The ministry of surface transport has, on behalf of the Oil Coordination Committee (OCC), sought a minimum tariff for shipment of crude and petroleum products. Officials said the minimum tariff was necessary to replace the cost-plus formula that was in operation till March 31.
The formula assured shipping companies of a minimum 12 per cent return on equity plus interest, operation and maintenance costs.
The formula covered both fixed and variable costs for shipment of petroleum products. All time charters by Indian tanker fleets were entered with the OCC on this basis. With the downturn in the shipping industry, international tariffs are insufficient to cover fixed costs. Consequently, acquisition of new tankers is likely to be affected.
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Of India's overseas tanker fleet of 68 vessels (both crude and product carriers), at least 53 are between 15 and 20 years old. The bulk of replaceable tankers is with the public sector Shipping Corporation of India.
These old vessels have recovered their fixed costs. What needs to be covered are operation and maintenance costs. Tariffs are at present fixed on a market-determined rate and are just sufficient to cover the operation and maintenance costs. The debt component for shipping companies is about 400 basis points above the London Interbank Offered Rate (Libor), since debt finance for acquisition is from external commercial borrowing sources. The maximum debt-equity ratio accepted by ship financiers is 1.5:1 for acquisition purposes.
Sources said what was being sought was not a fixed return on equity of 12 per cent, but a return sufficient to cover both the capital and the operations and maintenance costs. Otherwise there is bound to be a shift in favour of old vessels, especially those that are fully depreciated. So far, neither the Shipping Corporation of India nor the Indian Oil Corporation has reached any kind of arrangement for covering fixed costs after disbanding the cost-plus formula for oil shipments. As a result, oil companies prefer to enter into time charters at existing low freight rates, whereas none of the shipping companies has agreed to these rates for entering into time charters. Shipping companies have preferred voyage charters to protect their earnings.