Growing fleet strength

Driven by the boom in the freight market, Indian shipping companies begin to expand their fleet strength.

KEEN to take advantage of the unprecedented boom in the freight market, which is expected to last until 2006, Indian shipping companies are gearing themselves up to make major investments in fleet acquisition. Never before has the freight market witnessed such an upsurge in all segments ranging from tankers to dry bulk. The freight boom is being fuelled by a variety of factors, including a short supply of ships in the global maritime trade sector and an increased demand for steel in China. An indication of the buoyant mood in the industry can be had from the results of shipping companies for the third quarter (Q3) of 2003-04. Great Eastern Shipping, India's largest fleet owner in the private sector, came out with the best Q3 results to touch the Rs-110-crore mark, showing an increase of 130 per cent in the net profit compared to its performance in the previous fiscal. During the nine-month period ending December 2003, the company's income soared to Rs.947.47 crores, as against Rs.727.6 crores recorded during the first nine months of last fiscal.

Shipping Corporation of India (SCI), India's largest fleet owner, reported handsome profits, although it could not make the best use of the boom period as it had not been permitted to make any major investments for fleet expansion in the light of its on-going disinvestment programme (the government recently gave it the go-ahead to make investments up to Rs.300 crores). The company's net profit during the October-December period in 2003 rose to Rs.133.23 crores from Rs.76.22 crores registered in Q3 of last fiscal, which represents an increase of 74.79 per cent. During the period, the company's profit stood at Rs.369.85 crores as against Rs.147.29 crores during the corresponding period of last fiscal.

Essar Shipping, which is in the race for the majority stake holding in SCI, has reported a net profit of Rs.36.84 crores, which is up from Rs.16.36 crores in Q3 of last fiscal, representing an increase of 125 per cent. Its income rose from Rs.122.85 crores in Q3 of last fiscal to Rs.148.47 crores this fiscal, up by 21 per cent. Varun Shipping's net profit during the quarter swelled from Rs.2.70 crores last fiscal to Rs.10.04 crores.

Analysts say that the results for the fourth quarter (Q4) would reflect the same bullish trend. What has been driving the freight market boom? Says a senior official of Great Eastern Shipping: "The third quarter has been exceptional for the dry bulk markets, as freight rates have been on a meteoric rise. In fact, we have seen that the Capesize, Panamax and Handymax segments earned the highest-ever freight rates during the last quarter. China undoubtedly continued to be the major factor behind the surge in freight rates."

Indeed, the Baltic Handymax Index (BHMI), which indicates the freight market movement, shot up from 15,763 on October 1, 2003 to 26,593 on December 31, 2003, and towards the end of January 2004 it stood at a whopping 30,213. Even the tanker market, which was relatively subdued in the second quarter (Q2), witnessed buoyancy in Q3, with China surpassing Japan to become the world's second largest oil consumer. Market analysts said that increasing long-haul trades, strong winter demand in the northern hemisphere, congestion in the Bosphorus Strait and migration of Oil Bulk Oil (OBO) vessels (capable of carrying both wet cargo and dry bulk) to the dry bulk trade had then impacted on the tanker market earnings. The Baltic Clean Tanker Index and the Baltic Dirty Tanker Index, which were 869 and 1006 respectively on October 1, 2003, increased to 1,099 and 2,242 on December 24, 2003 - they stood at 1,317 and 2,048 respectively towards the end of January. "Crude carriers recorded an average TCY (Time Charter Yield) of about $22,600 a day during the quarter as against $21,900 a day in the third quarter of last fiscal," the Great Eastern official pointed out.

Market analysts feel that the strong recovery led by China and the United States is expected to boost world oil demand, while Japan continues to depend on oil, as its nuclear plants are not fully operational yet (six out of the 17 plants are in operation). Further, the rising natural gas prices have resulted in a switch-over to oil. "Tanker freight rates are expected to remain healthy, especially with the U.S. commercial petroleum stock levels at a 28-year low," an analyst pointed out.

In fact, the freight market boom has prompted many companies in the private sector to go in for fleet expansion. Take the case of Great Eastern Shipping - the company acquired seven crude carriers and two product carriers during the first three quarters of the current fiscal, which increased its tonnage from 1.317 million dwt (deadweight tonnage) as on March 31, 2003 to 2.10 million dwt as of end-December 2003. This apart, the company has laid out a capital expenditure programme for Rs.1,038 crores, involving the acquisition of 10 vessels, including one Aframax, one product carrier and two Suezmax vessels, which are expected to be delivered before September 2005. This would increase its fleet strength to 2.68 million dwt by March 2006.

Originally, SCI had an ambitious expansion programme, involving an outlay of $1 billion for acquiring 29 vessels, including 26 tankers, during the Tenth Plan. Moreover, the company has to replace 25 to 30 per cent of its tanker fleet within the next few years. But with the government asking SCI to put on hold major capital expenditure plans in view of the pending disinvestment programme, the company could not make any major acquisitions. However, after the government recently lifted the ban, SCI lost no time in drawing up a Rs.300-crore acquisition programme. The SCI Board, which met in Mumbai in February, had approved a broad acquisition programme, which includes the purchase of capsize vessels.As a matter of fact, despite the high rate of taxation that continued to gnaw at the Indian shipping industry during 2003, the growth of the Indian fleet has been significant during the year. Industry analysts revealed that the tonnage began to soar after April 2003, when the boom in the freight market actually began to galvanise ship-owners. From a level of 6.20 million grt (gross registered tonnage) as on January 1, 2003, the Indian tonnage crawled up to 6.62 million grt on January 1, 2004. Since 1976, the Indian tonnage had peaked to 7.05 million grt in January 2000, with the maximum addition of 5.9 lakh grt, witnessed in 1999.

"The growth in tonnage is expected to continue on its upward course in the coming months as shipping companies are looking for fresh acquisitions," according to an analyst. This marked a reversal of trend in tonnage, as during the entire 2002-03 period there had been a decline in tonnage addition, with the high taxation constraining the generation of funds for shipping companies. The strength of the Indian fleet flagged from 6.82 million grt as on March 31, 2002 to 6.18 million grt as on March 31, 2003 - a net reduction of 6.43 lakh grt. Interestingly, during this period the number of ships had risen from 560 to 616. This was mainly on account of the inclusion of 56 ships, mostly comprising tugs, survey vessels, towing vessels and pilot vessels belonging to the Indian ports and State Maritime Boards, in the registry of Indian ships.

However, from April 1 2003, the Indian fleet began to show signs of a recovery. As on July 1, 2003, the tonnage increased to 6.43 million grt, as during the preceding months there was an addition of seven oil tankers - SCI (three), Great Eastern (two) and Mercator Lines (one) and India Steamship Co (one). However, one disconcerting factor has been the deteriorating age profile of the Indian fleet. According to a senior official of the Indian National Ship-owners Association (INSA), as on April 1, 2003, the average age of the Indian fleet was 16.5 years. In terms of dwt, over 31 per cent of the overseas fleet, totalling 80 ships of 2.91 million dwt, was over 20 years of age, while another 29.3 per cent between 15 and 19 years. Thus, over 60 per cent of the Indian fleet needs to be replaced within the next five years or so. In fact, the Planning Commission's Working Group has recommended acquisition of 156 ships of 3.25 million grt so as to maintain the strength of the Indian fleet at around 7 million grt.