Solid fundamentals expected to support tanker market in 2017 while other segments continue to suffer
The tanker segment will stand out amid challenging times for shipping companies in 2017, according to Fitch Group agency India Ratings and Research, known as Ind-Ra. The agency has provided a negative-to-stable outlook for the shipping sector in 2017 on the expectation of a varied performance across different sub-segments. In particular, the tanker segment is likely to perform better than other segments due to its sound fundamentals while further deterioration is expected in the dry bulk, off-shore and container segments next year, it says.
Healthy demand, manageable supply growth and an increase in long-haul trade due to the diversification of purchases by buyers in Asia are cited as factors that will lead to better performance of tankers in 2017. Globally, capacity additions have been limited and demand for vessels has remained strong.
Dry bulk, meanwhile, will continue to be under pressure in 2017. “The slowdown in emerging and developing economies, particularly in China, has exacerbated the demand-supply mismatch in the dry bulk segment,” says Ind-Ra. “The agency expects freight rates to remain depressed in FY17 as Chinese demand remains subdued.”
The container segment will also continue to deteriorate at a concerning pace, the agency says. Slow growth in global merchandise trade volumes coupled with continued capacity additions will continue to impact container charter rates across trade routes globally in 2017. Ind-Ra adds: “The agency does not expect the supply-demand gap to correct in the near term. As a result, pressure on charter rates is expected to continue.”
“With oil prices remaining range-bound, tanker demand has begun to normalise, and spot and charter rates have come off from the elevated levels witnessed earlier.”
Furthermore, there will be a mixed impact on credit metrics, according to Ind-Ra. The agency expects the credit metrics of companies operating solely in the offshore segment to deteriorate further in 2017, but tanker operators will fare better. “Companies which derive a majority of their revenue from the tanker segment saw an improvement in their margins and consequently credit metrics during late 2016,” it says. “Entities having a larger exposure towards the tanker segment are likely to exhibit stable metrics in 2017.”
Ind-Ra has identified a number of outlook sensitivities for 2017. These include demand-supply change, improvement in trade activity and recovery in crude oil prices.
A higher than expected addition of capacity in the tanker segment could lead to the outlook for the segment being, unsurprisingly, revised to negative, for example. While 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, just as an increase in crude oil prices – leading to an improvement in capex activity by exploration and production companies – could prompt a revision of the outlook for the offshore segment to stable.
Sluggish global trade growth also continues to be an issue. Fitch Ratings expects global gross domestic product, or GDP, to grow at 2.5% in 2016, a moderate pace according to Ind-Ra. On the back of this, “Ind-Ra believes the sluggishness in global seaborne trade will continue in 2017. The investment slowdown in China and sharp expenditure compression in major commodity-producing emerging markets are likely to continue to have a subdued impact on the world economy given that emerging markets now account for around 40% of world GDP.”
In addition, Ind-Ra has identified that bunker rates are likely to remain lower than historical levels providing support to the operating profits of shipping companies. “The decline in bunker fuel rates in line with falling crude prices has resulted in lower operating expenses for shipping operators.”
Returning to the one potential bright spot, Ind-Ra noted that demand for tankers, which had earlier received a boost from the fall in crude oil prices, began to normalise in the second half of 2016. “Earlier, the contango in the crude oil market had encouraged floating storage and also led to on-shore stockpiling,” it says. “Subsequently, with oil prices remaining range-bound, tanker demand has begun to normalise, and spot and charter rates have come off from the elevated levels witnessed earlier.” That said, the demand-supply scenario in the tanker segment is likely to remain better than in other segments, such as dry bulk and containers.
Global demand for crude oil and its products continues to grow, with the US Energy Information Administration predicting world liquid fuel consumption to increase by 1.2% in 2016 to 94.84bn barrels per day and, successively, to 96.06bn barrels per day in 2017. Furthermore, lower oil prices have resulted in an increase in Indian demand for oil imports. This, along with the additional refining capacities being set up by Indian refiners over the next three to four years, will maintain supportive demand conditions for tankers.