For shippers, it’s choppy weather as far as the eye can sea

When the globe was in recession in 2009, the shipping industry had pinned hopes on 2011 for a recovery. But two years on, the scenario remains grim with the global shippers still filing for bankruptcies and selling and idling assets as the freight markets continue to remain depressed.

According to a GE Shipping official, things are so bad that most of the asset classes are finding it hard even to recover operating expenses.

While shippers see global recovery still two years away, they say things are better on the domestic front.

About 58% of the total gross registered tonnage of 10.16 million in India is with oil tankers, about 29% with bulk carriers and 10% with dry cargo liners, or container vessels.

The tanker segment is struggling due to overcapacity, forcing shippers globally to file for bankruptcy, sell assets or idle them.
While the Indian tanker companies have not yet started idling or offloading vessels, they are considering slow-steaming and warm-lay ups to tide over the crunch.

Under warm lay-up, the ships are idled but kept ready to start sailing within a notice of 48 hours; mothballing involves shutting down engines, making it comparatively more time-consuming to put the vessels back into action.

“We have considered options like warm lay-up and mothballing. Warm lay-up will be done only when the returns from operations are so low that we would save more through warm lay-ups. In any case, every time you intentionally wait for cargo you are on a warm lay-up,” said Capt Sunil Thapar, director-bulk carrier and tanker, Shipping Corporation of India.

Industry officials said a couple of domestic tanker players are exercising warm-lay ups, but not much of mothballing is seen.
Thapar said players are also using slow-steaming as a strategy, but as most Indian ships ply through the pirate-affected region, not much is gained.

“Ships have to move out of these regions as fast as possible, so all that is gained through slow-steaming in other parts is lost in this area,” he said.

Dry bulk carriers are also facing overcapacity situation, but not as bad as the tanker segment.

While the dry-bulk demand is growing at 8%, the supply growth is at 13-14%. The Baltic Dry Index, an indicator for Capesize vessel rates, which has been volatile for the past one year, is currently at 912, about 27% lower than a year ago.

Interestingly, container, which has 10% of India’s total gross registered tonnage, is facing minimal issues globally. However, India is grappling with its own domestic problems and thus is unable to cash in on the opportunity.

“On the domestic side, while the potential is great, the problem is inadequate port infrastructure and evacuation issues. New capacities have to be created and fast,” said Capt Dinesh Gautama, vice chairman, Container Shipping Lines Association.
Rates for the traditional routes on which Indian container ships ply are also depressed.

“The smaller container ships in India are focusing on the already established routes, which is full. To solve the problem, one will have to consider redeployment of fleet in new sectors,” Gautama said.

While all three segments suffer from their own issues in the short term, top shipping officials are confident of a recovery in two years and a healthy growth thereafter. But the next 12-15 months are expected to remain bleak.

Thapar said the demand-supply gap will narrow down by 2013-14, both for the tanker and dry-bulk segments. He expects demand and supply for the dry-bulk to grow at a healthy 10%, post 2013.
Similarly, the demand-supply mismatch in tankers is also expected to equalise around the same time at 5%. At present, tanker supply growth is 6%, while demand is growing at 3-3.5%.
Thapar said post recovery shipping companies would be able to maintain an internal rate of return (IRR) of close to 13-15% on their assets, which is considered healthy in this industry. Most officials declined to share any specific IRR figure they were expecting.

This optimism is based on China’s and India’s growing raw material requirement and India’s increasing refining capacity.

India’s role in the oil-refining space is expected to translate into more crude-oil imports and exports of refined products.
Also, some see huge opportunity for large-sized vessels in the tanker segment. “In the long term, India is expected to consider importing crude from distant places like Mexico and Venezuela. This would mean long-haul movement. China is also expected to explore similar options. Very large crude carriers would benefit from this,” said AR  Ramakrishnan, managing director, Essar Shipping.

On the dry-bulk side, most Indian players said India’s growing demand for raw materials like coal and iron-ore will help keep the India dry-bulk fleet busy in the long term.

Main players like Essar Shipping, GE Shipping and Mercator Lines also have individual company strategies.

Ramakrishnan of Essar Shipping believes a mix of group cargo and third-party cargo in addition to conscious asset acquisition would be the key for his company.

“We have a mix of 50% group cargo and remaining third-party cargo. The group has huge expansion plans and thus will also have huge raw material requirements. In addition, all our ship acquisitions are backed with clear visibility of long-term cargo. We do not acquire assets based on price speculations,” he said.
Mercator Lines is looking to increase presence in the non-shipping segments like coal mining and trading. Experts see the diversification strategy working well for Mercator in the long term.

GE Shipping expects its exposure in the offshore segment and its wait-and-watch policy in terms of asset acquisition will ensure revenue growth in the long run. “For the last two years, the company has adopted a wait-and-watch policy and is sitting over a cash of close to Rs.2,500 crore, waiting for an appropriate time to augment its fleet. On the other hand, the company’s offshore subsidiary, Greatship India Ltd, has been on an expansion spree. The exploration and production activities worldwide are expected to grow at a healthy level, which will provide a decent revenue visibility for this offshore business going forward,” a GE Spokesperson said.

Hemant Bhattbhatt, senior director, Deloitte, a consulting firm, suggests companies in a survival mode should weed out the old fleet, get in to ship-pooling agreements with like-minded and like-sized players and tie up servicing rights for emerging future demand.

In spite of a great home-grown story expected to unfold in India, global investors remain as wary of Indian shippers as they are about their global counterparts.

“All Indian ship owners will be affected as everyone else, depending on how much cover they have and at what price they acquired ships. The growth in imports of coal are huge but the Indian vessels have just as much chance as everyone else in carrying them, but the end cannot be anything but the cheapest,” said a top official from a global research firm.This official, who is also an investor, sees a huge growth in Indian companies in the long term. “But I will not invest in shipping at this stage of the cycle,” he said.