Fitch Ratings downgrades global shipping outlook for 2016 to negative

Fitch Ratings has revised the global shipping sector outlook for 2016 to negative from stable in 2015.

The rating agency expects muted global trade growth and the economic slowdown in emerging markets to exacerbate overcapacity, leading to declining and volatile freight rates.

But performance will vary across the segments, with dry-bulk and container shipping under pressure, while tanker and LNG shipping fare better.

Fitch believes that China’s slower growth and economic transition will pose particularly significant risks for the shipping sector due to its key role in global trade, accounting for two-thirds of global iron ore imports and 20% of world coal imports.

“Weaker demand growth will increase overcapacity, the key factor blighting the shipping sector’s recovery prospects and putting pressure on freight rates. We expect container shipping capacity to rise 6% in 2016 on top of a 9% increase in 2015, easily outpacing demand growth of 2% this year and 3%-4.5% in 2016,” Fitch said.

Shipping companies are expected to continue to implement defensive measures including cost-cutting, which will be helped by lower bunker prices, slow steaming, idling and the cancellation of sailings to achieve profitability.

However, according to Fitch, these measures are insufficient to lead to a protracted recovery in the sector. Rigorous capacity discipline along with a pick-up in demand would be necessary to reach a sustained equilibrium.

“We expect larger container shipping companies that successfully implemented cost-containment measures to remain profitable in 2016. But the financials of smaller, unrated, especially dry-bulk shippers will remain stretched, which will probably lead to more bankruptcies. Tanker shipping companies will outperform their peers in other segments due to more moderate fleet growth and healthy demand resulting from oil stockpiling and high refinery throughput due to low oil prices,” Fitch said.