Shipping freight market revives: Indian companies are yet to see the change

The shipping freight market is turning the corner, and the worst seems behind it. The freight market is here to stay firm, at least for some time, say analysts. From next year, however, new regulations being implemented might have some implication for the industry. Indian companies have a large share of tankers in their fleet, so their revival is yet to come.

Fortunes turning better

Benifer Jehani, director, CRISIL Research, said: “The shipping sector will now see fortunes turning better for them. Freight-charter rates have seen an increase of 35 per cent in the dry-bulk segment, while the container segment has also seen a 30-35 per cent rise.”  However, the tanker segment has not done so well, as rates have fallen by 5-10 per cent. The fall is even bigger for very large crude carriers. 

Ranjeet Singh, who has been the Chief Executive Officer of Essar Shipping since September 2016, said, “momentum seen in global shipping freight market will also benefit Indian shipping companies”.

Dry-bulk segment best performer

Indian shipping sector has a larger dependence on tankers due to high imports, but this segment has not done well. Benifer of CRISIL explained that the dry-bulk segment, which accounts for 45-50 per cent of the world fleet (in deadweight tonnage terms), witnessed a 35-40 per cent increase in charter rates during January-April this year, as compared to a similar period last year. This increase is on account of high-quality coal and iron ore imports and by the East Asian nations. 

Fortunes of Indian shipping companies would be mixed. Jenifer said, “Tankers account for the largest share, of about 60 per cent, in Indian fleet because of high dependence on import of petroleum, oil and petrol products and LNG imports.

Bulk cargo demand has received a boost following the substitution of lower-grade coal and iron ore in the East Asian nations with higher-grade inputs in order to improve environmental efficiencies. Iron and coal account for almost half of the global dry-bulk trade.

Earning should look better going ahead

Pradeep Rajan, Senior Managing Editor, Asia Pacific Shipping & Freight, S&P Global Platts said, “Shipping companies’ earnings should look decent in the next 4-6 quarters. Many indicators are now turning positive.” A major sign of turnaround is that bigger ships are getting higher rates. The rates were low in 2016 which changed in the last few quarters. According to Pradeep, the tanker segment is over-supplied due to an increase in new tonnage at a time when OPEC has cut production, hence, requiring lesser ships for transport.

According to him, another healthy sign is that the global growth rate is pegged around 3.8 to 4 per cent. This kind of high growth was not seen for many years. It will increase global trade and, in effect, benefit shipping. 

Going ahead, the industry will face multiple challenges. Some of them will be new regulations, the addition of new capacities, and the scrapping of older ships-- which fail to meet new regulations, or become unviable-- in the wake of high investment requirement for upgrading them.

New Regulations will change the landscape

The first regulatory change would come into effect from January 2020. According to the International Maritime Organization's (IMO) International Convention for the Prevention of Pollution from Ships, ships would be required to comply with reduced sulphur content in fuel from the current 3.5 per cent to a new cap of at 0.5 per cent mass by mass (m/m). Companies and countries will start implementing this from this year. Taiwan would implement it from next year.

Companies have two options. Either keep ships which comply or upgrade old ships by installing scrubbers. Low-sulphur fuel is costlier and the cost of upgrading is also higher. Pradeep said, “companies have to check the viability of ships when it upgrades them, and hence, comparatively younger ships may be upgraded." 

As a result of this regulatory change, what is final tonnage kept and sent for scrap will be known after year.

Ranjeet Singh of Essar said that next regulatory change after reducing sulphur content in fuel is implementing the International Maritime Organization (IMO) Ballast Water Management Convention. Ballast water treatment is the process of treating such water in order to actively remove, kill and/or inactivate organisms prior to its discharge. 

To make ships comply with this system, each ship would require an investment of $0.5 to $2.5 million depending upon its size of the ship. He said, “after such a huge investment if five to seven years of the ship's life is left, only then will it be viable.”

Both these regulations of low sulphur and BWTS will decide the fate of the shipping market. The number of ships upgraded, the number of them sent for scrap and the number of new ships delivered would be known in the coming years. Indian investors should “wait and watch” till then. 

Currently, there are signs of freight growth rate coming off in the dry-bulk segment even as additional ships being delivered, according to Pradeep.

Analysts expect Indian companies will benefit when tankers are scrapped.

Noel Vaz, senior analyst at IIFL said, "The shipping sector remains a mixed bag. Bulk and container shipping have seen firm charter rates as global economic activity has picked up. However, tanker and offshore rates remain weak as supply overhang remains an issue. There are some green shoots as crude oil prices have moved beyond their 2015 highs, indicating higher tanker rates sometime in the next 12 months. We recommend investors to adopt a wait and watch attitude till tanker rates revive, as weakness in tanker rates over near term would impact earnings."