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Shipping Sector Analysis Report 

[Key Points | Financial Year '17 | 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 or lower level of industrial activity generally leads to higher or 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 Baltic 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’s 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 '17

    • In FY 2016-17, the Indian Port sector witnessed capacity growth of 1,065 million tonnes per annum (MTPA), implying a CAGR of 7.8% since FY07. (source: ibef.org)
    • Between FY07–17, cargo traffic grew at CAGR 3.4%. Cargo traffic during FY17 for solid, liquid and container cargo was 310.8, 212.4 and 124.6 MMT, respectively. During April – December 2017, traffic handled by major Indian ports increased 3.6% year-on-year.
    • The government has initiated National Maritime Development Programme (NMDP), an initiative to develop the maritime sector; the planned outlay is US$ 11.8 billion.
    • During FY07–17, container traffic rose to 124.6 MMT, implying a CAGR of 5.9%. Indian ports are expected to witness a profit of Rs 70 billion (US$ 1.08 billion) in 2018.
    • A consequence of strong GDP growth has been rising energy demand; the country currently meets about 75% of total crude oil demand by imports. India’s crude imports touched 214.9 MMT in FY17, implying a CAGR of 6.7% over FY07–17. Private ports have been especially good at attracting crude import traffic. – Petroleum, Oil, and Lubricants (POL) have been the major contributors to total traffic at ports. POL traffic in FY17 reached 349.8 MMT.
    • The Central Government is planning to setup logistic hubs near seaports with the help of private sector players, to augment exports from the country.
    • In January 2017, a new container service, operated by K Line, commenced operations between CITPL (Chennai International Container Terminals Pvt. Ltd) at Chennai port and the Far East.
    • In May 2017, DP World has agreed to develop Indian port projects and plans to sign an MoU with the National Investment and Infrastructure Fund (NIIF), the Indian wealth fund. The projects worth US$ 1.3 billion include the development of Sagarmala and Bharatmala projects.

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    Prospects

    • 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 2,493.1 MMT by 2017. This is against 1,806.8 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

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    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.

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    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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