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Shipping: On a high - Views on News from Equitymaster
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  • Aug 25, 2000

    Shipping: On a high

    Wondering why GE Shipping’s share price is hitting new highs everyday? Freight rates have been hitting new highs on the back of buoyant world trade, rising oil demand and growing environmental concerns. The Baltic Freight index has touched 1,650 points last month compared to 850 during FY99.

    The recovery in the Asian economies and the continued strength in the US economy have resulted in both the Time Charter Earnings (TCE) and freight rates firming up considerably. For instance, the average earning per-day-per-ship in the tanker market has gone up from US $ 10,000 in FY99 to as much as US $ 32,000 in FY00, a growth of 220%. The Clarksea Index, which indicates freight rates on 52 routes for tankers, bulkers, gas and container ships, has also gone up from US $ 10,000 to US $ 20,000 per day per ship compared to the previous year. The container freight rates is currently at US $ 13,000 (US $ 7,500 in FY99).

    Gaining momentum...
    Period Baltic Freight Index change (%)
    Apr-95 2,333  
    Apr-96 1,462 -37%
    Apr-97 1,292 -12%
    Apr-98 998 -23%
    Apr-99 1,057 6%
    Apr-00 1,600 51%

    One of the main reasons for the upsurge in earnings is due to a surge in global trade. The world gross domestic product is expected to grow by 4% in current year backed by recovery in both Asia and Pacific region. Another reason is the shipwreck of the 24-year old tanker Erika off the coast of France last December that resulted in an oil spill. This led to a scrapping of old tonnage as the European Union introduced strict measures to curb old vessels from plying in EU waters. Scrapping of these vessels resulted in shortage of tonnage, which led to a firming up of freight rates.

    How does the Indian shipping scenario look?
    Indian shipping companies are in an expansion phase. Both Shipping Corporation of India (SCI) and The Great Eastern Shipping Company (Gesco) have laid out growth plans to cater to growing demand. Gesco has placed orders for two crude carriers and one Aframax while SCI has allocated Rs 18 bn for acquisition of 15 vessels (9 crude tankers, 3 dry-bulk vessels, 3 LNG vessels).

    Moreover, Liquefied Natural Gas (LNG) shipping is set to take off in India with an amendment to the LNG policy coming through in mid August. The policy has mandated a minimum 26% holding in joint ventures and transfer of technology to Indian companies. This is expected to give the Indian shipping companies an opportunity to participate in a high growth business area.

    However, the world order book indicates that fresh tonnages are expected to be delivered by second half of FY01. This may lead to fall in freight rates. But for the moment, the industry is riding high. Its time to take a re-look at Great Eastern and Shipping Corporation of India.



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