Global shipping industry to see rough seas over the next 12-18 months

"Industry conditions are likely to deteriorate over the next 12-18 months, with the dry-bulk segment likely to be the hardest hit in 2011 because of the large size of its order book," says Marco Vetulli, a Vice President -- Senior Credit Officer in Moody's Corporate Finance Group. 

"The current dry-bulk order book is equal to approximately 46% of the tonnage on the water, and around 80% of these vessels are due for delivery over the next two years, creating a supply-demand imbalance that will continue to depress freight rates," adds Mr Vetulli.

The dry-bulk companies that Moody's rates are among the most efficient operators in the industry, and are therefore better positioned to manage these issues compared with peers that have higher cost bases. Moody's expects that freight rates on average will be substantially lower in 2011 than in 2010, and consequently the degree of negative rating pressure that the players will face will depend on the degree of their spot-market exposure.

Despite the increase in oil demand over the past 18 months, 2011 is likely to be another challenging year for the tanker segment. Moody's believes that there is unlikely to be a sustained recovery in this segment until the latter half of 2012, or even 2013, when supply and demand become more balanced.

As with the other shipping segments, there are too many ships and not enough cargoes, notwithstanding the recent growth in daily oil demand. The end of a significant "contango" in the crude oil curve brought an end to floating storage, which had utilised many large crude carriers, reducing effective vessel supply. The return of these vessels to the spot fleet exacerbates the pressure on supply that deliveries in upcoming quarters will sustain.

While the oversupply of vessels is credit negative for tanker operators, Moody's sees no immediate downward pressure on the ratings of its rated entities. Although Moody's recently downgraded these issuers, those rating actions also factored in the companies' good liquidity profiles, which Moody's would expect to mitigate pressure on earnings during the weak demand environment of next year, or beyond.

Supply is likely to broadly match demand in the container segment in 2011, although the balance will be very fragile. While major industry players recorded acceptable financial performances in the first quarter of 2011, Moody's expects earnings to have come under pressure in the second quarter because of softening demand and the large number of scheduled vessel deliveries.

Nevertheless, Moody's expectations for H2 2011 remain neutral. However, Moody's believes the downside risks associated with oversupply in this segment have recently heightened on the back of a surge in orders for new vessels, which is a significant contributor to the negative outlook. Negative pressure on the ratings and/or outlooks of our rated entities may arise if excess capacity builds up.

Moody's believes that Japanese shipping conglomerates are being impacted to a lesser extent by the negative trends affecting other global shipping companies. This is because their scale, diversification and strong relationships with customers act as mitigating factors.

However, the earthquake and tsunami in Japan have disrupted freight flows, especially in the car carrier business, which is credit negative for conglomerates. Nevertheless, Moody's expects the effects of the disruption to be relatively short-lived and for volumes to recover to pre-earthquake levels in the fourth quarter of this year.