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Shipping: In choppy waters - Views on News from Equitymaster
 
 
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  • Mar 15, 2002

    Shipping: In choppy waters

    Shipping companies have been in the limelight on the bourses over the last few months. The reason for this is the government's disinvestment programme of Shipping Corporation of India (SCI), for which all other private shipping companies have evinced interest. But the business prospects remain challenging in light of the slowdown in the world economy.

    World economy is expected to grow at around 2.6% in the current fiscal as compared to 4.2% levels last year. The reasons for this slowdown are multifold. Firstly, the US economy, which has been growing at a steadfast rate in the last decade, witnessed weaker consumer spending. This along with the technology crash affected business confidence, which is yet to show any positive signs. Secondly, sighting weakening oil demand, the Organisation of Petroleum Exporting Countries (OPEC) slashed crude throughput. Non-OPEC countries like Norway and Russia closely followed suit. Besides, industrial production in Japan and European Union (EU), some of the largest manufacturer of steel in the world, remained sluggish. Steel production, which has a direct bearing on dry bulk freight rate, has been flat in the last one year.

    Dry bulk rates trend...
    (US$/day) Dec'99 Dec'00 Oct'01 Nov'01 Dec'01
    Capesize 17,225 21,250 7,650 7,300 7,450
    Panamax 8,725 10,750 5,850 5,500 5,700
    Handymax 7,525 8,625 6,400 6,125 6,300
    Source: Fearnleys

    Given this backdrop, the fall in freight rates do not come as a surprise. Just to put things in perspective, very large crude carrier rates (VLCC), after touching US$ 72,133 per day levels in December 2000, were trading lower by 76% in December 2001. The scenario was similar across the tanker segment as well as dry bulk category.

    Freight rates also declined on account of one more reason. Since FY01 was one of the most profitable years for shipping companies, global majors went on an ordering spree. It is estimated that close to 20 million dead weight tonnage (mdwt), which is around 7% of existing tanker capacity, has been added to global capacity in the last year. World order book for dry bulk vessels also hint at an excessive supply scenario. Even after assuming a marginal improvement in world trade in the coming fiscal as expected by the International Monetary Fund (IMF), freight rates are not expected to increase significantly.

    Tanker deliveries...
    Year First half Second half Total (dwt)
    FY00 83 59 142 20,573
    FY01E 53 40 93 14,642
    FY02E 55 39 94 15,914
    FY03E 32 6 38 6,516
    Total 223 144 367 57,645
    % of existing fleet 6.6% 4.3% 10.9% 18.4%

    As far as Indian companies are concerned, they have also gone on an expansion spree. While GE Shipping has earmarked around Rs 10 bn as capital expenditure over the next three years, SCI has placed orders for around 10 vessels for a total consideration of Rs 12 bn. Apart from catering to domestic demand for crude oil, Indian shipping majors have explored international waters, which augurs well for them in the long run.

     

     

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