring him the leading lawyer for Shipping & Maritime expertise.”

The Maritime Foundation has launched a search for the UK’s top maritime journalists, writers and broadcasters for its annual awards. Winners will be honoured at a dinner at the Institute of Directors, in London on 28 October.

Previous winners include broadcaster Libby Purves OBE, defence writer Michael Evans and the BBC producers Andrew Williams for the Battle of the Atlantic series and Marshall Corwin’s Serious Ocean children’s programmes.

Those wishing to make a nomination can do so by logging onto the Maritime Foundation’s website at www.bmcf.org.uk