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Global shipping: Riding the tide! - Views on News from Equitymaster
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  • Mar 11, 2005

    Global shipping: Riding the tide!

    The year 2004 has been pretty volatile for the global shipping industry, including the Indian players, as freight rates were impacted by uncertain moods of the oil market and a natural disaster towards the end of the year. Rising global oil production and demand led to shipping companies ramping up capacities (especially tanker tonnage) on a fast footing. Consequently, tanker freight rates strengthened to their highest levels in the final quarter of the year (October-December 2004). Apart from the abovementioned factors, the Hurricane Ivan in the US, which knocked off around 500,000 barrels per day (bpd) of US production and led to long haul trades from the Middle East, also supported the upward movement of the rates.

    What pulled the growth?

    The reason for these high tanker rates is the continued strength in global demand for oil, which currently stands at 84.4 million barrels per day (mbpd). This is a strong 3% growth over the demand (82.1 mbpd) witnessed in the first quarter of the year. China and North America accounted for a majority of the YoY growth in oil demand. The strong increase in OPEC output from 27.9 mbpd to 34.0 mbpd (YoY growth of 22%!) also aided the strength in tanker freight rates for the shippers. As per the management of G.E. Shipping (GES), while the International Energy Agency (IEA) has forecasted oil demand to grow by 1.8% in 2005, the US Department of Energy projects a higher growth rate of 2.5%. Effectively, tanker demand could grow anywhere between 3.0%-4.5%. This promises a huge growth opportunity for global shipping companies, especially those operating in the tanker segment.

    Readying for the future!

    In anticipation of this rapid growth in global oil trade, most of the shipping companies in the world are not wasting any time in increasing their fleet size. As per Teekay Shipping, the world tanker fleet size grew by 1% QoQ and 4% YoY in the final quarter of 2004, to 334 million dead weight tonne (mdwt). In case of GE Shipping, at the end of 3QFY05, the company had a committed capex of US$ 350 m, to be spent through the first half of FY07. During this period, the company expects to take its shipping capacity to 3.3 mdwt, a strong growth of 18% from the current levels of 2.8 mdwt.

    Now, it must be noted here that, apart from anticipation of high demand going forward, the need for shipping companies to order for new ships also stems from the fact that they have to adhere to the stringent safety norms as prescribed by the IMO (International Maritime Organisation). According to the safety norms, around 32 mdwt (or 10%) of the existing world tanker fleet is expected to be banned from worldwide trading by April 2005 and a further 87 mdwt to be excluded by 2010.

    On the offshore front, on the back of high oil prices, global E&P (exploration and production) activities have been on a rise. The need to enhance strategic reserves and maintaining oil security has led to increased activity in the E&P market worldwide, including India. In fact, the Government of India's decision to conclude NELP-V in 4 months instead of 6 as in case of NELP-IV gives a clear indication of seriousness of ensuring oil security. In this light, ONGC has decided to spend US$ 2 bn on E&P activities and this is likely to be beneficial for players like GES.

    Good! But, what next?

    Despite the fact that shipping companies have benefited from high growth in tanker demand in the last year, we believe sustainability is still an issue. Higher crude prices could impact the global economic growth momentum, which in turn could slowdown oil demand. Another factor to watch out for is the performance of the Chinese economy. If China were to slowdown, on the margin, there could be oversupply of fleet in select regions of the shipping market. As a result, freight rates are vulnerable. Also, any ‘shock' in form of the US economy slowdown might have a negative impact on the shipping industry's and GES' performance in the future. Having said that, there is likely to be stability on the offshore side of the business, which would act as a cushion in case the shipping cycle weakens significantly in the future.



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    Aug 23, 2017 (Close)


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