 "Slump in freight rates a drag on firms")
Close to full fleet capacity utilisation, amid declining bunker fuel rates, is still not allowing domestic shipping companies to make a profit. The reason is significantly lower freight rates.
“Freight rates in the bulk segment are so low that despite deploying nearly 95 per cent of the bulk fleet and bunker prices falling, we have no margins in this segment and are absolutely in a hand-to-mouth situation,” a senior official from the bulk division of Shipping Corporation of India (SCI) told Business Standard. The government-owned company has a well-diversified fleet of 69 vessels, including 17 bulk carriers.
Mercator, another leading company, whose stand-alone business is largely pure shipping, has also missed the bus, for a different reason. “With us, the issue is that Mercator is already into a two-year contract for tankers, and the rate locked in are marginally lower than the prevailing market rate, so we are missing out on the opportunity. Our contracts will come for renewal only in October; so, we will have to wait,” a senior official said.
The company has seven tankers, one VLCC (very large crude carrier) and 13 bulk vessels. Mercator’s bulk business is handled by its Singapore subsidiary, Mercator Lines (Singapore).
“When we moved into long-term contracts for tankers, the market was very volatile and to protect our margin, we moved into two-year contracts,” explained the Mercator official.
SCI, Mercator and Essar Shipping are close to 100 per cent fleet utilisation, despite a slowing economic situation in China, which has impacted the global trade, apart from oversupply of vessels. In the past seven months, the Baltic Dry Index — a measure of change in the transport cost of raw materials such as metals, grains and fertilisers by sea — has halved. It touched a record low of 509 in February before it recouped somewhat; it is now at about 590. The index does not currently include any India trade route, unlike earlier when the country was the world’s third largest iron ore exporter.
In line with the price of crude oil, the rates of bunker oil have almost halved in recent months. “The price has tumbled nearly 50 per cent to about $300 a tonne, which could lower input costs of shipping companies, lending some support to their operating profits,” shipping agent Rajesh Kumar Shahi of Glory Ship Management said.
Bunker oil, mainly used to fuel ships, accounts for 40 per cent of the total cost of shipping companies. “The extent of fall in freight rates is much higher than in bunker (fuel) prices,” said a senior official with Essar Shipping. The company has hedged itself on bunker prices and is insulated from fluctuations in fuel prices.
Given the grim earnings situation, the tanker segment seems to be of some saving grace. This is evident from the movement of both, the Baltic Dirty Tanker and Clean Tanker indices, which have risen in the past seven months. The crash in crude oil prices has been supporting the shipping sector, as oil purchases have become more attractive, triggering stockpiling and a rise in demand for tanker vessels.
The Baltic Dirty Tanker is used to access the crude oil shipping segment and the Baltic Clean Tanker Index indicates the freight rates of vessels carrying petroleum products. Since September, the former rose 38 per cent until December, before settling to 770 in March. Baltic Clean Tanker rose by almost the same percentage and is currently at 681.
“Tanker freights have moved up to about Rs 40,000 a day from Rs 19,000-20,000 in September. With lower bunker fuel prices and higher freights for tankers, margins are improving for this segment,” said the Mercator official.
“Freight rates in the bulk segment are so low that despite deploying nearly 95 per cent of the bulk fleet and bunker prices falling, we have no margins in this segment and are absolutely in a hand-to-mouth situation,” a senior official from the bulk division of Shipping Corporation of India (SCI) told Business Standard. The government-owned company has a well-diversified fleet of 69 vessels, including 17 bulk carriers.
Mercator, another leading company, whose stand-alone business is largely pure shipping, has also missed the bus, for a different reason. “With us, the issue is that Mercator is already into a two-year contract for tankers, and the rate locked in are marginally lower than the prevailing market rate, so we are missing out on the opportunity. Our contracts will come for renewal only in October; so, we will have to wait,” a senior official said.
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The company has seven tankers, one VLCC (very large crude carrier) and 13 bulk vessels. Mercator’s bulk business is handled by its Singapore subsidiary, Mercator Lines (Singapore).
“When we moved into long-term contracts for tankers, the market was very volatile and to protect our margin, we moved into two-year contracts,” explained the Mercator official.
SCI, Mercator and Essar Shipping are close to 100 per cent fleet utilisation, despite a slowing economic situation in China, which has impacted the global trade, apart from oversupply of vessels. In the past seven months, the Baltic Dry Index — a measure of change in the transport cost of raw materials such as metals, grains and fertilisers by sea — has halved. It touched a record low of 509 in February before it recouped somewhat; it is now at about 590. The index does not currently include any India trade route, unlike earlier when the country was the world’s third largest iron ore exporter.
In line with the price of crude oil, the rates of bunker oil have almost halved in recent months. “The price has tumbled nearly 50 per cent to about $300 a tonne, which could lower input costs of shipping companies, lending some support to their operating profits,” shipping agent Rajesh Kumar Shahi of Glory Ship Management said.
Bunker oil, mainly used to fuel ships, accounts for 40 per cent of the total cost of shipping companies. “The extent of fall in freight rates is much higher than in bunker (fuel) prices,” said a senior official with Essar Shipping. The company has hedged itself on bunker prices and is insulated from fluctuations in fuel prices.
Given the grim earnings situation, the tanker segment seems to be of some saving grace. This is evident from the movement of both, the Baltic Dirty Tanker and Clean Tanker indices, which have risen in the past seven months. The crash in crude oil prices has been supporting the shipping sector, as oil purchases have become more attractive, triggering stockpiling and a rise in demand for tanker vessels.
The Baltic Dirty Tanker is used to access the crude oil shipping segment and the Baltic Clean Tanker Index indicates the freight rates of vessels carrying petroleum products. Since September, the former rose 38 per cent until December, before settling to 770 in March. Baltic Clean Tanker rose by almost the same percentage and is currently at 681.
“Tanker freights have moved up to about Rs 40,000 a day from Rs 19,000-20,000 in September. With lower bunker fuel prices and higher freights for tankers, margins are improving for this segment,” said the Mercator official.