Moody’s: Global shipping earnings forecast cut as supply set to outstrip demand

EBITDA forecast worsens, keeping outlook negative. We now expect the aggregate EBITDA of rated shipping companies to fall by around 16%-18% in 2020, widening from our previous projection of a drop of around 6%-10%. We expect the global economy to shrink in 2020 and its recovery to be long and bumpy. We think that supply is likely to exceed demand significantly in the dry bulk and container segments with tankers helped by a temporary dislocation in the oil market. Our outlook for the global shipping industry has been negative since March 2020.

The outlook for the dry bulk segment is negative. Although the sharp decline in the Baltic Dry Index (BDI), a measure of dry-bulk rates, has recently reversed, market conditions will continue to be highly volatile. The reduction in iron ore cargoes from Brazil in the aftermath of last year’s Vale S.A. (Ba1 stable) dam accident and significant new supply of vessels slated for delivery in 2020 also pose risks. These risks are only partially offset by the resumption of industrial activity in China.

The outlook for the container shipping segment remains negative. Still, positive signs are emerging following unprecedented capacity adjustments by the carriers, keeping freight rates above last year’s levels despite a significant decrease in the bunker
price. Nevertheless, this positive development could be challenged by a resurgence in infections, endangering fragile demand for finished and semifinished goods in advanced economies in North America and Europe. We expect the supply of new vessels in 2020 to be slightly lower than last year with further postponements and cancellations likely, but still exceeding the lacklustre demand.

The outlook for the tanker segment is stable. Tanker rates have benefitted tremendously from high demand for floating storage, but charter rates will return closer to long-run averages in the second half of the year as broad economic weakness finds its way into the tanker market. Positively, new vessel deliveries are reducing in 2020 after several years of overbuilding in the industry.

What would change the outlook. We would consider revising the outlook to stable if both the oversupply of vessels declines materially such that shipping supply growth does not exceed demand growth by more than 2% and year-over-year aggregate EBITDA growth appears likely to be between -5% and +10%. We would consider revising the outlook to positive if the oversupply of vessels declines materially and aggregate year-over-year EBITDA growth appears likely to exceed 10%.

Outlook for the global shipping industry remains negative
We are maintaining our negative outlook for the global shipping industry. This reflects our view that supply will significantly exceed demand in key shipping segments for the balance of 2020 and likely into 2021, and that the aggregate EBITDA of the shipping companies we rate globally will decline significantly over the next 12 to 18 months.

These expectations reflect quarantines and lockdown measures introduced in the wake of the coronavirus pandemic as well as the related global economic downturn. As Exhibit 1 shows, we expect both the comparable and the aggregate EBITDA of rated shipping companies to decline by around 16%-18% in 2020 compared with last year. Comparable EBITDA incorporates organic growth excluding M&A.

Previously we had forecast an EBITDA decline of around 6%-10% in 2020. Our more pessimistic view is largely based on the gloomier outlook for the global economy in 2020 and the likelihood that its recovery will be long and bumpy. We expect G-20 advanced economies collectively to contract 6.4% in 2020 before growing at 4.8% in 2021, while G-20 emerging markets will collectively contract 1.6% in 2020, followed by 5.9% growth in 2021.

Continued restrictions on the movement of people, as well as some goods, also bode ill for the global shipping industry’s prospects.

The global shipping industry is facing a number of challenges over the next 12-18 months, including geopolitical uncertainties, such as the US-China trade negotiations and the US-EU discussions. Although the introduction of the International Maritime Organization’s lower global sulphur cap on marine fuels (IMO 2020) from 1 January caused less disruption than we expected in the first quarter of 2020 in part because of the recent sharp decline in crude oil prices, the effects of this legislation are still filtering through. Two of the main options for companies to comply with IMO 2020 are to use low sulphur fuel, which is more expensive, or to outfit vessels with scrubbers, which are costly, to clean exhausts of excess sulphur while continuing to burn cheaper fuel oil.

While tonnage providers (companies that charter out their fleets) are less sensitive to changes in fuel expenses because these
costs are passed through to their customers in most cases, they can form a significant share of container liners’ cost bases. As Exhibit 2 shows, falling crude oil prices have led to substantial declines in both regular and low sulphur fuel oil prices. In the first quarter of 2020, container liners, such as A.P. Møller-Mærsk A/S (Maersk, Baa3 negative), CMA CGM S.A. (B2 negative), and Hapag-Lloyd AG (B1 negative), have been quite successful in passing on these costs to their customers. We also recently reduced our medium-term crude oil price assumptions to $45-$65/barrel (bbl), down from $50-$70/bbl. The price range reflects our view that oil prices will remain highly volatile, with periods outside the top or bottom ends of the range.

We expect global trade to contract by around 11.9% this year. Key reasons are the coronavirus-induced drop in consumer demand and investment in the second quarter, and disruptions along supply chains and shipping routes resulting from coronavirus lockdowns. Consumer demand will recover only gradually in the second half of the year. In addition, the pandemic will complicate and possibly delay US-China “phase two” trade negotiations, and UK-EU and US-EU negotiations. In the longer term, a move to more regional supply chains, which was already occurring in the auto and electronics sectors, could also accelerate, as well as further shifts toward domestic production of critical goods, such as pharmaceuticals and food. This is likely to lead to the reconfiguration of a number of shipping routes, although the ultimate effect on tonne-miles, a key revenue driver, is uncertain at this point. The crisis has also laid bare the vulnerabilities of just-in-time supply chain management and could prompt companies to consider moving supply chains closer to their final markets and building redundancies.
Source: Moody’s

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