Credit ratings agency Fitch has affirmed a negative outlook for the Indian shipping industry in 2012 on account of lower international trade.

The 2012 outlook for the Indian shipping industry is negative, Fitch said in a statement today.

“Unfavourable demand-supply dynamics in the global shipping industry driven by low global trading levels accompanied by fleet additions across segments in 2012 would be a significant drag on the revival of charter (hiring) rates during the year,” it said.

Cash flows

Indian shipping companies are likely to report reduced cash flows in 2012 from a fall in revenues and profitability, which will weaken their credit metrics.

Those companies, which made large debt-funded capex programmes during 2008-2009 (when asset valuations had peaked), are likely to face challenges in debt servicing, considering the typically short tenure of rupee terms loans availed for ship acquisitions.

Even companies that availed dollar loans are likely to face liquidity pressures in 2012, considering the rupee depreciation, which has translated into higher cash outflows for debt servicing, it added.

Moreover, the current trend of risk aversion and deleveraging (paying off existing debt on balance sheets) by European banks reduce the likelihood of existing dollar loans being refinanced.

Charter rates

Fitch expects charter rates in 2012 to be constrained across segments — dry bulk, tankers and container vessels.

The agency believes that the dry bulk segment could be particularly impacted in the Indian scenario as over 50 per cent of capacity additions to the Indian fleet in FY’12-FY’14 (financial year ending March 31) are likely to be in this segment.

In the container segment, although global demand for vessels is also expected to be lower in 2012 than in 2011, given the probable drop in trade of manufactured goods, the decline in charter rates is not expected to be drastic as this segment often exhibits traits of an oligopolistic market.

According to the agency, the tanker segment could see a slight revival in rates in the middle of 2012 in view of the reduced inventory levels of crude oil in the largest importing countries towards end of 2011. This is likely to translate into higher purchases of crude and a slight recovery in rates during the first half of the year.

However, the increase in rates may not be sustained over the entire year in the absence of a meaningful revival in global industrial activity.

With charter rates remaining low and bunker fuel costs expected to remain firm in 2012, Fitch believes that the operating margins of shipping companies will be under pressure.

A revision in the outlook to stable is unlikely in the next two years given the overcapacity that is expected to persist in the medium-term.

Related Topics