The Market Monitor Minding the Nation's Business
By Luis Leoncio
The ports sector in the Asia-Pacific sector will suffer the strongest impact from the headwinds of slowing economies in the region, Standard and Poor’s Ratings Services (S&P) said in its latest report.
In its report titled “Asia-Pacific Sector Outlook 4Q 2016: Net Negative Outlook Bias Rises to 13 percent from 11 percent,” S&P said that across the region, the ports sector was facing the strongest headwind with softening gross domestic product (GDP) growth and potential short-term impact from the recent bankruptcy filing of the South Korean cargo liner Hanjin Shipping. Asia-Pacific continues to weigh on S&P Global Ratings’ outlook for credit quality across the region.
Despite some easing in the rate of slowdown, the lag effect from earlier periods of deceleration has translated into a worsening in the net outlook bias for the pool of Asia-Pacific issuers, according to the report.
“In particular, the continued slowdown in China and recent revisions to our outlooks on several sovereigns have contributed to the weakening,” said Terry Chan, a credit analyst at S&P Global Ratings.
Still-low commodity prices have kept a net half (-44 percent) of the ratings outlooks on metals and mining issuers and a net third (-36 percent) of oil and gas issuers on negative.
The property oversupply in China, despite rising prices, is contributing to a net quarter (-26 percent) of outlooks on real-estate developer issuers being negative.
In contrast, the conservative profiles of REITs have kept the net negative outlook to just -7 percent.
A net 15 percent of building materials issuers are on negative, although admittedly this has more to do with company-specific challenges.
The general economic slowdown has caused businesses to be more prudent with capital expenditure. “This has driven the net outlook on capital goods to -19 percent and c
hemicals to -18 percent, although company-specific difficulties are the primary reason for the latter,” Chan said. S&P said shipping ports were 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 expected 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, issued a warning that for the ports subsector, the situation was 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 were 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 that 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 was 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 was worse than expected “has a low possibility of occurring 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 anticipated “these trends to continue” in the coming years.