The role of finance and climate regulations in the maritime shipping industry

Maritime shipping is a crucial piece in today’s global economy puzzle, transporting about 90% of the world’s cargo by volume and 80% of the world’s cargo by value. 

This article summaries the main aspects of the event “Maritime financing – An exploration of the role of finance in the shipping industry” in which the speakers answered some crucial questions regarding the world of maritime shipping and the role that finance plays in it, paying attention to the topics of shipping decarbonization and emissions regulations.

What are the aspects to consider when buying a vessel?

Vessels are the heart of maritime shipping and when buying a vessel several factors should be taken into consideration, based both on the type of vessel and the overall market condition for maritime shipping. 

First, buying a vessel should make sense from a financial point of view: the revenues the vessel will bring to the buyer should cover the buying expenses in a reasonable amount of time. The cost of vessels follows a cyclical trend and is influenced by the Supply/Demand Fundamentals and other factors such as the shipping Market Outlook; therefore, buyers should carefully calculate the time of entrance into the market, balancing it with the strategy they want to adopt (Long-term/Sustainable vs Short-Term/Opportunistic). 

After considering the financial aspects buyers should focus on the technical and environmental aspects of the vessel. The choice of the shipyard is one of the most crucial decisions the buyer faces: quality, reputation, and flexibility of the producer should be balanced with reasonable delivery dates and costs. Another important decision in this field, especially in times with high fuel prices and uncertainty about the future of the energy market, is whether to choose a costly vessel with low fuel consumption or a cheaper vessel with higher fuel consumption, considering if the ROI time of the first is lower than the average life of the ship. On one hand, buyers should be careful when buying vessels with a high environmental impact since regulatory changes made to lower carbon emission can make the ship obsolete in a matter of months; on the other carefulness is also needed when buying (costly) vessels with very low environmental impact or that adopt alternative fuels since possible future technological changes in the maritime industry can make the ship obsolete fast i.e., this was the case for LNG carriers.

Getting deeper into the financial aspects buyers should find their optimum Leverage/Equity ratio, balancing market conditions and individual preferences. Again, market timing is crucial: in good markets, investors may pursue shipping investment opportunities to make a decent return, and financial institutions are more willing to lend capital due to strong cash flows and robust security cover; in bad markets, lenders tend to reduce their shipping exposure and investors usually avoid allocating capital to shipping, given the industry’s volatile nature.

What are the main sources of finance used to buy vessels? 

Vessels are rarely financed through 100% equity; usually, a vessel is financed through a combination of debt and equity, depending on the general outlook of the shipping market and the strategy the buyer wants to adopt.

Even though traditional bank debt remains the most common source of shipping finance, other methods for financing fleet expansions and maritime operations are gaining popularity.

Chinese leasing, for example, recently skyrocketed in popularity: lessors (Chinese leasing houses) lease vessels (1 or more) to the lessee (shipowner) in exchange for payment of lease payments, and the lessor retains legal ownership of the asset throughout the lease period. This method allows higher leverage than traditional banks and the capacity to lend higher amounts.

Another way in which companies can raise capital to expand their fleet is via public offering (IPOs); this method provides the company with a greater ability to grow and easy access to capital, the company on the other hand is subject to increased scrutiny, transparency, and reporting requirements.

Companies can also raise capital through private funds and investors that invest directly in companies (both private or public via buyouts); this method is effective but usually seek a long-term horizon and allows buyers to have a saying on the company’s decisions and strategy often required.

Funds can also be found via export credit agencies (ECAs). ECAs are usually state-funded institutions engaging in the financing of international export operations of domestic companies; their purpose is to encourage export activities and international trade. The most popular and active are the Chinese and south-Korean ECAs, financed by CEXIM and KEXIM.

Lastly, master limited partnerships (MLPs) can be used for raising capital. MPLs are publicly traded limited partnerships which combine the tax benefits of a private partnership with the liquidity of listed companies, and are suitable for low-risk, long-term investments, providing slow but steady income streams.

What can be done to decarbonize the shipping industry and what are the current regulations on the matter?

Although shipping is responsible for the carriage of around 90% of global trade it is only responsible for approximately 3% of global CO2 emissions. Despite being the most energy-efficient mode of mass transport a global approach to further improve energy efficiency and emission control is required.

The international maritime organization (IMO) has developed measures to further contain emissions, working both on short-term and long-term plans. 

Concerning the short-term measures, the IMO has developed fleet improvement programs, pushes shipping companies to consider the use of speed optimization practices, and encourages the development and update of national plans addressing greenhouses emissions deriving from shipping. 

As for today, the biggest challenge of the policymakers is to balance regional initiatives and international regulations, remembering that the international and capital-intensive nature of the maritime shipping industry dictates that these measures must be harmonized and aligned.

In conclusion, the optimal solution would be the development of a zero-carbon fuel to allow the full decarbonization of the shipping sector.

Final remarks

In conclusion, we would like to thank the speakers: Michael Gialouris (Group CFO, ONASSIS FOUNDATION, President & Managing Director ASOFIN Management S.A.), Theofanis Moustakatos (Head of Shipping, National Bank of Greece S.A.), Dr. Hanan Kaffoura (Consultant at the International Maritime Organization IMO) and the moderator Professor Brunella Bruno (Bocconi University). 

Francesco Lamesso

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