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Economic slowdown to hit ports the hardest – S & P

Seaport operations in the Asia-Pacific region are expected to suffer the strongest impact from the headwind of slowing economies in the region, Standard and Poor’s Ratings Services (S&P) said in its latest report.

In the report “Asia-Pacific Sector Outlook 4Q 2016: Net Negative Outlook Bias Rises to 13 percent from 11 percent,” S&P said across the region the ports sector is facing the strongest headwind with softening gross domestic product (GDP) growth.

In the short term, the report added, ports are expecting potential impact from the recent bankruptcy filing of South Korean cargo liner Hanjin Shipping.

S&P said shipping ports are faring the worst because of weak volume growth.

“Ports dedicated to commodity trades could benefit from the recent rebound of coal prices although this would reduce the downside risk rather than providing true upside,” S&P said.

S&P said it expects business conditions for other transportation subsectors such as road, airport and rail to remain broadly stable with some potential upside for rail operators exposed to commodity prices.

It, however, warned that for the ports subsector, the situation is more about “reducing downside risks.”

“The current negative rating bias is primarily because of the negative outlook on the China and Australia sovereign ratings, which impacts the ratings on state-owned enterprises,” the report added.

The report noted that in emerging Asia, the main risk “is a material slowdown since investments continue to be high and lumpy, with assets having limited ability to adjust.”

“The second risk is the tightening in credit markets as a result, which would further stretch balance sheets as earnings weaken,” it added.

Container shipping is also grappling with overcapacity, the report said.

It noted that capacity issues in container shipping freight are weighing on earnings despite the recent bankruptcy of Hanjin.

“Dry bulk shipping should be nearing a bottom, with volume recovery likely in 2017,” the report noted.

S&P added container shipping freight has been weak due to stagnant economies and persisting capacity pressure, which prompted consolidation and alliances among key global players.

“We expect container operators to remain under strong earnings pressure even after Hanjin Shipping’s filing for court protection,” it added.

In addition, S&P said, the tanker market is likely to weaken because of higher capacity pressure.

“The dry bulk shipping market has been at a historical low since the beginning of the year. We believe this is near a bottom and that the market is likely to show gradual improvement given expectations of trade volume recovery and tighter capacity control in 2017,” it added.

It said a slowdown of the Chinese economy that is worse than expected “has a low possibility of occuring but (it will have a) high impact, particularly on the dry bulk and tanker segments.”

“China is by far the largest global importer of iron ore and one of the largest importers of coal. Furthermore, China’s share of global container volumes is likely about 30 percent,” it added.

Most shipping companies are leveraged and heavily rely on accessing capital markets or bank facilities, it noted.

“Over the past two to three years, some shipping companies spent substantially on strategic new fleets, backed by narrower order books and attractive vessel prices,” S&P added.

It said it anticipates “these trends to continue” in the coming years.