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Shipping: Challenges galore

Mar 30, 2002

After a bumper year (FY01), slowdown in world economy and sluggish industrial sector has had bearing on the shipping sector. While expectations are ripe for recovery in the US economy in the second half of the current fiscal, prospects for FY03 remain challenging for this sector. Nevertheless Indian shipping majors are on an expansion spree to capitalize on any upturn in the world economy. But before that, a brief understanding of demand drivers is essential to gauge future growth prospects of the industry. One of the sectors that mirror the trend in the world trade is the shipping sector. Since the industry is global in nature, performance of the three major economies viz. US, Japan and Europe are vital for the shipping industry. Broadly the sector could be divided into two segments namely, dry cargo and wet cargo. Dry cargo would typically mean raw materials used in manufacture of goods namely iron ore and bauxite (click here to understand more about the sector).

Cumulative 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%

Wet cargo, on the other hand, is basically crude and crude based product like petrol, diesel and other chemicals. Freight rates for both dry and wet cargo tend to increase when industrial activity gains momentum, consequently increasing tonnage demand. Currently, more than 60% of exports and imports are transported through water. At the same time, as simple economic states, if supply i.e. tonnage increases more than commensurate to demand, freight rates decline.

Given this backdrop, consider the trend in the shipping industry over the last two and a half years. FY01 was a bumper year for the sector, with freight rates touching historically high levels in mid FY01. This was well supported by a buoyant world trade scenario, which increased by more than 4% during the same period. Per day earnings of crude tankers, notably, touched 20-years high levels. This is apparent from the FY01 performance of the Indian shipping majors like GE Shipping (Gesco) and Shipping Corporation of India (SCI). Excluding adjustments for extraordinary items (primarily income from sale of ships), Gesco reported a 141% rise in net profits in FY01. Similarly, SCI reported almost 111% growth in profits in the same period.

But since then there has been shipping industry witnessed a downward trend. All started with the slowdown in the US economy, which percolated into other economies like South East Asian countries that are heavily dependent on exports (predominantly to US). Japan and Europe have their own internal issues that have been hampering growth and the current fiscal was no exception. Sluggish world trade and industrial sector also had a bearing on crude demand. With crude prices falling, OPEC was forced to cut output to maintain prices around the comfort level of US$ 22 per barrel. Nevertheless, lack of demand resulted in crude prices touching US$ 16 per barrel levels in 3QFY02. As a result, demand for tankers has remained lacklustre during the year.

Baltic indices
Segment Dec'00 Sep'01 Oct'01 Nov'01 Dec'01
Handymax - 7,334 6,896 6,782 6,844
Panamax 1,555 734 845 867 874
Capesize 2,195 1,102 970 981 976
Baltic Dry Index 1,600 952 861 868 871

However, industry sources opine that there are certain factors, which could result in higher demand for tonnage in the coming years. Globally, oil majors have been increasing their presence in developing countries by setting up refining capacities. As a result, increasingly, supply of crude is expected to shift more towards developing countries than developed majors like US, which was the case hitherto. A typical example would be India itself. On one hand, demand for product tankers in India is expected to decline in light of new refining capacities being set up. At the same time, going forward, crude demand is expected to rise (key raw material for refineries). This effectively means a change in trade patterns.

Besides, the sinking of Erika near the French coast in FY00 has forced the international shipping regulator to tighten safety standards. Accordingly, with effect from FY05, single hull tankers above 26 years of age have been barred from plying international waters. By FY15, the regulator has proposed to scrap single hull tankers altogether. Consensus estimates suggest that close to 25%-30% of existing tanker tonnage are single hull based ones. Though world order book for fresh tonnage has been on the rise, industry expects this scrapping to neutralize to a certain extent.

As far as the dry bulk segment is concerned, prospects are closely linked to the steel industry. To that extent, prospects remain challenging for this segment. The segment should grow by atleast 6% to maintain the freight rates at the current level, which is unlikely. But the Indian shipping industry is concentrating on the crude segment and companies like Shipping Corporation of India (SCI) have gone a step ahead by venturing into liquefied natural gas (LNG) transportation. Since LNG transportation contracts are typically for atleast 20 years, this will reduce volatility in earnings.

Given this backdrop, while Indian shipping majors have enough room to improve on their margins, revenue growth prospects remains challenging. All in all, it is turning to be a demanding year ahead for the shipping sector.

  

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