- All the major shipping segments like dry bulk, containers, and tanker segments have witnessed sharp volatility in charter rates in the last six months
- Any sustained improvement will depend on recovery in global economic activity; and demand for commodities and container trade
The shipping sector has been facing turbulence in the current year due to the Covid-19 pandemic and the impact of containment measures adopted by major economies, which has weighed down on the demand. While demand contraction had happened across major segments like dry bulk, tankers, and containers, the charter rates have seen steep volatility. While, the tanker segment (crude as well as products) had witnessed a sharp increase during March and April, due to an increase in demand for storage amid contango situation in oil prices and touched all-time high rates, however with the weakening of the contango situation, the storage play petered out and there has been a steep decline in rates subsequently as the regular demand for transportation remains subdued. On the other hand, with the easing of containment measures and some pickup in economic activity and demand, especially from China, there has been a recovery in dry bulk rates in the last three months. Further, despite the demand remaining subdued for the container segment, there has been a sharp increase in rates in the last two months, which can be attributed to supply management by liners. Hence, even though the demand outlook remains muted for the current year, the charter rates have been volatile.
Mr. Sai Krishna, Assistant Vice President, and Associate Head, Corporate Ratings, ICRA Limited commented, “Despite the recovery in charter rates in some segments, ICRA believes that the charter rates will be exposed to volatility in the near term, as the demand outlook still remains muted. Any sustained improvement in charter rates will depend on stable recovery in economic activity and trade.”
While factors like supply management and an uptick in storage demand for crude and oil products can provide a spike in rates, the sustainability of the same remains uncertain. However, any supply-side correction in the form of increased scrapping should be beneficial for the sector during the recovery phase.
Regarding the impact on the domestic shipping sector, ICRA notes that the negative impact of Covid-19 on the domestic shipping sector is milder than anticipated by the market during H1 FY2021, due to the recovery in rates in the container and dry bulk segment, although the tanker segment was adversely impacted during Q2 FY2021 after witnessing healthy rates during Q1 FY2021.
“Nonetheless, given the uncertainty regarding rates going forward and demand outlook still being muted, the credit profile of Indian shipping companies may witness pressure during H2 FY2021, especially those which are highly leveraged. Companies with diversified fleet and low leverage will be better placed to withstand the volatility,” added Mr. K. Ravichandran, Senior VP & Group Head, Corporate Ratings, ICRA Limited.
