Dry bulk and container shipping sectors are those most likely at risk of damage from the economic slowdown in China, while the tanker industry should prove to be resilient, according to a new report from Fitch Ratings.
Fitch Ratings said in a report published this week, “China’s slower growth and economic transition will pose significant risks for the shipping sector, which already faces overcapacity, weak freight rates and stretched financials.”
One of the big three ratings firms along with Standard & Poors and Moody’s, Fitch said, “These pressures will probably lead to bankruptcies among smaller unrated shippers and may drive consolidation. The impact, however, is likely to vary by segment, with dry bulk and potentially container shipping most at risk while tanker shipping is likely to fare better.”
The report came this week as Japan’s Daiichi Chuo Kisen Kaisha, a bulk shipping company, filed for reorganization under bankruptcy laws in Tokyo and New York.
”China accounts for two-thirds of global iron ore imports, 20 percent of world coal imports and 16 percent of global oil imports and that Asia (primarily China) was responsible for 40 percent of container import volumes in 2014,” Fitch said in the report. “China’s slowing growth will therefore significantly cut demand for shipping services, while oversupply is rife in all segments except tanker shipping. This will put further pressure on freight rates.”
The report noted China’s coal imports plummeted by 15 percent in 2014 and a further 32 percent year-on-year in the first eight months of 2015, while China’s iron ore imports were marginally down in the first eight months of 2015.
The Baltic Dry Index, pegged at 900 on Tuesday, has ranged between 1,484 and 509 this year, hitting its all time low in February. In 2008, in the midst of a bubble in freight rates, it reached a high of 1,793.
Fitch said several small dry bulk shipping companies have filed for bankruptcy and more are likely, adding that “companies are also adapting to harsh sector fundamentals through consolidation,” pointing to the potential merger of two large Chinese shipping groups – China Ocean Shipping (Group) Company (COSCO) and China Shipping (Group) Company. Trading in the stocks of those two companies, which are involved in various shipping segments, have been suspended since August 10 amid speculation that they are being encouraged to combine by the Chinese government.
“Weaker data on exports and manufacturing in China and its economic transition increase uncertainty for container shipping,” said Fitch. “We expect global container demand growth to moderate to between 2 percent and 4 percent this year compared to our previous forecast of 4 percent -5 percent.
“The year-to-date average of the China (Export) Containerised Freight Index, which is a measure of freight rates, is down 16 percent compared to the same period last year. The supply/demand imbalance will be exacerbated by container shipping companies continuing to order mega-vessels. Because of their size, these vessels are largely limited to the Europe-Asia trading lane, contributing to the overcapacity.”
Fitch said it expects tanker shipping to be more resilient to China’s slowdown than other shipping segments due to better supply-demand fundamentals.
“The fall in oil prices has also strengthened demand despite slowing growth, with China’s oil consumption increasing 2.6 percent in the first eight months of this year,” the agency noted.
Fitch: Slow growth in China poses risks for shipping industry
