Shipping prospects sink on high costs, oversupply - Fitch

Monday, 19 March 2012 00:00 - - {{hitsCtrl.values.hits}}

High fuel prices and an oversupply of ships will dampen earnings and profitability for global shipping operators over the coming 12 months, says Standard & Poor's Ratings Services in a new report "Top 10 Investor Questions: Oversupply And High Fuel Prices Sink Prospects For Global Shipping."

Bunker fuel, which constitutes the bulk of voyage expenses for shipping operators, is currently at a five-year high of about $720 per ton, compared with an average of about $630 per ton and a five-year low of $200 per ton in 2008.

Although many companies can insulate themselves from higher fuel prices by effective hedging arrangements or by operating under contracts in which the charterer pays the bunker fuel bill, some companies do bear bunker price risks, particularly container liners. "If bunker fuel prices don't stop rising, the pressures on shippers' operating expenses and hence on their bottom-line earnings will continue to mount," said Standard & Poor's credit analyst Izabela Listowska.

What's more, persistent industry overcapacity will impede their ability to recover fuel cost inflation, said the report says.Companies have expanded their fleets enormously over the past five years. The global tanker fleet has grown by 40%, the dry bulk fleet by 80%, and the container fleet by 90%, and orderbooks remain substantial, the report says.

"We expect that fleets will expand more slowly in the coming years, which should progressively prop up fleet utilization and, hence, charter rates," said Ms. Listowska. "Nevertheless, in view of historically poor supply discipline by industry players, there remains a risk that aggressive ordering will resume and destroy the potential equilibrium."

The weak industry conditions are weighing on the credit quality of rated ship operators, the reports says. Standard & Poor's has taken more than 20 negative rating or outlook actions on shipping firms over the past six months. "Half of the 14 shipping operators we rate globally have negative outlooks or are on CreditWatch with negative implications," said Ms. Listowska. "Clearly, this indicates that we might see further downgrades in the next 12-18 months if freight rates do not turnaround and/or lenders do not provide support through financial covenant amendments, waivers, or other actions to bolster liquidity."

The report also addresses the following potential downside risks for the shipping industry:

nEU and U.S. trade sanctions against Iran could hurt the oil tanker sector, particularly if this escalated to a disruption of crude oil supplies through the Strait of Hormuz.

nA hiccup in growth in Asia could harm shipping profits given that the industry has put great faith in China's ability to deliver progressively high economic growth.

nCompanies could find bank funding increasingly scarce and expensive, as European banks seek to cut their exposure to the shipping industry because of their own internal issues, such as scarcity of capital, changing regulatory capital rules, and relatively high funding costs. Alternative sources of funding, such as bond or equity markets, also currently appear limited.