KUALA LUMPUR: The global shipping industry is facing tough times as they brace for mounting negative factors including high oil price, unrest in the Middle east and oversupply of vessels.
Moody's Investors Service said on Monday, March 7 that last week, oil prices reached their highest levels since August 2008 on fears that unrest in Libya will spill over into other large oil-producing nations in the region.'' Bunker fuel prices have risen over 25% since the start of the unrest in Africa and the Middle East.
The oil price surge has added further pressure on shipping companies, particularly liners and vessels leased out on a spot charter basis, as they face weak operating margins owing to the supply-demand imbalance seen in most parts of the shipping industry.
'If the unrest is prolonged or spreads to the major oil-producing countries in the region, it will reduce trade volume, the viability of routes, and lead to sustained higher bunker prices, all of which are credit negative for the global shipping industry,' it said.
Moody's said some shipping companies regularly enter into short-term financial derivatives contracts to reduce their exposure to fuel price fluctuations. The reason for such strategies is due to the depressed freight rates and limited ability to fully pass through higher fuel costs to charterers.
'Such hedging strategies, however, have proven to be tricky, as shipping companies might lock in high bunker fuel prices,' cautioned the ratings agency.
It also cited shipping companies such as MISC BHD [] (A3 stable) which had resorted to slow-steaming to reduce fuel usage, optimize voyage planning and routing, and deploy measures to monitor vessels' performance and fuel consumption.
Slow steaming refers to slowing down vessels to save fuel, while maintaining shipping schedules by adding vessels to routes.
However, Moody's warned that such savings are limited, as the extension of transit time is restricted by the time sensitivity of shipments. The risk of engine damage increases at extremely low steaming levels if a ship is not designed for slow steaming.
Meanwhile, the turmoil in the Middle East and Africa has shut down key ports in Egypt and Libya for varying periods of time, disrupting loading and unloading operations for shipping operators with established routes to the region.
Shipping companies such as Pacific International Lines (B1 stable), which have operations in that region, are monitoring the situation closely for possible contagion to nearby ports.
Libya, unlike Tunisia and Egypt, is an oil exporter, accounting for around 2% of global production. Reports indicate more than half of this has been taken off the market since the start of the uprising.
Consequently, petroleum and chemical tankers need to be redeployed elsewhere owing to the reduced output in Libya. This may be mildly positive for tanker rates as reduced oil shipments from Libya are likely to be replaced by higher output from other parts of the Middle East and West Africa, resulting in lengthened voyage distances to Europe and the US.
'However, the fundamental structural imbalance is still the key negative driver for the shipping industry. Besides the oversupply forecasted in the dry-bulk shipping industry 2 a similar demand and supply structural imbalance exist for liners and the tanker business over the next 12-18 months.
'Such pressures were evident in the weak performance of MISC Bhd's chemical, petroleum, and liner segments in its recently released fiscal third-quarter 2011 results,' it said.
Moody's Investors Service said on Monday, March 7 that last week, oil prices reached their highest levels since August 2008 on fears that unrest in Libya will spill over into other large oil-producing nations in the region.'' Bunker fuel prices have risen over 25% since the start of the unrest in Africa and the Middle East.
The oil price surge has added further pressure on shipping companies, particularly liners and vessels leased out on a spot charter basis, as they face weak operating margins owing to the supply-demand imbalance seen in most parts of the shipping industry.
'If the unrest is prolonged or spreads to the major oil-producing countries in the region, it will reduce trade volume, the viability of routes, and lead to sustained higher bunker prices, all of which are credit negative for the global shipping industry,' it said.
Moody's said some shipping companies regularly enter into short-term financial derivatives contracts to reduce their exposure to fuel price fluctuations. The reason for such strategies is due to the depressed freight rates and limited ability to fully pass through higher fuel costs to charterers.
'Such hedging strategies, however, have proven to be tricky, as shipping companies might lock in high bunker fuel prices,' cautioned the ratings agency.
It also cited shipping companies such as MISC BHD [] (A3 stable) which had resorted to slow-steaming to reduce fuel usage, optimize voyage planning and routing, and deploy measures to monitor vessels' performance and fuel consumption.
Slow steaming refers to slowing down vessels to save fuel, while maintaining shipping schedules by adding vessels to routes.
However, Moody's warned that such savings are limited, as the extension of transit time is restricted by the time sensitivity of shipments. The risk of engine damage increases at extremely low steaming levels if a ship is not designed for slow steaming.
Meanwhile, the turmoil in the Middle East and Africa has shut down key ports in Egypt and Libya for varying periods of time, disrupting loading and unloading operations for shipping operators with established routes to the region.
Shipping companies such as Pacific International Lines (B1 stable), which have operations in that region, are monitoring the situation closely for possible contagion to nearby ports.
Libya, unlike Tunisia and Egypt, is an oil exporter, accounting for around 2% of global production. Reports indicate more than half of this has been taken off the market since the start of the uprising.
Consequently, petroleum and chemical tankers need to be redeployed elsewhere owing to the reduced output in Libya. This may be mildly positive for tanker rates as reduced oil shipments from Libya are likely to be replaced by higher output from other parts of the Middle East and West Africa, resulting in lengthened voyage distances to Europe and the US.
'However, the fundamental structural imbalance is still the key negative driver for the shipping industry. Besides the oversupply forecasted in the dry-bulk shipping industry 2 a similar demand and supply structural imbalance exist for liners and the tanker business over the next 12-18 months.
'Such pressures were evident in the weak performance of MISC Bhd's chemical, petroleum, and liner segments in its recently released fiscal third-quarter 2011 results,' it said.
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