The prospects of the beleaguered shipping industry are expected to be brighter in 2013 than they have been at any time since the 2008 financial crisis, with freight rates expected to rise for the first time in two years, across nearly all segments.
However, despite scrapping of orders and postponement of deliveries, supply-side challenges in the dry bulk segment and a slow revival of trade in the tanker segment will continue to weigh down freight rates.
Led by revival in China’s dry bulk trade and steady growth in India’s trade, dry bulk demand appears set for a healthy revival in 2013. Although freight rates are expected to be weighed down by fleet additions, improvement in freight rates will be a consequence of shipping companies increasing rates to ensure that they recover their operating and financing costs. At current freight rates, shipping companies are unable to operate their vessels profitably. Therefore, despite low utilisation rates of 72 per cent in 2013, a minor improvement from an estimated 71 per cent in 2012, dry bulk freight rates are expected to grow by 14-16 per cent in 2013.
This projected trend in freight rates, for the industry, will be a heartening sign and a far cry from the situation in 2012.Mirroring trends in the dry bulk segment, average tanker freight rates too are expected to revive in 2013, led by lower net fleet addition, and moderate improvement in global sea-borne POL trade. POL (petroleum, oil and lubricants) trade is expected to grow by 1 per cent and average tanker freight rates by 13-15 per cent in 2013.
Tanker freight rates dipped in 2012 on the back of a nearly 19 per cent fall in tanker time charter rates and a nearly 10 per cent decline in spot rates, primarily due to moderation in POL trade, coupled with surplus tanker capacities. In 2013, the still relatively lower consumption of petroleum products in developed economies and rising production of POL products in the U.S. will impact growth in demand in the tanker segment. However, subdued net fleet additions will lead to improved capacity utilisation.
Indian players have a high exposure to the POL segment: data available for 2011 shows that tankers comprise 62 per cent of the Indian shipping industry fleet, whereas dry bulk accounts for around 30 per cent and offshore, nearly 1 per cent. Utilisation rates of tankers too are expected to stabilise at 52-53 per cent in 2013, because of subdued growth in demand and lower fleet additions.
Profitability of the industry will remain under pressure with revenue expected to grow at a modest 2-3 per cent during 2012-13 and operating margins remaining more or less at 2011-12 levels due to aforementioned factors. In the medium-term, to beat the ongoing downturn, players are reducing their capacity and increasing exposure to the offshore segment — mainly rigs and offshore support services that are leased to deep sea exploration companies. We believe that the imperative of greater energy security and higher crude oil prices will propel investment in exploration and production. In India, capex spends by E&P players have risen over the last few years due to higher crude oil prices, increase in acreage made available for exploration under NELP (New Exploration Licensing Policy) rounds, and greater participation of private players, which has improved the pace of execution in exploration activities. As a result, demand for offshore shipping services has risen. What makes the segment attractive for the players is the fact that margins in the offshore segment, at 35-40 per cent, are far higher than those in the dry bulk and tanker segments.
For a better future, the industry will be praying for an early global economic recovery, particularly of major economies such as China, the U.S., and India. Even so, the most optimistic players too will not dream of a return to the halcyon days preceding the 2008 financial crisis, when the Baltic Dry index zoomed to levels that today seem stratospheric.
The author is Director, Crisil Research, a division of Crisil