Backed by expectations that freight rates will continue to remain depressed due to the demand-supply imbalance caused by a net increase in capacity exceeding demand, Fitch Ratings said the 2011 outlook for shipping industry is negative. In a recently published report, it said that companies with a greater proportion of their ships on long-term charters also cannot expect to be completely protected against the prevailing low charter rates as most contracts have a tenor of one year and contract rates will be reset at prevailing low rates upon renegotiation. Leverage will continue to remain high as debt is likely to be refinanced given lower operating cash flows. The rating agency expects all segments of the shipping industry to face low freight rates in 2011. As at end-2010, the global order book position for new builds as a percentage of existing capacity was 46% for dry bulk segment, 28% for tankers and 26% for container carriers.
With these, additional capacities are expected to come on stream over 2011-2013 period and the global shipping industry over the next three years will continue to witness overcapacity and depressed freight rates. In the dry bulk segment, rates are expected to be range bound, given the volatility in demand for iron ore from China. China’s overall steel production is expected to go up by 7%-9% in 2011 and 5%-7% in 2012 and inefficient steel plants are expected to close down.