Revenue, margin of shipping cos to dip as charter rates retract

Mumbai, December 17, 2024: Domestic shipping companies are likely to see their declining trend in revenue continue with an on-year dip of 8-10% in fiscal 2026. This will be on account of softening of charter rates — for crude oil and petroleum products amid stagnant demand, and moderation in those for dry bulk carriers following fleet additions.
 
Revenue and margins, which came down last fiscal, continue to slide in the current fiscal after a robust 35% growth in fiscal 2023, when charter rates had surged (see Charts 1 and 2 in Annexure) as a result of disruption in global sea borne trade caused by the Russia-Ukraine confrontation and pent-up demand after the pandemic. A sharper decline in revenue is unlikely since the overall tonne-mileage remains healthy owing to long-haul travel routes adopted by ships amid the ongoing geopolitical conflicts (including the Red Sea crisis).
 
Lower revenue means operating margin will also fall to 32-34% next fiscal from over 40% last fiscal. It will still be higher than the cyclical average of 25-30% for the industry and vary by companies, depending on fleet and contract mix.
 
The credit profiles of shipping companies would however remain stable given modest capital expenditure (capex) plans.
 
A study of five shipping companies, which account for about half of the ~20 million metric tonne deadweight tonnage (DWT) of shipping fleet in India, indicates as much.
 
Fleets of domestic shipping companies are dominated by tankers that carry crude oil and clean petroleum products (~70% to total DWT), followed by dry bulk carriers hauling unpackaged commodities such as coal, iron ore and grains (~20%). The balance is distributed among container ships, gas carriers and others.
 
Charter rates correlate with global demand-supply dynamics. While those for crude and petroleum product tankers began on a firm footing this fiscal, they moderated in the second quarter due to lower consumption, leading to an average ~6% decline on-year in the first half. With this trend in rates expected to continue, the second half could see a steeper on-year decline, on a high base of previous fiscal caused by the Red Sea crisis.
 
Says Ankit Kedia, Director, CRISIL Ratings, “The current trend of softening in charter rates for crude and product tankers is likely to extend in next fiscal as global crude oil consumption is expected to grow a mere 1%. This could lead to an overall 8-10% on-year fall in revenue for shipping companies next fiscal. The continued rerouting of ships to avoid Red Sea route would, however, result in higher tonne-miles. This, coupled with low addition to the shipping fleet, will prevent any steep decline in charter rates over the next 12-15 months.”
 
Average charter rate for dry bulk carriers had almost doubled during the first half of this fiscal on back of growth in demand for key commodities, especially iron ore and coal (accounting for 40-45% of the global dry-bulk trade) and higher tonne-mile outpacing fleet growth. This will likely continue before charter rates soften next fiscal as additions to fleet are expected to be strong on the back of scheduled deliveries and healthy orderbook position of ~10% at yards.
This dip in charter rates would moderate the operating profitability of shipping companies.
 
Says Joanne Gonsalves, Associate Director, CRISIL Ratings, “The operating margin of shipping companies is likely to see 400-500 basis points contraction to 35-37% this fiscal and further to 32-34% next fiscal as charter rates normalise. Nonetheless, margins would continue to be remunerative and ensure a comfortable low-to-mid-teen return on capital. We expect the credit profiles to remain stable, on back of healthy cash flows and limited debt addition as no major capex in the form of fleet addition is planned.”