Earnings are likely deteriorate sharply for the Indian ship industry as a result of the fall in the Baltic freight index. This index, which reflects the freight for bulk carriers, has dropped to a low of 923.
The domestic shipping companies, barring the Shipping Corporation of India, comprise more of bulk carriers.
Out of the total of 245 vessels, almost 158 are bulk carriers. The fact that none of them are in a position to trade vessels makes matters more complex for them.
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Typically vessel sales become attractive only if freight rates are high. Domestic shipping firms like the Great Eastern Shipping company periodically take advantage of this cycle.
Buying a vessel becomes attractive when the index is down, especially old vessels.
This is because the capital cost of these vessels are low and low earnings are sufficient to meet the capital servicing costs of such vessels, plus also earn a decent margin.
But this is possible only if the index follows a particular cycle. However, with the Asian crisis, analysts expect a deviation implying that earnings are unlikely to show any substantial improvement.
The worst blows are likely to be taken by companies who have fairly new vessels and have tonnage on order for delivery this year.
About two bulk carriers of 85,500 dead weight tonnage are expected to be delivered during the next few months.
And companies locking into a time charter are expected to find servicing of capital costs very difficult from the existing freight rates.
So the next best option, analysts opine, would be to stick to voyage charters, which is what the new vessel owners would prefer.
Glimmers of hope are elusive even for the tanker markets. Currently there are about 67 tankers in the Indian fleet, of which 28 are with Shipping Corporation alone.
Besides companies like Chemplast have got into tankers on the basis of the cost plus formula, which guaranteed a 12 per cent return on equity.
The above vessel was purchased through a bareboat cum demise method, which is basically a form of financial leasing.
With the discontinuance of the CPF from April 1998, there is no guaranteed return on equity.
Instead, the prices are to be worked on the basis of the market prices, which, at present, does not even give an internal rate of return of 6 per cent at current prices.
But on the flip side, if there is a war in the middle-east , the fortunes of tankers could undergo a change and tanker freight rates could go up .
That could probably bring some unexpected windfall profits for the industry.
That would probably be the right time for getting into time charter arrangements, the analysts say.