Ratings specialist Moody’s has seen reasons to be cheerful in its short term outlook for the shipping industry altering its outlook from ‘Negative’ to ‘Stable’. But a myriad of concerns remain meaning that the award of the sought-after ‘Positive’ outlook is still some way off reports Carly Fields, Baltic Exchange editor.

By
Carly Fields,
Baltic Exchange Editor

Adding to the weight of support for improving shipping fortunes, ratings house Moody’s Investor Services has changed its outlook for shipping from ‘Negative’ to ‘Stable’.

The move is based on EBITDA growth and stabilisation of the industry, albeit at a low level.

“This outlook reflects our expectations for the fundamental business conditions in the industry over the next 12 to 18 months,” said Moody’s.“The revision reflects our expectation that the global industry’s aggregate EBITDA will rise by mid-single digits in percentage terms year-over-year in 2014, in line with our -5% to 10% growth range for a stable outlook.”

The industry outlook had been negative since June 2011. A negative industry outlook indicates that fundamental business conditions will worsen, while a stable industry outlook indicates that conditions are not expected to change significantly.

In its latest research the agency acknowledges the continuing issue of overcapacity, but stresses that it believes that industry conditions are “at a trough” and that the supply-demand gap will “not worsen materially”.

Moody’s expects that the supply of vessels will exceed demand by no more than 2% or that demand will exceed supply by up to 2%. However, the agency pulls no punches when it says that if the supply-demand gap widens beyond that 2% band it will consider returning to a negative outlook for the global shipping industry. The outlook could also revert to negative if there are signs that the industry’s aggregate EBITDA will decline by over 5%.

“Downside risks remain high as the order book continues to increase and economic growth in China may be slowing,” it warned.

Downside risks remain high as the order book continues to increase and economic growth in China may be slowing

Fuel fix

A driver for the expected EBITDA growth is the falling bunker price, now nearer to $600 per ton rather than the $700+ per ton recorded in February 2012.

“The lower prices, combined with slow steaming and the use of newer and more efficient vessels, have reduced shippers’ fuel costs, contributing to earnings growth.”

In an assessment of market conditions, the agency describes the sector as “tepid but not getting worse”. This is supported by early signs of improvement in freight rates for dry bulk, which is tempered by instability in the container market and stagnating rates in the tanker sector.“While there is significant volatility, the average daily spot rates for capesize vessels since late 2013 have fluctuated between about $10,000 and $35,000 per day, compared to rates of less than $5,000 a year ago.

“Freight rates in the container segment remain under pressure and we expect them to remain volatile in the next 12-18 months. Market discipline through actively managing supply by postponing and cancelling deliveries, scrapping the oldest and most inefficient vessels, idling vessels and slow steaming would help stem further meaningful deterioration in box rates for container ship operators.

“For crude tankers, there is not enough GDP growth for demand to absorb the current oversupply. As a result, we do not expect meaningful sustained increases in spot rates in the next 12-18 months.”

On the latter point, Moody’s has expressed concern that the supply of ships continues to outstrip demand – perceived as a challenge for at least the next year.

Beyond this, the hope is that stronger growth in global GDP and fewer orders for new ships will allow demand to outstrip supply, driving freight rates up for all sectors.

The elusive ‘Positive’ rating will only be given if the amount of vessel oversupply “declines materially” and if the industry’s aggregate EBITDA growth exceeds 10%.