Challenging environment in the container and tanker segments, while dry bulk segment showing signs of revival: ICRA
The global shipping sector has been facing a challenging and volatile environment post the 2008 financial crisis. Charter rates across almost all segments as well as the asset values have plummeted from the highs seen in 2008. Container freight rates fell by about 50% from early 2015 to mid-2016, before seeing a recovery to some extent in 2017. Crude tanker rates have on the other hand continued their downward journey, plummeting sharply in early 2018 to reach a 4-year low.
Elaborating this further, Mr. K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRAsays “For any meaningful recovery in the container and tanker charter rates, there needs to be rationalisation of fresh order-booking. The bigger shipping entities with stronger balance sheets and availability of funding lines continue to enhance their fleet as they look to benefit from the under-utilisation of Asian shipyards that can result in heavy discounts for new buildings. On the other hand, the cargo growth in these segments has remained muted and is unlikely to witness any significant uptick in the near term. On the bright side, the tanker industry has seen a much-needed spree of scrapping of old vessels in the first quarter of 2018 which needs to continue to reduce the supply side pressures.”
With regards to the domestic shipping companies, they have struggled during this period as most of them had carried out sizeable acquisitions 5-6 years back anticipating an uptick in the charter rates which has not fully materialised leading to subdued return indicators and debt coverage metrics. The profitability levels of the shipping companies are further facing pressures from the rising bunker costs which increased by 40%~50% over the past one-year period due to the increase in global crude prices.
On the other hand, the dry bulk segment has been a bright spot in an otherwise struggling industry with relatively lower order-booking and improvement in global economy lending support to the charter rates which have seen an upward trend over the past two years. The order book-to-fleet ratio in the dry bulk segment remains currently low at 9%~10% that would help in reducing the supply side excess capacities.
Adds Mr. Abhishek Dafria, Assistant Vice President & Co-Head, Corporate Ratings, ICRA, “While there are positive signs for a sustained resurgence in the dry bulk segment, we remain cautious to some degree since the improving outlook in this segment and increase in prices of second-hand vessels could revive the appetite for new-buildings. We are, however, expecting the overall shipping sector to see some respite in the medium term following the implementation of stricter regulations by International Maritime Organisation concerning ballast water management (which was effective from September 2017 and is to be phased in over 1-2 year period) and use of fuel with lower sulphur content (effective from July 2020) which would lead to scrapping of older vessels that would reduce the supply side pressures at least for the immediate future.”
The domestic shipping companies should further benefit over the long term from the initiatives of the Government of India, such as the Sagarmala Programme, to expand the coastal and inland waterways. However, challenges would remain in terms of mobilisation of the investments in a timely manner, allocation and availability of adequate budgetary support as well as a conducive business environment and tangible incentives for the private players.
