Shippers get some relief even as credit worsens: Moody's

The ratings agency also warns ships could go idle again but so far so good.

In 2010, the industry rebounded from the 2009 crisis, boosted by a 12% increase in container trade volumes and concerted efforts by players to reduce their operating costs. "While Moody's expects volumes to grow at a more moderate pace of 5-6% in 2011, it believes the positive growth momentum will aid the ongoing recovery of all the main operators," says Marco Vetulli, a Senior Vice President in Moody's Corporate Finance Group. "Nevertheless, issuers' credit metrics are likely to weaken slightly compared with 2010, which was a stellar year for the industry," adds Mr Vetulli.

While oversupply plagued the industry in 2009, Moody's expects supply to be broadly in line with demand in 2011. However, the reactivation of idle ships could upset this fragile balance. Industry dynamics are likely to remain fragile over the next decade as the industry is entering a more mature phase in its life cycle, characterised by lower growth rates. Moody's central scenario remains that of a sluggish rebound in advanced economies in 2011-2012, although the downside risks have recently heightened. "If the economic recoveries in these countries were to falter, it could pose a challenge for the industry. Against this backdrop, a disciplined investment approach by container shipping companies and a focus on improving efficiency will be key to enhancing operating performance," explains Mr Vetulli.

For 2011, Moody's believes that the following four factors will determine the credit quality of rated container shipping companies: (i) issuers' capital investment programmes and their ability to finance them; (ii) free cash flow generation, which will play a key role in helping players meet the contrasting needs of improving their financial profiles and making the necessary investments to maintain their market share; (iii) cost efficiency, because this will be key to issuers sustaining their operating margins -- and upside potential in their credit metrics -- in a maturing market; and (iv) liquidity.