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Shipping: The dredging opportunity - Views on News from Equitymaster
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  • Aug 14, 2007

    Shipping: The dredging opportunity

    After offshore, dredging seems to be the latest buzz among the shipping companies. Lured by the dredging opportunities in India, companies like Mercator Lines, Essar Shipping and Shipping Corporation of India are planning to foray into this segment. In this article, we take a brief look at the business and try to understand the overall opportunity.

    What is dredging?
    Dredging is the process of deepening shipping channel to improve navigation. According to Wikipedia "Dredging is an excavation activity or operation usually carried out at least partly underwater, in shallow seas or fresh water areas with the purpose of gathering up bottom sediments and disposing of them at a different location, mostly to keep waterways navigable". Dredging is of two types - capital (creating depths) and maintenance (maintaining depths). Dredging companies are generally hired by port trusts.

    What are the opportunities?
    Dredging business provides immense opportunity in India, with only two large dredging company operating in India - state-owned Dredging Corporation of India (DCI) and engineering and construction major L&T. While DCI is the largest dredging company in India, L&T entered this space by acquiring a majority stake in International Seaport Dredging, a subsidiary of Belgium-based Dredging International NV. The current dredging capacity in India is unable to meet the demands of ports and harbours, which have to contract for dredging with foreign flag vessels. Hiring foreign flag vessels is costlier as it involves mobilisation and demobilisation costs (cost of bringing a vessel from its current location and back) and hence provides an opportunity for domestic players. The huge dredging component of Rs 25 bn Sethusamudram Ship Channel Project (SSCP), envisaging a ship channel across the Palk Strait in Tamil Nadu, has evoked new interest among new players. Moreover, the dredging work at major and minor ports cannot be handled by the DCI alone.

    Government's dredging policy
    As per the new dredging policy announced by the government (w.e.f. from 1St April 2007 for the period of 3 years), all major ports shall invite open competitive bids for dredging works and Indian companies owing Indian flag dredgers, including DCI shall have the right of first refusal if the rate is within 10% of the lowest valid offer. This would apply to both maintenance and capital dredging works with sole exception of the maintenance dredging requirement of Kolkata Port for which separate instructions shall apply. Also if more than one company owing Indian flag dredger participates in the tender, the right of first refusal will go to that Indian company which has quoted the lowest rate and is within 10% of the lowest valid offer.

    What to expect?
    According to the Ministry of Shipping, the cargo handled by all ports in India is expected to grow at a compounded rate of 7.7% to 877 m tonnes by 2012. To meet the projected traffic, the government has come up with National Maritime Development Programme (NMDP). This coupled with favourable dredging policy of the government provides good opportunities for Indian dredging companies in the medium to long term.



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