Shipping downgraded by Moody’s

Moody’s has revised its outlook for the global shipping industry down from positive to stable for the next 12-18 months on the back of peaking earnings during 2021. But it’s not all bad news as earnings are still expected to be “considerably higher” than pre-Covid-19 levels during the next 12 months.

In its Shipping — Global: 2022 Outlook, Moody’s investor Services gave five predictions for shipping’s prospects in 2022. First, while rates are expected to be high in 2022, ‘peak earnings’ are anticipated as demand stabilises and supply chains are untangled.

Second, fundamentals are expected remain strong: “Our outlook change is driven by tough comparisons with current data – the base effect – rather than a deteriorating business environment.”

Third, the tanker market is bottoming out. “Despite a projected recovery in oil demand, charter rates remain at very low levels. Our expectation is that earnings have troughed, and that the next 12 months will at least show a steady development for tanker carriers,” Moody’s said.

Four, strong conditions may persist as demand for goods and commodities remains high and will “stay robust” in 2022. That said, Moody’s believes that growth rates have also “most likely” peaked and will start to decelerate next year.

Fifth, capital spending will continue to increase. This will support continued orders for newer and more energy efficient ships in 2022 as shipping companies prepare for the gradual phase in of stricter environmental regulations from 2023.

“Earnings for container and dry bulk carriers are at record levels; however, we expect earnings to fall from their 2021 peak but remain high,” said Daniel Harlid, a vice president – senior analyst at Moody’s and the author of the report. “Still, limited deliveries of new vessels next year will help keep freight rates at elevated levels.”

Moody’s drivers for a stable outlook include vessel supply growth exceeding demand growth by no more than 2%, or demand growth exceeding supply growth by up to 2% and year-on-year EBITDA growth of -5% to 10%. This compares with the positive outlook drivers of expectations that the oversupply of vessels will decline materially and expectations that aggregate year-over-year EBITDA growth will exceed 10%.

Sector focus

In its analysis of ship ordering, Moody’s expects supply of new ships to be limited in 2022, with demand and supply set to be broadly in balance next year. “The limited amount of new vessels due for delivery during 2022 is credit positive for the global shipping industry,” noted the report. It forecasts the fleet at December 31, 2021 at 947 million deadweight for dry bulk, 24.56 million teu for containers and 531 million deadweight for tankers. Those forecasts rise to 972 million, 25.36 million and 543 million respectively for December 31, 2022. This equates to supply growth of 3%, 3% and 2% respectively across the three sectors. This is balanced against demand growth prospects of 3%-5%, 3%-4% and 3%.

Looking at the three main shipping sectors in turn, dry bulk demand is expected to remain high, underpinned by continued strong demand for commodities such as iron ore and coal. Moody’s notes that in the first nine months of 2021, global steel production was up 9% compared with the same period last year, boosting charter rates. Here, the current order book points to very limited new supply over the next three years, which will help keep freight rates high, Moody’s said.

For container shipping, the headline is that favourable demand/supply dynamics are expected for 2022. Again, limited deliveries of new vessels in 2022 will help keep freight rates elevated. However, there is downside risk from the high amount of new vessel orders placed in the last 12 months. “2023 and 2024 will see high supply growth,” notes Moody’s.

In analysis of market share, the analyst said the top five carriers have almost doubled their market share, consolidation which has helped to stabilise the market.

Tankers and finance

Turning to tankers, Moody’s expects demand to be supported by oil market conditions: “We expect the direction of business conditions for crude oil and product tankers to at least stay flat in 2022, underpinned by rising oil demand.” That said, global oil demand is expected to continue to recover from the 2020 pandemic lows. Sustained growth in the fleet size will, however, constrain the benefits of increasing oil demand. “Increasing oil demand has not translated into a meaningful improvement in the direction of business conditions for tanker owners and operators amid the fleets ongoing expansion. However, scrapping activity has picked up as the fleet of very large crude carriers ages,” Moody’s said. Freight rates for tankers have likely “troughed”, said Moody’s, but signs of improvements in charter rates “remain limited so far”.

Lastly, Moody’s considered the credit landscape in 2022 in its review. It highlighted debt levels that have climbed to unprecedented highs, which will create repayment risks where growth and earnings prospects weaken or liquidity wanes, policymakers will scale back fiscal and monetary support to varying degrees, and the solidifying of the global economic recovery but with diverging prospects across regions and sectors, among other factors.

But the key feature is that investments aimed at improving energy efficiency will grow over time as the industry travels on the path to net zero. “We believe capital spending will rise significantly during the current decade as shipping companies will need to replace part of their older fleets to become more energy efficient,” said Moody’s.
Source: Baltic Exchange