Moody's downgrades outlook for shipping to negative due to COVID-19 pandemic

In the wake of coronavirus pandemic and deteriorating global economic outlook, ratings agency Moody's has changed its forecast for the shipping industry to negative for the next 12-18 months from stable.

"We have changed our outlook for the global shipping industry to negative from stable. This outlook reflects our expectations for the fundamental business conditions in the industry over the next 12 to 18 months," the agency said in a statement.

According to Moody's, the EBITDA of shipping companies will decline in 2020 amid sharply reduced demand for shipping services in the wake of the coronavirus.

"This is because of the expected impact of the outbreak on Chinese manufacturing output and demand for coal and iron ore in China, especially during the first half of 2020, as well as related economic disruption. As a result, we have changed the outlook for the global shipping industry to negative from stable," it said.

Moody's expects the EBITDA of rated shipping companies to decline by around 6-10 per cent in 2020 compared with EBITDA growth of almost 40 per cent in 2019.

The EBITDA of shipping companies globally could decline by 25-30 per cent, similar to levels last seen in 2016 when Hanjin Shipping Co went bankrupt in one of the largest recent failures in the sector, it said.

The agency had maintained a stable outlook for the global shipping industry since May 2017.

"We expect the supply-demand balance to tilt toward oversupply for the container shipping and dry bulk segments, especially in the first half of this year. The situation is more positive for tankers at the moment given the recent sharp drop in oil prices. We had previously expected demand and supply growth to be largely balanced across these three key shipping segments in 2020," Moody's said.

It further noted that the revised supply and demand forecasts reflects its expectations for the conditions in the specific industry sectors taking into account historical industry trends as well as the likely effect of the coronavirus.

The agency had recently revised down its 2020 baseline growth forecasts for all G-20 economies because it expect the coronavirus to hurt economic growth in many countries through first half of 2020 and to hamper trade.

Even if it has maintained a negative outlook for container segment, the recent drop in oil prices is a positive sign as it will help offset fuel costs, especially in light of the IMO 2020 low sulphur fuel regulations that came into effect in January, Moody's said.

According to the agency, some container liners have indicated that the activity in China is picking up, which is a positive, but we are also mindful of the potential for reduced commercial activity in Europe and North America as these regions battle the coronavirus.

"Although there are a number of large deliveries of new vessels anticipated in 2020, we would expect many of them to be postponed. Also, the outlook for the dry bulk segment has changed to negative from stable. China is the largest importer of dry bulk commodities and the sharp reduction of Chinese demand sent the Baltic Dry Index (BDI), a key benchmark for dry bulk shipping, toward historical lows," it said.

Moody's, however, noted that it would consider revising the outlook to stable if both the oversupply of vessels declines materially such that shipping supply growth does not exceed demand growth by more than two per cent and year-over-year EBITDA growth appears likely to be between -5 and +10 per cent.

"The industry outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the industry, but rather our assessment of the main direction of business fundamentals within the overall industry," it added.