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Shipping Sector Analysis Report 

[Key Points | Financial Year '16 | Prospects | Sector Do's and dont's]

  • Shipping is a global industry and its prospects are intricately linked to the level of economic activity in the world. A higher/lower level of industrial activity generally leads to higher/lower demand for industrial raw materials. This in turn boosts/adversely impacts imports and exports. For instance, a higher level of economic growth would generally mean higher demand for industrial raw materials, which in turn will boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be highly volatile.
  • The industry acts as a primary means of international transport of any essential commodity. The global shipping industry can be broadly classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal) and liners (like containers and others). Further, there are various benchmarks that determine freight rates for these segments. The prominent amongst them are Baltic Freight Index, Baltic Dry Index (for dry bulk segment) and Balti Clean and Dirty Tanker Index (for tankers).
  • Freight rates and earnings of the shipping companies are primarily a function of demand and supply in the markets. Demand drivers are a function of trade growth and geographical balance of trade (which determines the length of haul required). On the other hand, the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.
  • The industry is regulated by the rules and regulations of International Maritime Organization (IMO), classification society, and the requirements of the flag state. Apart from these, there are also the rules and regulations of various countries where the vessel operates.
  • As regards India, the ports and shipping industry plays a major role in sustaining growth in the country's trade and commerce. As per the Ministry of Shipping, around 95% of India‚Äôs trading by volume and 70% by value is moved through maritime transport.

How to Research the Shipping Sector (Key Points)

  • Supply
  • Supply is determined by the addition to shipping capacity. Also, factors such as ordering and scrapping influence the supply in this industry. On the ordering side, for example, the number of vessels that a shipyard can build and the time taken to build a vessel plays an important role in determining the growth in tonnage supply. On the scrapping part, decline/delay in scrapping activity would lead to oversupply of vessels.
  • Demand
  • Demand in the shipping industry is largely determined and is closely related to the growth in world trade.
  • Barriers to entry
  • High capital investments and the requirement of adequate cash flows act as major barriers to entry in this space. Moreover, critical factors such as expertise and technical know-how are some of the pre-requisites that limit the entry in this industry.
  • Bargaining power of suppliers
  • Is diminishing on the back of gradual increase in fleet supply and intense global competition.
  • Bargaining power of customers
  • High bargaining power as competition is high in the industry.
  • Competition
  • Competition is price based. However, companies with younger fleet command a premium. Companies operating in this space not only face competition from the domestic players but also from international shipping companies.
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    Financial Year '16

    • In FY 2015-16, the Indian Port sector witnessed capacity addition of 94 million tonnes per annum (MTPA). This is recorded as the highest in the history of major ports. (source: ibef.org)
    • During April-August 2016, cargo traffic handled by India's major ports increased 4.6% YoY to 264.73 million tonnes (MT). In terms of composition of cargo traffic, the largest commodity group in the total traffic was P.O.L. (Petroleum, Oil & Lubricants) with around 32% share, followed by Container traffic and Coal (21.5% each), 'Other Cargo' (21%), Fertilizers and Iron Ore 2% each.
    • On the FDI front, the Indian ports sector received FDI worth US$ 1.64 billion between April 2000 and March 2016.
    • The Maritime India Summit 2016 attracted investments worth Rs 829 billion (US$ 12.18 billion) across 141 memorandum of understanding (MOU) and business agreements, which were signed by various players in the maritime sector. (source: ibef.org)
    • The Baltic dry index, which is a measure for charter rates for dry bulk carriers, hit an all-time low of 290 in February 2016. However, since then it has more than doubled and in May 2016 touched 600.
    • Global demand for dry bulk is expected to remain under pressure largely due to the slowdown in China.

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    • The dry bulk business segment in the shipping industry has been impacted by the global commodity slump. While China's slowdown has led to a sharp moderation of imports like Iron ore, on the other hand, emphasis on the environment has led to the lower usage of coal. This has impacted coal imports. Further, India's domestic coal production has also improved over the years leading to fewer coal imports. All these factors have led to decline in demand for commodities, thereby reducing commodity moments. The trend is quite visible from the Baltic Dry Index or BDI. If the slowdown in China widens and the movement of coal remain as it is now, the future prospects in this space seem unfavorable.
    • The statistical forecasts for India, however, seems bright. The cargo traffic is expected to witness growth and is said to reach 1,758 MMT by 2017. This is against 1,052 MMT recorded in 2015.
    • The increase in India's refining capacity will benefit the offshore shipping lines as demand for their services picks up. As a result of the commissioning of large domestic refining capacities, the imports are expected to jump in the future. This would benefit shipping majors operating in India.
    • On the other hand, there would be a negative impact on the demand for tankers if the OPEC decides to cut output in the future as a result of global supply glut.
    • The shipping industry is impacted by numerous short term and regional factors such as political fallouts, weather changes, etc. This could result in great amount of volatility in the freight market.
    • Lastly, china has been the main driving factor of the shipping demand. However, the Chinese economy is presently facing headwinds in growth. This has affected its dry bulk imports and has kept a lid on world trade growth in dry bulk.

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    Related Links for Shipping Sector
    Quarterly Results | Sector Quote | Over The Years

    Views on News

    GE Shipping: Disappointing Performance (Quarterly Results Update - Detailed)

    Nov 16, 2017

    GE Shipping reported a subdued performance on the back of weak tanker and offshore segment.

    G E Shipping: Feeling Pressure From the Offshore Segment (Quarterly Results Update - Detailed)

    Aug 18, 2017

    GE Shipping reported a subdued performance on the back weak offshore segment.

    Cochin Shipyard Limited (IPO)

    Aug 1, 2017

    Should you subscribe to the IPO of Cochin Shipyard Ltd?

    G E Shipping: A Bad Quarter (Quarterly Results Update - Detailed)

    May 9, 2017

    GE shipping registered a loss in 4QFY17 due to weak global shipping market and lower crude prices which negatively impacted the offshore segment.

    G E Shipping: Crude, Product, and Offshore Segment Drag Performance (Quarterly Results Update - Detailed)

    Feb 16, 2017

    G E Shipping has reported a 22.8% YoY decline in the topline while the bottomline has declined by 33.4% YoY.

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