Standard & Poor’s Ratings Services has explored the 2016 outlook for the global shipping industry and believes that global shipping companies, and drybulk and containership operators in particular, will continue to face difficult operating conditions over the coming year, characterised by fragile demand and chronic structural oversupply in the industry.
Slower economic growth in China and other developing countries, which import a large share of internationally traded commodities, will restrain ship utilisation and prevent a recovery in charter rates.
Plummeting oil prices have spurred oil trades and charter rates in the currently more stable tanker segment and also helped to reduce operating costs more widely, with container liners and ferry operators especially likely to continue to benefit from the low bunker bill.
However, given that an overly large global fleet is chasing too few cargo volumes, shipping charter rates remain at break-even or below operating costs in the drybulk and container industry segments.
Furthermore, the severe drop in oil prices has intensified uncertainty in the global economy, which could have a further knock-on effect on global demand for all shipping.
Despite already relatively low ratings on many of the 16 shipping companies that S&P rates globally, the vast majority of ratings range between the ‘BB’ and ‘B’ categories, and expectsthat rating activity will continue to be weighted towards dwngrades this year.
This would follow a number of negative rating actions already taken across the shipping portfolio in recent months, reflecting the impact of currently very weak industry conditions. Further rating downside could stem from weaker-than-forecast cargo volumes, owing to a sharper slowdown in Chinese economic growth than expected, a sudden rebound in oil prices, an inability to renew existing charters at profitable rates due to a protracted industry downturn, aggressive debt-funded ordering, and last but not least eroding liquidity.
Will shipping supply and demand likely reach a healthier balance in 2016?
S&P believes that ship operators will continue to face structural and chronic oversupply in their markets, because of (i) the large global fleet presently in the water, which is a result of deliveries of new ships that were ordered years ago when prospects were more promising; (ii) the continued race, particularly between container lines, for larger and more efficient vessels, and (iii) poor supply discipline among ship owners in general. Presently, overly large dry bulk and containership fleets in particular are chasing too few cargo volumes. Furthermore, the fading demand due to reduced growth from developing countries, such as China, that import a large share of internationally traded commodities, is restraining ship utilisation and charter rates from recovery. This is notably the case for dry bulkers and containerships, a trend that we believe will continue in 2016.
The container liners segment is experiencing severe freight-rate volatility and downward pressure on the primary and secondary routes that has intensified in recent months. The container shipping lines’ efforts to sustain periodic general freight rate increases are generally failing in an environment of low bunker prices and rapid deliveries of ultra-large containerships, which S&P expects will deepen persistent oversupply problems. Furthermore, the recent contraction of exports from Asia to Europe (attributed to slack demand in Europe) and slowed intra-Asian trades, will likely exacerbate the already strained situation in the container liner sector. On a positive note, cost pressures have eased sustainably following the drop in bunker prices, as bunker fuel is a container liner’s major cost item.
