The economy is reviving, but Indian shipping companies still have reason to be cautious. In the dry bulk segment, demand is dependent on Chinese requirements. H K Mittal, chairman and managing director of Mercator Lines, India's second largest private shipping company, spoke to Abhineet Kumar on the outlook and how he feels India can become the next catalyst for growth of the segment. As ship prices drop, his company is also considering expanding its fleet of 15 dry bulk carriers and 11 tankers. Edited excerpts:
Shipping freight rates have been a barometer for global trade. This time the uptake in global economies is not reflecting in these rates.
Economies have not revived globally. If you talk about India, yes, it has recovered almost completely but the situation here was not so bad. The European, US and Japanese economies have not recovered fully.
The shipping industry is an average for the global economy, so it is not getting the full impact of recovery. But, China has more or less recovered, so there has been some recovery in the demand for dry bulk carriers.
How long is the shipping industry going to be dependent on Chinese demand?
In India, if all power plants under implementation come up in the next four or five years, then there will be huge growth in the shipping requirement. Then, India will also become one of the driving factors, along with China. China is building up the whole nation, so the requirement from there will anyway continue for the next 15 to 20 years.
But, India will also become a significant portion of the demand. The infrastructure is improving, power plants are coming up. All these need some kind of import, like power plants will need coal. The demand here may not be like China. It may be slow but it will definitely come up.
Don’t we expect any revival in demand from Europe and the US in this year?
No. This year, the demand is mostly going to be from China. Even in the future, European demand is not expected to be significant.
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In the dry bulk segment, as much as 24 per cent of the existing fleet is expected to be added this year, while in the crude tanker segment, it is about 11 per cent. Is that putting additional pressure on freight rates?
Yes, it is. But, there are old vessels due for scrapping this year. Steel rates are fairly good now, lightweight ships are getting scrapped at $380 to $400 per lightweight (light displacement tonne or per tonne for ship without cargo). We hope some older tonnage will be phased out.
What is your outlook for the freight rate for dry bulk carriers? Where do you see the Baltic Dry Index moving this year?
The peak of the index was around 11,600 and bottom was about 600. I think the index should be at 3,500 this year. Any thing above 2,500 is good.
How is that good?
See the return on investment. Ship prices have come down. The Panamax price went up to $100 million for second-hand ships and even yard prices for new ships had reached about $60 million. Now it is available at $35 million for newly built ships. There is a huge fall. At a $35-million cost for Panamax, the index level of 2,500 is not bad.
That means you would be looking at some buy out of ships at a low rate this year?
Not immediately. But, we are definitely thinking of expanding. The requirement in terms of size of the vessel changes every time. The latest requirement is being assessed and we will definitely try to expand.
What is your outlook on tanker rates, which has seen recovery on the strong winter in the western countries? The Baltic Dirty Tanker is at 1,100 against the 2008 peak of 2,347 and the Clean Tanker Index is at 900 against the peak of 1,509 in 2008. Do we expect a correction post winter?
I think the strong winter has definitely added to the demand. But, single-haul tankers are to be phased out this year, under the deadline for their use posed by many countries. So, the rates are not expected to go down sharply post winter.