Moody’s holds negative outlook for global shipping industry in 2017

The credit rating agency said container shipping companies will continue to face oversupply, and profitability could be put under even more pressure if bunker fuel prices increase.    Moody’s Investors Service holds a negative outlook for the global shipping industry in 2017, reflecting the continued oversupply of ships and a 7-10 percent decline in earnings before interest, taxes, depreciation and amortization.
   Container shipping companies will continue to face oversupply, and profitability could be put under even more pressure if bunker fuel prices increase, the credit rating agency said.
   Since late 2015, the industry has had very weak freight rates, Moody’s said, noting how the “sustainability and magnitude of recent rate increases remain uncertain.”
   Moody’s, which attributed the low freight rates to excess vessel and slot capacity across the fleet and a decline in fuel surcharges with the sustained lower costs of fuel, said it predicts “supply growth will continue to outpace demand growth and pressure freight rates.”
   Bunker fuel prices will remain low, and Moody’s believes operators will have difficultly passing on higher fuel costs in an over-supplied market.
   While consolidation in container shipping continues and may reduce price competition over time, Moody’s said that a lasting improvement in rates is not likely in 2017.
   In dry bulk shipping, Moody’s believes freight rates will remain low due to subdued demand, but that deferred vessel deliveries, cancellations and scrapping will help curb net capacity growth.
   Meanwhile, Moody’s believes the North American railroad industry will be stable with flattening freight volumes and easing pricing pressure.
   Rail revenues are expected to grow between zero and 2.5 percent in the next year.
   “After a steep decline this year, freight volumes should stabilize near current levels, with core pricing rising between 2 percent and 2.5 percent as a result,” Moody’s said. “Coal shipments will bounce back from the recent plunge, though natural gas prices and the weather pose risks. Grain shipments should continue to show strong growth, while robust consumer spending could spur growth in intermodal.
   “Railroad operators have demonstrated the ability to adapt to changing demand conditions. Operating margins remained largely intact when freight demand deteriorated, while in the coming year, shareholder returns will demonstrate companies’ willingness to manage elevated leverage.”
   Airline profitability will weaken slightly in the year ahead, but Moody’s said the outlook for the global airline industry is stable for 2017.
   “Operating margin is expected to come in at around 9.5 percent, while operating profit will decline by about 11 percent. US airlines will see a 20 percent contraction in operating profit due mainly to increased labor costs, while Latin American carriers will see an 80 percent expansion on the back of improving economic activity and capacity discipline. Passenger demand will grow about 5.2 percent, trailing capacity expansion by about half a percentage point,” Moody’s said.
   “Growth in passenger demand will remain slow overall, due to lackluster global economic growth, geopolitical uncertainties and the threat of terrorism,” said Moody’s analyst Jonathan Root. “But increasing demand in developing markets, supported by rising disposable incomes and loosening regulations, will act as an offset.”