Moody's has changed its outlook for the global shipping industry to stable from negative on April 30. This outlook reflects Moody's expectations for the fundamental business conditions in the industry over the next 12 to 18 months.
Moody's believes that the global industry's aggregate EBITDA will rise by mid-single digits in percentage terms year-over-year in 2014, in line with the -5% to 10% growth range for a stable outlook. While overcapacity remains a concern, industry conditions are at a trough and that the supply-demand gap will not worsen materially. Moody's expects the supply of vessels will exceed demand by no more than 2% or that demand will exceed supply by up to 2%. The industry outlook had been negative since June 2011.
Cost reductions drive EBITDA growth. Bunker fuel prices have receded to around $600 per ton from their peak of nearly $740 per ton in February 2012. The lower prices, combined with slow steaming and the use of newer and more efficient vessels, have reduced shippers' fuel costs, contributing to earnings growth. Slow steaming, which involves operating vessels at reduced engine power, can also help absorb excess capacity as it requires more vessels to maintain schedules. Companies have been cutting other operating expenses, which also supports EBITDA growth.
Market conditions remain tepid but are not getting worse. Freight rates for the dry-bulk segment are showing some signs of improvement but remain at very low levels. While there is significant volatility, the average daily spot rates for Capesize vessels since late 2013 have fluctuated between about $10,000 and $35,000 per day, compared to rates of less than $5,000 a year ago. Freight rates in the container segment remain under pressure and are expected to remain volatile in the next 12-18 months. Market discipline through actively managing supply by postponing and cancelling deliveries, scrapping the oldest and most inefficient vessels, idling vessels and slow steaming would help stem further meaningful deterioration in box rates for container ship operators. For crude tankers, there is not enough GDP growth for demand to absorb the current oversupply. As a result, Moody's does not expect meaningful sustained increases in spot rates in the next 12-18 months.
Industry outlook – outlook update: global shipping industry: change to stable outlook for shipping sector reflects EBITDA growth
Oversupply remains a concern. It is expected the supply of vessels will continue to outstrip demand for most shipping services over the next 12-18 months. Beyond this outlook period, continued demand and EBITDA growth will be contingent on stronger growth in global GDP and fewer orders for new ships, to allow demand to outstrip supply, driving stronger freight rates across vessel classes.
Changing the outlook for the global shipping industry back to negative is well possible if signs appear that the supply-demand gap is likely to widen such that supply exceeds demand by more than 2%. The outlook could also revert to negative if see signs appear that the industry's aggregate EBITDA will decline by over 5%. Downside risks remain high as the order book continues to increase and economic growth in China may be slowing.
A positive outlook is possible if the amount of vessel oversupply declines materially and if the industry's aggregate EBITDA growth exceeds 10%.
Note: a negative industry outlook indicates that fundamental business conditions will worsen. A positive outlook indicates fundamental business conditions are expected to improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent a forward-looking view on conditions that factor into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely, on average.
