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Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. A higher level of economic growth would generally lead to higher demand for industrial raw materials, which in turn will boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be volatile.
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Freight rates and earnings of the shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth and geographical balance of trade (which determines the length of haul required), the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.
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The global shipping industry can be broadly classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal) and liners. Under liners, it has containers, MPP and Ro-Ros types of vessels. There are various benchmarks that determine freight rates for these segments. The prominent amongst them are Baltic Freight Index, Baltic Handymax Index (for dry bulk segment) and World Scale (for tankers).
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| Supply |
Determined by the addition to shipping capacity
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| Demand |
Closely related to growth in world trade.
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| Barriers to entry |
Highly capital intensive and adequate cash flows required for funding working capital requirements. Moreover, expertise and technical know-how are critical factors.
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| Bargaining power of suppliers |
Diminishing with gradual increase in fleet supply and intense global competition.
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| Bargaining power of customers |
High bargaining power as competition is high in the industry.
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| Competition |
Competition is price based. However, companies with younger fleet command a premium. |
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Even with an annual expansion rate in world shipbuilding of 16% to 20%, the fleet growth of 8.4 per cent 2007 was marginally lower than the estimated tonnage demand growth of 9 per cent.
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OPEC production cuts towards the end of 2006 and early 2007 in anticipation of slower demand growth and willingness of the refiners to cut down on the inventories in view of backwardation in oil prices resulted in decline in tanker earnings in the 1st half of the FY08. OPEC raised production in November, which led to increased imports by US refiners to replenish the depleted inventories, resulting in increased loadings from the Arabian Gulf. Overall, tanker rates in 2007, though healthy as compared to historical averages, fell during the middle of the year as a result of subdued demand emanating from high oil prices and an increasing world tanker fleet.
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The world tanker fleet increased to 387.7 mdwt at the end of the FY08, higher by 5% YoY then the 369.2 mdwt at the end of FY07. The tanker orderbook stood at about 159.9 mdwt or 41.2% of the fleet, at the end of March 2008.
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2007 was the strongest year ever for the dry bulk markets. Yearly average freight rates more than doubled compared to the previous year. The dry-bulk markets in 2007 were predominantly driven by the Chinese demand for commodities. Chinese imports of iron ore grew by 57.3 million tones (MT) over the 2006 level, totaling 383.6 MT, while steel production moved up 73 MT to 487 MT in 2007. India too registered a robust increase in steel production from 42 MT in 2006 to 49.5 MT in 2007.
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Surging demand for both coking coal and steam coal led to record waiting delays in Australian ports in the second quarter of FY08. Drought in Australia led to increased grain shipments from South America to Asia. Also, demand of cement clinker in the Middle East firmed up significantly in 2007. Against this, the world dry bulk fleet increased to 396.7 mdwt at the end of FY08, 7% YoY growth. Though the fleet growth was robust, it was not enough to service the trade growth adequately.
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After five years with persistent high economic growth it seems like 2008 is bringing a slow-down, initiated by the US subprime crisis. The global economy is projected to grow by about 4% in CY08 down from last year's 5.2%. The demand for dry bulk commodities is expected to grow by 4.5-5%. A total of 30.4 mdwt is due for delivery in CY08 resulting in a fleet growth of about 7%. Average earnings may therefore be slightly lower than FY08. However, due to periodic supply demand mismatches, sharp volatility in freight markets may continue during FY09 as well.
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International Energy Agency (IEA) expects that the average oil demand for CY08 in total will be 87.2 million barrels per day or a 1.5% growth over CY07, hence showing belief in continued demand growth. It is expected that the incremental demand for tankers will be approximately 3% to 4%. With a total of 40.5 mdwt of tankers to be delivered in CY08 and about 18 mdwt of removals expected, the net fleet growth in tankers in CY08 will be about 6%. Hence broadly the average earnings for tanker markets in FY09 may not far exceed the averages for FY08. However, on the larger size crude tankers, there is an upside potential in spot earnings due to tighter tonnage supply.
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The sharp increase in domestic refining capacity and a pick up in oil exploration activity globally will benefit the offshore shipping lines as demand for their services picks up. As a result of the commissioning of large domestic refining capacities, the import of crude is expected to jump in the future. This would benefit shipping majors.
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Following some big accidents in seas, environmental regulations have hardened for single hull tankers. The International Maritime Organistaion (IMO) has stipulated that all single hull ships be scrapped by 2010.
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Under investment in earlier years, surge in Chinese growth and scrapping of vessels built in 1970s have all created conditions for a strong market for tankers. Further, the gap in charter rates between single hull and double hull vessels is widening as more charterers prefer double hull tonnage and many states impose restrictions on single hull tonnage. In the coming years as single hull will be mandatorily required to be phased out, the demand for double bull tonnage will be strong.
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All major Indian ports are presently working at 100% capacity, whereas India further expects 8 to 9% growth rate. This would translate into an exponential rise in sea borne trade from current levels of about 400 MT to 900 MT by the year 2013. The Indian Government plans to develop new ports, as well as deepen the existing ports to absorb additional requirements.
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