Thursday, 9 June 2011

No shipping recovery before 2013, says ICRA

The Indian shipping market is unlikely to recover before 2013, says a new report by ICRA, an associate of the international credit rating agency Moody’s. The agency adds that credit profiles of Indian companies are unlikely to show meaningful improvement before calendar year 2013.

The bright spot in the shipping space may be the container segment, which ICRA believes is better placed than the rest of the industry, whose outlook will remain muted in the medium term because of slow recovery in freight rates, oversupply of global tonnage and lower fleet utilisation. The container segment, may in fact see fleet capacity keeping pace with growth in demand, particularly since more and more box ships are resorting to slow steaming, thus reducing available supply.

ICRA analysts K Ravichandran and Kunal Mittal said, “The cancellations, deferrals, lesser new contracting, recovery in international trade and concentrated effort by operators to reduce total vessel supply by extra slow steaming (ESS) facilitates improvement in average container freight rates.” Going further, they added, “The low ship idling and the continuation of ESS will prevent a collapse in the supply-demand balance like that seen in 2009 and also provide savings in bunker cost, thus improving the operational economics of container operators.”

The gloomier ICRA report for the broader segment is at odds with those from many other analysts who predict a recovery by the second half of next year. Many have taken heart from the spike in container rates last year, and, although they agree with the reasons ICRA outlines for a generally slower recovery, they say that the negatives are somewhat overstated in the report. The ICRA report, however, details the deep collapse in freight markets, where rates have declined by between 55-75 % from peak levels. It also points out that freight rates today “are close to their charter rates for the period from 2002 and 2003”.

ICRA seems to be even more pessimistic about the dry bulk segment, given the supply demand mismatch. It sees slightly better prospects for tankers, though, and adds that the offshore segment is decently placed in the next year or two. Major players in the industry, however, would continue to see their profitability shrink. “Companies that have comfortable cash flows, low gearing levels and large liquid reserves will be well placed to take advantage of lower vessel prices and to augment their capacity. Hence, liquidity and capital structure will remain the discriminating rating factors in the foreseeable future”, it said.

ICRA accepts that new sources of supply further away from consumption centres have meant longer steaming and an expansion of trade areas, factors that should assist recovery. Nonetheless, its analysts say that the net addition to fleets during 2011-12 would be significant and that world trade growth is unlikely to be able to absorb incremental tonnage capacity. As a consequence, any increase in freight rates would be modest and the slump may well be more prolonged than expected. 

ICRA therefore concludes that shipping markets will remain subdued in the near to medium term. While remaining optimistic on demand recovery, the agency feels that this will be offset by the oversupply overhang that threatens to plague Indian- and global- shipping for some time.

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