Ind-Ra: Outlook for Shipping Sector Remains Negative-to-Stable in FY16

India Ratings and Research (Ind-Ra) has maintained a negative-to-stable outlook for the shipping sector for the Fiscal Year 2016, saying that the performance of dry bulk and container operators will continue to be affected by weak global trade growth and persistent overcapacity.

The agency, however, believes that the tanker segment, which accounts for a majority of the Indian fleet, will remain an exception due to its better demand-supply situation. Global demand for tankers increased in 2HFY15 as the sharp drop in crude oil prices resulted in floating storage and onshore stockpiling, Ind-Ra says. This along with a rise in long haul trade due an increase in crude oil purchases from Africa and Latin America by Asian buyers led to an increase in spot freight and time charter rates which has continued into FY16.

However, Ind-Ra suggests that the rates will come down gradually during the year as demand will not sustain at the current artificially high levels. Nevertheless, the decline will be limited only to moderate levels as the fundamentals of the segment have improved over the last couple of years with an improving demand-supply scenario. Global capacity additions over the last two years have been only marginal (FY15: 2.2%; FY14: 0.2%).

The oversupply in the dry bulk segment, along with weaker demand conditions, particularly in China, kept freight rates low throughout FY15. The agency expects the segment to be under pressure again in FY16 as overcapacity will persist and demand growth will remain subdued.

Continued increase in global container capacity (FY15: 6.2%; FY14: 5.6%), coupled with subdued demand conditions, have led to a decline in container freight rates across most routes since the start of 2015. The agency expects freight rates to stay under pressure for the rest of FY16 as global capacity growth will continue to outstrip demand growth. As a result, the operating margins of container operators will decline in FY16.

The agency expects the leverage indicators of shipping companies to remain high in FY16 as performance across most segments will be subdued. The credit profile of companies in the tanker segment will not show a meaningful improvement, despite the segment’s better fundamentals, as most companies also have a sizeable presence in other segments which are expected to perform weakly.