Thursday, August 31, 2017

For the Shipping Industry Risk Can Come in Many Guises

Survey Reveals How the Sector Assesses its Vulnerability
Shipping News Feature
UK – WORLDWIDE – Shipping is a risky business. There are many complex parts to an industry which can be physically dangerous for those at the sharp end who we rely on to ensure goods from every point on the globe reach their respective destinations no matter the weather, the political situation or, in these troubled times the roving gangs of maritime pirates who would look to profit by interrupting safe passage.

The crews which man the merchant ships we rely on so heavily to keep us supplied with everyday items and foodstuffs run those physical risks but there are other hazards for those who finance the industry and are directly concerned in maintain the ocean supply chain. Every year companies such as accountants and business advisors Moore Stephens calculate the changes in risks in a sector which sees alterations in the levels often dependent on factors completely outside anyone’s control.

This month sees the annual report from the London headquartered company which has around 40 offices in the UK alone and a presence in over 600 locations worldwide, and the document gives a good insight into the evolving face of risks faced by the shipping community today. Prepared from the answers given by a swathe of industry stakeholders, this year respondents rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.8 out of a possible score of 10.0, compared to 6.6 last time.

Charterers returned the highest rating (8.8) in this regard, followed by owners (6.9) and ship managers (6.8). Brokers returned the lowest rating at 6.3. Geographically, Europe (7.0) was ahead of Asia (6.6), but it was the Middle East which returned the highest figure, at 7.8. As to the extent to which enterprise and business risk was being managed effectively by their organisations, there was 7.1 out of 10.0, up from the rating of 7.0 recorded last time and indeed in the inaugural survey in August 2015. Charterers (8.8) expressed the highest level of confidence in this regard, followed by owners (7.3) and managers (6.9). In the previous survey, charterers recorded the lowest rating (6.5) of the main respondent types.

So what are seen as the principal risks to global shipping businesses? Again it seems that depends on which sector of the industry one fits into. The biggest risk was seen as demand trends and certainly this is the case with charterers, owners and brokers, a result which is of course perfectly logical. Managers on the other hand see competition as the biggest risk. Geographically, demand trends were the number one concern in Europe, Asia and the Middle East, while respondents in Latin America and North America identified competition as posing the highest level of risk.

Respondents to the survey generally felt that the level of risk likely to impact on their businesses was liable to remain unchanged in the next year but there are certain exceptions which give an insight into how the overall control of the industry is perceived. These exceptions include ballast water management legislation, cyber security, geopolitics, operating costs and other changes to laws and regulations. Ballast water management is seen as an unavoidable expense required to protect the environment, whilst cyber security is no doubt something which most companies are extremely concerned about, particularly following the ‘Petya’ ransomware attack on Maersk Line in June of this year.

Auditing of risk was reviewed by a stand-alone survey question addressed only to publicly traded companies which revealed that 80% of such organisations had a dedicated audit committee in place. Respondents in two-thirds of those companies, meanwhile, confirmed that their audit committees met on a quarterly basis to discuss risks, while 22% reported that such meetings were held annually. Michael Simms, Partner at Moore Stephens, comments:

“Embedding proper and effective risk management controls into daily operating procedures is a huge challenge for companies in the shipping sector, where high risk levels are an accepted and fundamental part of the industry. This is particularly the case, as is now, when the industry is ultra-competitive and grappling with an imbalance in tonnage supply and demand, and when wider global economic conditions remain extremely tough.

“In such a scenario, it may be tempting for companies to take their eye off their exposure to risk in pursuit of retaining or securing new business. And although the survey suggests that is not the case, it also reveals that the standard of risk awareness and response capability in many shipping companies is below the required levels.

“The good news is that there is greater acknowledgement that sound enterprise and business risk management is contributing to the success of those shipping organisations which responded to our survey. More companies are now formally documenting the way in which such risk is managed, with a healthy level of involvement by senior management. Moreover, there has been a noticeable increase in the deployment of third-party software to manage exposure to risk.

“But the survey results show that there is still room for improvement. There remains a need for companies engaged in the shipping industry to up their game in terms of implementing effective corporate governance systems, monitoring procedures and controls throughout their organisations, because the level of risk is not only increasing but also changing in nature.

“The factors identified by respondents to the survey as being most likely to result in a material misstatement in their accounts were unsurprising – particularly claims estimates and impairment. The same is true of factors posing an increased level of risk to business over the next 12 months, including operating costs, ballast water management legislation, and cyber security.

“There is nothing new about the challenge posed by operating costs, which are as old as shipping itself. Such costs may have fallen over the past four recorded years, but it is unlikely that this will continue, particularly given the need to meet increasingly onerous legislative and regulatory demands, and continually escalating crew costs. But the need to invest heavily in measures to preserve the environment, and to protect against the threat of cyber-attack, are more recent developments which change the risk landscape for the shipping industry.

A synopsis of the survey can be seen here.