Sub-sector outlooks for FY17 are as follows:
Stable Outlook for Tanker Segment: The agency expects the performance of the tanker segment to remain better than other segments in FY17 owing to healthy demand, manageable supply growth and continuation of the recent increase in long-haul shipments from West Africa to Asia. After the fall in crude oil prices, tanker charter rates had increased rapidly in 2015 owing to a higher crude oil output, strategic reserve stock-piling and floating storage. However, charter rates declined in 4QFY16 as the incentive of storing oil has reduced with oil prices remaining range-bound. The agency expects the charter rates to decline further in FY17; nevertheless the correction will be limited as demand for oil is likely to continue to grow at a healthy pace.
Negative Outlook for Offshore Segment: The agency does not expect a significant recovery in oil prices in FY17 and therefore expects offshore exploration activity to remain muted globally which will result in continued pressure on charter rates. Revenue of Indian companies which have deployed vessels on overseas waters declined during 9MFY16 as a result of the decline in demand for offshore drill ships, jack-up rigs and other support vessels which resulted in lower charter rates. Financial profiles of such companies are likely to weaken further in FY17. The agency expects Indian public sector units to continue offshore capex activities in FY17, however charter rates are likely to be renegotiated at lower levels when vessel contracts come up for renewal. Consequently, the financial profiles of companies catering largely to public sector units are also likely to deteriorate in FY17.
Negative Outlook for Dry Bulk Segment: The agency expects the dry-bulk to be the worst-performing segment among all the shipping segments in FY17. The slowdown in emerging and developing economies particularly in China has exacerbated the demand-supply mismatch in the dry-bulk segment. The agency expects freight rates to remain depressed in FY17 as Chinese demand remains subdued. Furthermore, growth in dry-bulk shipment volumes at Indian ports is also likely to remain limited in FY17 due to lesser imports of both coal and iron ore because of higher domestic production. Dry-bulk volumes at Indian ports (major and non-major) remained sluggish in 1HFY16 owing to the lower shipments of coal (1HFY16: 0.7%, FY15: 20.1%) due to the record domestic production by Coal India Limited. Also, iron ore shipments declined (1HFY16: negative 37.1%, FY15: 1.7%) due to lower imports.
Negative Outlook for Container Segment: The agency expects pressure on container charter rates to continue in FY17 on account of slow growth in global trade volumes coupled with continued capacity additions. Capacity additions in FY16 continued to outpace trade growth with global fleet capacity growing 6.8% yoy (FY15: 6.2%). Furthermore, the global order book as a % of outstanding capacity remained substantial (16.9%) indicating that further capacity is yet to come into the market. The agency does not expect the supply-demand gap to correct in the near term.
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Mixed Impact on Credit Metrics: Ind-Ra expects the credit metrics of companies operating solely in the offshore segment to deteriorate further in FY17. Companies which derive a majority of their revenue from the tanker segment saw an improvement in their margins and consequently credit metrics during 9MFY16. Entities having a larger exposure towards the tanker segment are likely to exhibit stable metrics in FY17. Nevertheless, leverage indicators of most shipping companies are expected to remain high in FY17 as performance across most segments will remain subdued.
Outlook Sensitivities
Demand-Supply Change: A higher-than-expected capacity addition in the tanker segment could lead to the outlook for the segment being revised to negative.
Improvement in Trade Activity: 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 capex activity by exploration and production companies leading to higher charter rates could lead to a revision in the outlook for the offshore segment to stable.
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