zoomImage Courtesy: Hanjin Shipping

Muted demand growth will exacerbate overcapacity for the shipping sector in 2017, putting pressure on freight rates and driving further consolidation and defaults, according to Fitch Ratings.

Fitch expects performance in all segments to be under pressure and has therefore maintained its negative sector outlook.

However, tanker shipping will face slightly less stress than dry bulk and container shipping, according to Fitch.

Many container shipping and tanker shipping companies had sufficient cash to cover short-term maturities at their most recent reporting date, but they are still reliant on uninterrupted access to bank funding to cover negative free cash flow. This funding is even more critical for companies that are not able to cover their upcoming maturities.

Therefore, the filing for receivership in August by Korea-based Hanjin Shipping, the seventh-largest container shipping company in the world, may have far-reaching ramifications, according to Fitch.

In particular, creditors’ withdrawal of support may indicate a reassessment of the financing landscape, where secured bank funding for new vessels has remained relatively accessible even as market conditions have deteriorated.

Fitch expects more Mergers And Acquisitions (M&A) activity and defaults in the short and medium term. But these will only restore equilibrium and boost freight rates if they prompt capacity reduction.

In container shipping Fitch expects consolidation to affect companies across the entire segment, with smaller operators focusing on survival through increasing scale while market leaders such as Maersk Line defend their market position through M&A. Defaults are likely to be concentrated among companies with weak liquidity and challenges with access to bank funding, Fitch said.