Shipping firms looking for discount buying

Indian shipping companies are looking for discount buying in international shipyards, which have seen a spate of order cancellations on account of credit crunch and freight rate correction.

The Baltic Dry Index, the benchmark for freight rates for bulk carriers, touched an all-time high of 11,039 on November 13, 2007, up from 2,438 on January 3 in the previous year.

This was the period when lots of speculative buyers booked orders with international shipyards. According to an analyst's estimate, about 45 per cent of the orders booked in the shipyards currently are for dry bulk carriers.

With the credit crunch in the market, big companies with good credit ratings are finding the effective interest cost higher by 100 to 150 basis point from the rates in December. And the bankers are shying away from the speculative buyers as well as small and medium size companies which have high credit risk.

Besides, the freight rates have also corrected; the Baltic index touched a low of 5615 on January 29 this year, and was at 7737 on April 4.

"There have been orders booked on speculation and as the cancellations come, we expect buying opportunities at a lesser price in the near future," said Kowshik Kuchroo, vice-president, business development, of Mercator Lines that has tanker, product carriers as well as bulkers.

Hong Kong-based and Oslo Stock Exchange-listed Jinhui Shipping and Transportation paid $4 million in penalties and cancelled two new building contracts with Chinese yards for Very Large Ore Carriers in January.

Jinhui said the subprime mortgage crisis and global credit crunch drastically changed the risk-return profile of completing the contracts. The order was booked in November last year.

In February, Norwegian ship owner Odfjell cancelled a $500m 12-ship new building contract with Russian shipyard Sevmash after claiming that the yard's lack of funding has led to "willful misconduct".

It takes usually two years to build a ship which is usually financed with a high debt ratio of up to 60 to 70 per cent. Speculative buyers were able to raise much higher debt from the banks till the credit crunch came.

Earlier, a speculative buyer would get into a contract to build a ship of $50 million after investing as low as $1 million and raise some amount from the stock market and the balance through debt from banks. Depending on the demand for that ship, they would manage to sell it in less than a year's time at a profit of 30-40 per cent profit.

"With the liquidity crisis, such buyers are not able to raise debt from banks, leading to cancellations," said Nitin Kolhatkar, chief finance officer of Mercator Lines.

Even the small ship owners, who were dependent on bank credit and expected high freight rates, are at the risk of cancelling their orders now.

According to an industry estimate, globally $500 billion worth of orders have been booked for building ships. These vessels will require a minimum $300 billion debt finance and a shortfall of about $150 billion is expected now.

According to an Indian shipping company's estimates, there are around 50 Norwegian companies listed on the Oslo Stock Exchange. These companies would be under pressure to sell their orders

"The ship yards are booked till 2010-11 and the cancellations are by fragmented ship owners who are forced to exit due to the present credit situation ," said V Ashok, whole-time director, Essar Shipping Port & Logistics.

The Ruia-promoted Essar Shipping (ESL) which has primarily been transporting crude oil through tankers, is planning to acquire four dry-bulk carriers in the next financial year to capitalise on the rising trade of commodities such as iron ore and coal.

It also plans to acquire one more very large crude carrier (VLCC) in the next financial year, primarily to take care of the expected rise in captive demand from Essar Energy Holding. The five vessels will cost the company up to $550 million.

However, the orders of the Indian shipping companies are not likely to get impacted, said Anil Devli, chief executive officer, Shreyas Shipping & Logistics.

"Indian shipowners booked most of the orders about a year and a half back and they are not likely to get impacted of the credit crunch," he added.

Depending on the type of vessels, the prices have even doubled in some categories of dry bulk carriers in the last three-four years.

"Historically prices of the ships have corrected up to 50% as the freight rate cycle comes down,"said Vikram Suryavanshi, analyst with Karvy Stock Broking, a Mumbai-based brokerage. " Distress sales happen when earnings are lower than operating cost," he added.

"If this phenomena grows leading to fall in prices it will only provide and opportunity to buy for companies sitting on large cash," said a spokes person of Great Eastern Shipping .

Great Eastern Shipping, is India's largest private shipping company with a fleet of 47 vessels with an aggregate capacity of 3.14 million dwt. GE Shipping has placed orders for 12 new vessels which includes 4 oil product carriers and 8 dry bulk carriers with delivery starting from 2008-09 to 2011-12.