Tuesday , 26 March 2019
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Scope Ratings: Only carriers with biggest fleets will be profitable

Only the container shipping lines with the biggest fleets and the most efficient vessels are likely to turn a profit this year and meet longer-term challenges according to a report from credit rating agency Scope Ratings.

Asset optimisation – ensuring ships are always at sea and fully loaded – as well as size and diversification will determine carriers’ success in the next 18 months, it noted.

Higher costs, tighter environmental rules and worsening global trade relations risk offsetting buoyant demand and capacity reductions, said the report.

Citing the oil price as a current problem for owners, Scope expects a rise of around 25% in bunker prices this year compared with 2017, squeezing thin profit margins despite robust global economic growth and buoyant trade, notably in Asia.

Denis Kuhn, analyst at Scope, said: “Strong demand is creating a better-than-expected supply-demand balance, but another headwind is the industry’s excess capacity which weighs on freight rates.”

A favourable demand outlook has not yet translated into visibly higher shipping rates, as supply has also been slightly higher than anticipated; mostly due to less capacity taken out of the industry via scrapping.

Kuhn added: “Scrapping should accelerate in H2 and 2019, easing the capacity glut.”

There are a number of factors that support this acceleration in scrapping, including new environmental regulations, capping sulphur emissions from 2020 and toughening up requirements for treating ballast water.

Increased crude oil and bunker prices and flat shipping rates will continue to put severe pressure on the operating profitability of older, less efficient vessels according to Scope.

This means that fleet efficiency and quality will become even more important over the next few quarters for container companies to be able to generate operating profits and maintain their credit-risk profiles.

Shrinking operating results will drive up leverage (typically measured by Net Debt/EBITDA) and may result in increased borrowing costs for shipping companies, the report added.

Longer term, potential disruption to global demand between the world’s major economies may hit global trade volumes but Scope is fairly sanguine about this.

Kuhn stated: “The net effect for shipping firms from further deterioration in relations between the US and its major trading partners – China and the EU included – could be less dramatic than it first looks.”

If consumers substitute imports from countries with increased tariffs for cheaper ones from other countries, the impact on overall trade volumes might be modest but will favour operators of large, diverse fleets able to adjust routes quickly to changing trade patterns.

For these reasons, alliance membership will be essential, the report stated.