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BDO: COVID-19 And Shipping

Shipping is a global industry and it relies on the safe passage of ships, seafarers and cargoes around the world. As COVID-19 escalates globally, shipping market intelligence is predicting a general downgrading of growth forecasts across individual shipping sectors and a weaker global GDP economic outlook. This is likely to impact shipping markets and put further pressure on shipping companies.

The impact so far has been on everyday operational issues including: restriction on seafarer changes and their wellbeing, restriction on vessel port calls, dry-docking delays, extended lay-ups, delay in the delivery of ships and the activation of contractual clauses. This has extended to major disruption to scheduling or suspension of services for ferry and cruise line operators and the question of when there will be a return of consumer confidence, which may impact future bookings for a longer period of time.

The recent oil price collapse has reduced fuel costs and has highlighted the narrowing spread between HSFO and LSFO, reducing premiums for eco or scrubber fitted vessels. It is difficult to predict the future spread due to the volatility in global oil supply and demand. Shipping companies who have committed to the installation of scrubbers are having to re-evaluate their earlier investment return scenarios.

The volatility in the spot price of oil has meant that it has turned “contango”, which means that the spot price of physical oil has been at a significant discount compared to the future price.  The impact of this seems be to that VLCCs have been used to store oil and it has significantly increased tanker charter rates. This may be short lived but there is tremendous volatility in the market at the moment. The decrease in the oil price will surely have a sharp negative impact on sentiment in the offshore markets.

The shipping industry has faced adversity for a number of years since the global financial crisis but the current circumstances will test their resilience even more than before. Supply chain interruption poses a huge challenge for many UK businesses and their management teams. If COVID-19 causes reduced economic activity in multiple sectors of the shipping industry and tips global economies into recession, the challenge will become even greater. Shipping companies need to build resilience and put in place appropriate contingency plans. Keeping a close eye on current and future cash flows and maintaining close contact with stakeholders are two key requirements for navigating through these uncertain times.
In addition to the UK Government’s announcement to provide assistance to UK businesses, it has also provided helpful guidance on the strategic management test relating to tonnage tax applicable to UK ship owners. In order to qualify for the UK tonnage tax regime, a company must both strategically and commercially manage its ships in the UK. If decisions have to be made by an international group at group level and not at UK board meetings as a result of COVID-19, HMRC has indicated that this will not mean that the UK companies fail the strategic management test.

Short-term issues
1. A general downgrading of growth forecasts across individual shipping sectors caused by the COVID-19 disruption around the world and a weaker global GDP economic outlook.
2. Operational issues persist in what is a global industry, including: crew changes, port calls, dry-docking delays, lay-ups, delivery of ships and the activation of contractual clauses.
3. Major disruption to scheduling or suspension of services for ferry and cruise line operators and the question of when there will be a return of consumer confidence, which may impact future bookings for a longer period of time.
4. The UK Government has provided helpful guidance on the strategic management test relating to tonnage tax applicable to UK ship owners. In order to qualify for the UK tonnage tax regime, a company must both strategically and commercially manage its ships in the UK. If decisions have to be made by an international group at group level and not at UK board meetings as a result of COVID-19, HMRC has indicated that this will not mean that the UK companies fail the strategic management test.

Long-term issues
1. The oil price collapse has reduced fuel costs and has highlighted the narrowing spread between HSFO and LSFO, reducing premiums for eco or scrubber fitted vessels. It is difficult to predict the future spread due to volatility in the global oil supply and demand. Whilst there has been a notable spike in tanker rates in recent weeks this may be short lived.
2. There has been a sharp negative impact on sentiment in the offshore markets from the oil price collapse.
3. Supply chain interruption poses a challenge for many UK businesses and their management teams. If the Coronavirus causes reduced economic activity in multiple sectors of the shipping industry and tips global economies into recession, the challenge will become even greater. Shipping companies need to build resilience and put in place appropriate contingency plans. Keeping a close eye on current and future cash flows and maintaining close contact with stakeholders are two key requirements for navigating through these uncertain times.
Source: BDO, Mike Simms – Partner & Head of Shipping

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