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TEXT-Fitch:Price rationality is only a start for shipping revival
Fri, Jun 08 09:28 AM EDT

(The following statement was released by the rating agency)

June 08 - CMA CGM's results are evidence that the world's largest container shipping companies are beginning to reap the benefit of a more rational approach to pricing. But they also illustrate how far the industry has to go before a full return to health, which Fitch Ratings thinks is unlikely before 2014.

The performance of container shipping through the downturn has been weak and erratic. Freight prices have fluctuated wildly. Major players have regularly reported negative operating profits since the crisis hit the industry in the second half of 2008.

Moreover, the container shipping industry is still struggling to recover from a frenzy of new ship orders in 2008, with a large number of new vessels expected to enter the world fleets in 2012-13. Attempts by some of the major players to address this oversupply - by retiring older vessels, delaying orders, or reducing capacity on key routes - have had limited impact. We don't expect overcapacity to begin to reverse until 2014 at the earliest.

The situation had been worsened by a focus among the world's three-largest shipping companies on gaining or maintaining market share, often at the expense of price. We believe this has run its course and that companies are shifting their focus more towards profitability. The size of freight-rate increases in March-May 2012 is evidence of this and should contribute to an improvement on Q112's negative EBITDA for the larger players.

Container shipping's underperformance has not only been due to deteriorating freight rates and weak demand - operating costs have gone up too. Although bunker (fuel) prices have begun to fall from a peak of around 720USD/tonne in Q112 to around 600USD/tonne in April and May, they remain high by historic standards. Fuel costs are likely to continue to depress margins in the near-term.

Against this background, many banks have withdrawn from ship financing, which is capital-intensive and high risk. We don't anticipate this being a major problem for the banks involved and the risk of losses due to non-performance is generally factored into their ratings.

Cyclicality, the capex intensive nature of the industry as well as high operating leverage and sensitivity to volatile bunker prices, mean companies in the shipping sector tend to be rated in the sub-investment grade ('BB' and 'B' or lower) rating categories. Larger companies (or conglomerates with significant shipping activities) with the benefit of diversity of shipping lines, stable profitability and strong market positions can be investment grade, but are rarely rated above the 'BBB' rating category.


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