After an eventful 2001, thanks to historically high freight rates, the slowdown in the global economy and a weak global trade does not augur well for shipping companies. While revenue growth has been impressive for shipping companies in the first half of the current fiscal, it might not be the case in the coming quarters.
If one were to look at the consolidated first half performance of GE Shipping (GESHIP) and Shipping Corporation of India (SCI), revenues rose by 17.7% to Rs 21,663 m. There has been a sharp rise in operating margins from 23% in 1HFY01 to 32% in 1HFY02 and this was primarily led by an improved performance from SCI. While consolidated profits have risen by 53.1% in 1HFY02, if one were to adjust for higher income in the corresponding period last year, profits have actually gone up by 154.9%. This is despite higher provisioning for deferred taxation, which resulted in a 410% rise in tax outflow.
In light of a weakening industrial production in three of the major economies viz. US, EU and Japan, crude prices touched at low of US$ 18 per barrel in 2QFY02. Following this, the Organisation of Petroleum Exporting Countries (OPEC) cut crude output by around 1.5 m barrels a day. Non-OPEC majors like Russia and Norway followed suit and further reduced crude throughput so as to bring back crude prices to the comfort range of around US$ 22 per barrel. The attacks on the US in September 2001 also infused a fresh round of uncertainty and consequently global trade has been affected. A combination of these factors has had a significant effect on tanker rates, which has declined by more than 20%-25% since August.
There is not much to cheer about on the dry bulk market front also. Most of South East Asian economies and Japan are reeling under pressure and as a result freight rates have been on the decline. The International Monetary Fund (IMF) has projected a 2.3% growth in world trade as compared to more than 3.4% in FY01. With almost 12% of the existing fleet already ordered and tonnage addition projections in the range of 30 m dwt in FY02, freight rates could witness sharp decline. It is also estimated that for the current freight levels to sustain, demand for dry-bulk carriers should go up by 6%. But the actual demand projections are around 2.3%. Given this backdrop, earnings growth is expected to be slower in 2002 for both the shipping majors.
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