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Set to cruise on perked up world trade - Views on News from Equitymaster
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  • Jul 8, 2000

    Set to cruise on perked up world trade

    After a rough patch during the Southeast Asian crises, lady luck seems to be smiling at the shipping sector. This is because, globally freight rates are moving up and the global trade scenario looks promising (Japan is staging a recovery, US economy is booming and prospects in South East Asian economy are encouraging). Added to this, the government looks keen to develop adequate infrastructure (i.e. ports) and is framing positive policies (tax exemption, subsidies etc) to revive this sector.

    The Indian shipping sector is truly global in nature as an astounding 90 percent of players are engaged in overseas shipping, 7 percent in coastal shipping and the remaining in offshore shipping. Dry cargo vessel account for more than 50 percent, while tankers account for 39 percent of the total dead weight tonnage (dwt) of vessels employed in overseas and coastal trade. Apart from the dry bulk and tanker segment, there are other kinds of ships such as offshore supply vessels, container ships, dry cargo ships. The average age of the Indian fleet is 15 years as against the world average of 18 years.

    The shipping barometer
    Year Gross additions
    grt m
    Decrease (%)
    Total Fleet
    grt m
    Decrease (%)
    1996 0.32 -63.6% 7.05 0.7%
    1997 0.17 -46.9% 6.88 -2.4%
    1998 0.25 47.1% 6.78 -1.5%
    1999 0.22 -12.0% 6.85 1.0%

    The current year has been a good one for this sector in terms of better realisations and demand scenario. The gross addition during financial year 2000 was at 46 ships of 0.59 million gross registered tonnage (grt) a rise of 155% compared to last year. The grt touched a high of 7.09 million tonnes at the end of February 2000. However, the total cargo handled by the shipping industry rose by a marginal 8 percent to 271.8 million tonnes. The country's major ports witnessed good traffic. Total traffic stood at 272 million tonnes, an impressive 8% growth compared to financial year 1999. This was backed by the significant growth in both exports (12.5%) and imports (10.5%) domestically as well.

    The coming years look even better for shipping. Improving traffic in most segments coupled with recovery in demand for commodities and economic improvement in Asia should give impetus to demand for tonnage.

    However, grt transported by Indian shipping companies, over a period of time has been on a declining trend. The share of Indian shipping sector in the total cargo transported worldwide is also decreasing consistently. The direct impact of this is visible from the tonnage targeted for every five-year plan and the tonnage achieved for the respective period. Right from the Ist five-year plan to the VIIIth five-year plan, the tonnage achieved is significantly less than the tonnage targeted.

    The Underachiever!
    (grt m) Targeted Achieved
    VIth plan 7,500 6,319
    VIIth plan 7,500 5,907
    VIIIth plan 7,000 6,916
    IXth plan 9,000 6,852

    On the upside, the Baltic Freight Index (the barometer of the freight rates in the dry bulk segment) is currently around 1,621 up sharply from the previous yearís level. The handymax index is around 1,161. The freight rates for both the tanker vessels and the cargo vessels are different and not dependent upon each other; rather the demand and supply of ships in the respective segments determine them. Basically it is the world trade scenario i.e. both the demand and supply of tonnage, that equates the freight rates ultimately. Importantly growth in the world gross domestic product has accelerated after the slowdown in financial year 98. With the economic recovery in the Asian region, the freight rates are expected to go up from the prevailing level.

    The Good news...
    Date Baltic freight Index change (y-o-y)
    Apr-95 2,333  
    Apr-96 1,462 -37.3%
    Apr-97 1,292 -11.6%
    Apr-98 998 -22.8%
    Apr-99 1,057 5.9%
    Apr-00 1,600 51.4%

    In June 2000, Rajya Sabha passed the Major Ports Trusts Bill enabling port trusts to form ventures with the private sector, including foreign ports. This would bring expertise and technology and thus improve the handling capacities of Indian ports. The government has appointed a new committee to give recommendations on improvising the shipping sector. This should improve the fund availability of the companies who have been primarily dependent on internal accruals and depreciation for their funds.

    With the OPECís decision to increase the output of crude, globally the prices have gone down to a sustainable level. With increase in output the demand for tankers should go up along with the World Scale index (WS). The market meanwhile has become upbeat after Shell sold its 1980 built, 81,000-dwt tanker for US$ 7.6 million in the scrap market. The sharp increase in domestic refining capacity and a pick up in oil exploration activity will benefit the off shore shipping lines in the coming year 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 from 37 million metric tonnes in financial year 99 to 55 million metric tonnes in financial year 2000. With all these favorable factors in place this sector is set to cruise on the buoyant world trade scenario.



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