Ind-Ra Maintains Negative-to-Stable Outlook on Shipping Sector

India Ratings and Research (Ind-Ra) has maintained a negative-to-stable outlook for the shipping sector for FY16. The agency expects the performance of dry bulk and container operators to continue to be affected by weak global trade growth and persistent overcapacity, while the offshore segment will face the negative impact of lower crude oil prices. 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.

Ind-Ra has also assigned sub-sector outlooks for FY16 as follows:

Stable Outlook for Tanker Segment: Global demand for tankers increased in 2HFY15 as the sharp drop in crude oil prices resulted in floating storage and onshore stockpiling. 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. The rates however 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%).

Negative Outlook for Offshore Segment: Exploration and production companies globally have suspended or curtailed expansion plans due to lower crude oil prices, which has impacted the demand for vessels in the offshore segment, leading to lower day rates and utilisation levels globally. The operating performance of companies in the segment is thus likely to weaken in FY16. Companies servicing state-owned enterprises will also be affected in FY16 even though state-owned oil companies are likely to continue offshore activities albeit at a lower intensity. This is because charter rates with shipping companies will be renegotiated at lower levels.

Negative Outlook for Dry Bulk Segment: 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.

Negative Outlook for Container Segment: 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.

Impact on Credit Profiles: The agency expects the leverage indicators of shipping companies to remain high in FY16 as performance across most segments will be subdued. The credit metrics of companies in the offshore segment will weaken in FY16 as their margins are expected to decline. The credit profile of companies in the tanker segment will also 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.

OUTLOOK SENSITIVITIES

Higher Capacity Additions: A higher-than-expected capacity addition in the tanker segment could lead to the outlook for the segment being revised to negative.

Absorption of Capacity: An improvement in trade activity leading to an improvement in the demand-supply scenario could lead to a revision in the outlook for the container and dry-bulk segments to stable.

Recovery in Crude Oil Prices: An increase in crude oil prices leading to an improvement in charter rates and the utilisation levels of offshore vessels could lead to a revision in the outlook for the offshore segment to stable.

Powered by Capital Market - Live News