Negative rating for global shipping sector

Monday, 27 June 2011 00:31 - - {{hitsCtrl.values.hits}}

The conditions in the shipping industry is likely to worsen in the next one and half years mainly due to a steady oversupply of vessels, according to a report by Moody’s.

The rating agency in an ‘Industry Outlook Update’ published last week said the dry-bulk shipping segment would be the hardest hit in 2011, because of the large size of its order book.

The current dry-bulk order book is equal to about 47 per cent of the tonnage on the water and about 45 per cent of these vessels are due for delivery over the next two years, the report stated.

However, the report stated that despite all this the demand for shipping services will remain solid in 2011 underpinned by positive trends in world trade.

The dry-bulk companies that Moody’s rates are among the most efficient operators in the industry and are therefore better positioned to manage these issues compared with peers that have higher cost bases.

However, Moody’s expects that freight rates on average will be substantially lower in 2011 than in 2010, and therefore the degree of negative rating pressure that the players could face will depend on the degree of their spot-market exposure.

The rating agency expects 2011 to be a challenging year for the tanker segment, despite increased demand for oil over the past 18 months.

“We believe there is unlikely to be a sustained recovery in this segment until the latter half of 2012, when supply and demand become more balanced,” it stated.

“The current oversupply is due to a large number of vessels that re-entered the market in the second half of 2010. These vessels had been used for floating storage during the economic downturn,” the report added.

Whilst oversupply of vessels is credit negative, Moody’s says there is no immediate additional downwards pressure on our ratings of the tanker companies, as the weakening of credit metrics due to deteriorations in financial performance were the drivers of the recent downgrades.

Overall, Moody’s expects supply to broadly match demand in the container shipping segment in 2011, although the balance will be very fragile.

Major industry players recorded solid financial performances in Q1 2011, although earnings are likely to come under pressure in Q2 because of softening demand and the large number of scheduled vessel deliveries.

Moreover, after a slowdown in capex in the containers shipping segment during 2010, orders for new vessels surged by 11 per cent between the end of January and the start of May 2011, a trend that looks set to continue.

Moody’s believes that if the intake of new orders continues to increase at the same rate over the next few months, it will trigger a drop in freight rates in 2012, posing a significant threat to all operators.

As a result, Moody’s believes that the downside risks associated with oversupply in this segment have recently heightened, which is a significant contributor to our negative outlook for this shipping segment.