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Over-capacity& low freight rates hit

Over-capacity& low freight rates hit
With the shipping industry still sailing in troubled waters, Fitch Ratings has taken a negative outlook on it for the year 2010.

Over-capacity, low freight rates put shipping sector in troubled waters.

With the shipping industry still sailing in troubled waters, Fitch Ratings has taken a negative outlook on it for the year 2010. Due to excess capacity across tankers, bulk carriers and container ships, coupled with declining freight and charter rates, shipping industry in a daunting state. ?Demand for Indian shipping is going to remain subdued in 2010 and 2011 due to the decline in overall global trade volumes,? said the report. With global trade volumes expected to be range?bound, charter rates will be kept low and will pressurize the margins of the shipping companies. The shipping industry has undergone probably the worst phase during the economic slowdown last year. However, since March 2009, there have been significant improvements in freight rates including very large cargo carriers (VLCCs) and Aframax tankers.

Long?term charter contracts have reduced volatility to some extent, and provide some revenue visibility. And hence, with the fall and rise in volatility of the charter rates, shipping companies now prefer long?term contracts to hedge risk. Companies with long?term contracts have been shielded to some extent from the sharp decline. However, these contracts generally have a tenor of around one year, and it is likely that charter rates will see some reduction upon renewal.

In the year ahead, shipping industry will need to line up further capex as about half of the cargo ships under the Indian flag are to be phased out in 2010, due to the International Maritime Organisation"s (IMO) directive to replace single?hull ships with double?hulls. This coupled with older age of ships is a major factor contributing to the necessity for further capex this year.

However, most of the Indian companies have limited room to purchase new vessels, due to the lack of availability of funds and the reluctance of banks to lend to this sector. ?Order cancellations and postponements, and the phasing?out of single?hull vessels, have to some extent staggered the availability of excess capacity, but the global shipping market is bound to face excess supply over the medium term,? explained Fitch in its report.

Since 2008, there has been a decline in traffic handled at the ports vis-à-vis growth in tonnage capacity and port handling capacity. The gross tonnage remained flat during this period, and remained around the 9.3-9.4 million tonne range at December 2009. Fitch expects traffic volumes to remain range?bound in FY10 and FY11.

The modernisation of Indian ports has led to an increase in competition from the international vessels at the country"s domestic ports.


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