Shipping

Stable outlook for global shipping industry

But recovery hampered by oversupply

The fundamental credit outlook for the global shipping industry is stable, reflecting the fact that conditions are unlikely to deteriorate further in the sector, says Moody's Investors Service in a new Industry Outlook.

However, the rating agency cautions that some segments, especially containers, will continue to under-perform throughout 2010.

"While the stable outlook is based on the belief that the main industry drivers are not likely to deteriorate further, we do not anticipate a full recovery of the main players to start until the end of 2011," said a Moody's Vice President-Senior Credit Officer and author of the report, said Marco Vetulli.

The Colombo port. Picture by Saliya Rupasinghe

"Furthermore, we believe the landscape of the industry may be quite different on the other side of the recovery."

In the report, Moody's notes that the long-term drivers of growth remain robust for shippers involved in transporting commodities such as coal, iron ore, oil and grain.

These sectors will absorb the number of new vessels scheduled to be on the water in the next few years relatively easily.

The rating agency says that although the outlook for container shipping is gloomier because of over-supply, there are other considerations supporting its stable outlook. These include a boost in demand due to an increase in containerisation, which in turn is driven by improvements in ports in emerging economies.

In addition, the three largest ports in the world - Singapore, Shanghai and Hong Kong - have all seen some pick-up in throughput in the past few months.

"Sustainable improvement will require growth in trade flows followed by reduction in capacity, both of which will take some time," cautions Vetulli.

"This means shipping industry dynamics could remain fragile for a number of quarters." However, the rating agency acknowledges that the stronger companies, which include many of its rated issuers, will recover more quickly than the industry average, which could significantly strengthen their market position. Overall, Moody's expects that credit metrics for shipping entities will remain subdued during the next 12 months and start to recover in 2011.

In addition, despite a slow return to more normal conditions in the financial markets, shipping finance will remain tight and banks will remain selective.

Shippers are ready to lift anchor

Global growth eventually should lift the shipping industry's fortunes, but investors will need a strong stomach until then.

DryShips, one of the largest shippers of commodities like iron ore and other "dry goods," releases its fourth-quarter results after the closing bell recently. The Athens company is expected to report earnings of 23 cents a share, down from 25 cents a year earlier, according to analysts polled by Thomson Reuters. Revenue is expected to rise 1 percent, to $215 million.

During the recession, DryShips' shares plunged below $3 from a high above $120 in late 2007, as investors soured on the debt-laden company.

The caution is understandable, because the industry is plagued by overcapacity from ships ordered during the boom that are just now being delivered.

The Baltic Dry Index, a measure of what shippers charge for hauling dry goods, is trading at about 2,700, a fraction of its peak of nearly 12,000 in 2008.

Other companies that move things by ship, such as Diana Shipping, reported mixed fourth-quarter results that disappointed the market. Diana Chief Executive Simeon Palios said the pipeline of dry-bulk vessels "will not be easily absorbed," even though global demand "is expected to be more solid" over the next two years.

Investors also are keeping a close eye on China, where imports of materials like iron ore surged last year as trade elsewhere floundered.

China was "the single most important factor in 2009 from preventing a disastrous year for the dry bulk market," according to Cantor Fitzgerald analysts. Any drop in Chinese demand now could knock the industry's rebound off course.

Shipping industry's 'best practices' deter piracy

At the intersection of the waterways leading to Africa, Asia and Europe, the coast of Somalia plays host to some of the most travelled shipping lanes on the globe, making transit of these pirate-infested waters a necessity for many commercial shipping companies.

With piracy now a growing concern and the global community unwilling to tolerate such behaviour, many nations have shown their commitment to the security of the maritime environment by deploying their navies, collectively or independently, to deter and disrupt these pirate activities.

Over the past 20 months these navies have patrolled the 1.1 million square miles of water-space surrounding Somalia, providing security to the region's sea lines of communication.

While these efforts have helped combat piracy, the military alone cannot prevent all pirate attacks, and commercial vessels must not depend solely upon military intervention to ensure their safe passage.

Now the commercial shipping industry is demonstrating that the most effective proven deterrent to piracy can be their own actions.

"Best Management Practices to Deter Piracy in the Gulf of Aden and off the Coast of Somalia (Version 2 - August 2009)" is an industry-developed publication that provides excellent guidance all commercial vessels should use to reduce the likelihood of becoming victims of piracy.

This advice is not based on theoretical data but proven effective deterrents taken from real-life scenarios. Whether it is recommended navigation routes, speeds and coastal stand-off distances, or on-board deterrents such as physical barriers and enhanced look-out watches, these continually-updated recommendations contain the industry's best management practices as derived from the piracy experiences of previous vessels, both good and bad.

Two recent piracy events highlight not only the importance of these best management practices, but also their effectiveness in a real-world scenario. The first event involved a vessel transiting the Gulf of Aden, North of Somalia when it was captured by pirates in early February.

The vessel placed itself in an unnecessarily dangerous position by travelling outside of the Internationally Recommended Transit Corridor and unable to benefit from increased patrols in that portion of the Gulf of Aden.

Unfortunately, the ship is under the control of pirate gangs, and its crew forced to await the outcomes of negotiations while anchored off the coast of Somalia.

Two days later a second vessel was attacked while also transiting the Gulf of Aden. Unlike the first, this vessel followed the best management practices advice, and made thorough preparations for sailing through these dangerous waters. She had registered with the Maritime Shipping Centre - Horn of Africa for updates on the Group Transit scheme, and was in contact with the United Kingdom Maritime Trade Organization for the latest update on areas of higher piracy risk prior to entering the IRTC.

The vessel had rigged fire hoses to push back any pirate boarding attempts, and razor wire was placed along the deck edges to block entry. Below decks, the crew mustered at a pre-determined safe area in order to account for themselves and ensure their collective safety.