Ind-Ra: Early signs of stability emerging for the Indian Shipping industry; downside risks still remain

India Ratings & Research (Ind-Ra) has revised its outlook on the shipping sector for FY15 to negative to stable from negative. Many shipping companies had embarked on debt funded capex plans in 2007-08. Since then, global freight rates have dropped considerably due to over capacity across segments as well as moderation in demand growth which led to deterioration in the credit profiles of shipping companies globally. The agency believes that the credit profile of Indian corporates in the sector is unlikely to deteriorate further as the bulk of the ships owned by Indian shipping companies comprises of crude oil and product tankers (as on 30.09.2013: 61.9%), a segment in which freight rates are likely to remain at around current levels in FY15.

Global trade volumes were muted in the first half of 2013 and only picked up tentatively in the second half led by an improvement in industrial activity in the United States and the European economies. Therefore, seaborne trade in 2013 is expected to have grown at a similar rate as the 4.3% growth seen in 2012. The agency expects a similar growth rate for 2014. Bunker fuel prices continued to remain high in 2013, around the same levels as witnessed in 2012. The high rates continued to hinder the revival in the profitability of shipping companies globally even in segments where freight/charter rates had somewhat stabilised.

The overall traffic at Indian ports (major & non-major) grew by a modest 2.2% yoy in FY13 (FY12: 3.2%). Shipments of crude oil and petroleum products, containerised goods and coal which together accounted for 71.8% of the traffic at major Indian ports grew by 5.1% in FY13 (FY12: 1%). This was driven by an increase in shipments of crude oil and petroleum products as India's refining output grew and also due to an increase in inbound shipments of coal for electricity production and industrial activities. Container traffic (in TEU's), at major Indian ports remained subdued in FY13 and grew by a mere 0.8% (FY12: 1.2%) hurt by weak external demand for Indian goods as well as poor import demand due to the slowdown in the domestic economy. The modest performance continued in 1HFY14 as total traffic handled at major ports grew by 2.3% (1HFY13: negative 3.3%).

Tanker Segment: Per day charter rates across various vessel types in the tanker segment exhibited stability in the first half of 2013 and picked up in the second half driven by a rise in crude prices. Global fleet capacity (in dwt terms) in the crude oil segment increased by a mere 1.7% in 2013 (2012: 4.1%). Since the proportion of order book under construction at the end of 2013 declined to 17.3% (2012: 29.7%) and the global fleet order book continued to moderate, Ind-Ra does not expect a significant capacity addition in 2014-2015. As a result of this and the agency's base case expectation of brent crude prices between USD104/bbl to USD108/bbl, Ind-Ra expects global charter rates to remain at around current levels in FY15. Additionally, stable global oil consumption and continued demand from Indian oil refiners, as well as the reduction in the size of tanker fleets owned by Indian shipping companies, mainly due to scrapping of old vessels could stabilise operating margins for Indian corporates with a significant presence in the tanker segment.

Containership Segment: Container charter rates have broadly remained steady since 4Q11 despite a significant moderation in global trade volumes since 2011 which may be attributed to cooperative capacity management by major players in this sector. Ind-Ra believes that the tentative demand recovery in Europe and the U.S could drive up global container trade as well as outbound container shipment volumes from Indian ports in 2014. On one hand while this would increase freight demand, the significant capacity additions over 2014-15 would keep international rates depressed at around current levels.

Dry-Bulk Segment: China's weakening import demand for iron-ore and coal is expected to keep pressure on dry bulk freight rates in the near term. Additionally, order book as a proportion of outstanding global fleet capacity at the end of 2013 was at the same levels as that reported in 2012 (19.4%), suggesting that overcapacity is likely to continue in the near term. This will continue to pressure financials of Indian shipping companies with a substantial dry-bulk fleet size, in the near term.

Other Segments: Performance of the offshore segment (rigs and support vessels) is expected to be healthy as crude exploration activities increase and prices remain high. A few Indian shipping companies that operate on unconventional business models (such as on a cost-plus basis) are also likely to sustain their credit profiles at the current levels.

What Can Change The Outlook

Revision unlikely till FY16: Ind-Ra believes that given the current order book in most segments and the unlikelihood of a rapid revival in seaborne trade, a meaningful improvement in freight rates is not likely in the near term. A sustained growth in international trade led by increasing demand from Europe and the US could lead to an improvement in container volumes, however likely capacity additions will keep freight rates under check. Global oil consumption is expected to remain at around current levels and therefore a rapid increase in rates in the tanker segment also seems unlikely. The dry bulk segment will continue to be influenced by demand from China, which has slowed down recently and the large capacity additions will keep the freight rates under pressure in the near term. Therefore, an outlook upgrade to Stable is unlikely at least for the next one year.

Aggravated demand supply mismatch: A higher than anticipated capacity addition in the tanker segment or a moderation in global trade activity could lead to the outlook being revised back to negative.

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