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Shipping: Back to square one? - Views on News from Equitymaster
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  • Aug 20, 2001

    Shipping: Back to square one?

    After having risen sharply in FY01, the stock prices of both Great Eastern Shipping and Shipping Corporation of India have fallen by 25% and 57% from their highs. Both the Indian shipping majors are concentrating on the tanker segment. But given the fall in freight rates over the last six months, a favorable environment is lacking.

    Declining freight rates…
    Indices BFI* BFI-Sep** BFI-Oct Gas Index Product Index Tanker Index
    Jan-01 1,570 1,545 1,550 1,558 3,221 3,769
    Aug-01 1,000 1,050 1,050 1,081 1,734 1,472
    change(%) -36.3% -32.0% -32.3% -30.6% -46.2% -60.9%
    * Baltic Freight Index spot
    ** Indicates forward freight rates for respective months

    The tanker rates have been under extreme pressure for quite some time in light of slowing global economy, a proposed cut in crude output by the Organisation of Petroleum Exporting Countries (OPEC) and rising fleet delivery. Let us look at each of these factors individually.

    The world economy is expected to grow by 2%-2.5% in the current year as compared to around 4% last year. The slowing economy affects the shipping industry as industrial production tumbles, manufacturing companies cut back their production due to lesser demand, which in turn affect raw material transportation. The South East Asian economies also are witnessing slow down due to falling exports (these economies basically rely on exports, predominantly to the US).

    The sharp upturn in freight rates in FY01 also prompted shipping companies to increase capacity. The order book levels went up alarmingly towards the end of FY01 (they have stabilised since then). If one were to look at the tanker segment (including crude, chemical and product tankers but excluding the very large crude carrier (VLCC)), the existing fleet size is close to 2,791 ships with the aggregate capacity of 296 million dwt (dead weight tonnage). Almost 15% of the existing fleet size and 20% of dwt have already been ordered and the delivery period varies between FY02 and FY03. The International Oil Agency expects oil demand to go up only by 1.8% in the current financial year. So, this substantial rise in new delivery could further pressurize freight rates and consequently margins.

    OPEC, meanwhile, has plans to cut crude output despite current crude prices of around US$ 25.5 levels. If this were to happen, there will be lesser crude to transport. So the shipping companies have to contend with lower demand, rising deliveries and cut in oil production. If one were to look at the bulk carrier segment, the Baltic Freight Index is currently trading at 1,000 levels, almost the same levels before the boom. Even shipping companies are of the view that the freight rates witnessed in mid FY01 will never be witnessed again for some time. So, prospects are not promising indeed.



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