Essar may buy five ships for $550 million

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 its captive demand from Essar Energy Holding.

The five vessels would cost the company up to $550 million.

Essar Shipping & Logistics (ESLL), a 36 per cent stake holder in ESL, has already placed orders for six Supermax bulk carriers and six mini -cape bulk carriers for $210 million and $390 million, respectively, in the current financial year. ESL now plans to acquire a total of sixteen bulk carriers with the new planned order for four in the next financial year.

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 around 2704 on March 10, 2006. This reflects the rising demand for bulk carriers. After correction in the prices, the index was 8346 on March 12 this year.

"The higher trade of iron ore and coal from countries such as China and India has fuelled the demand for bulk carriers," said Vikram Suryavanshi, analyst with Karvy Stock Broking, a Mumbai-based brokerage.

The company currently has total capacity of 1.32 million deadweight tonnage (dwt) of owned capacity, of which 0.58 million dwt is of twenty three vessels used for coastal transportation. It is the rest of 0.7 million dwt consisting of three tankers (two VLCC and one Suzemax) that is used on longer routes.

The twelve bulk carriers for which the order has been placed would add around 0.95 million dwt taking the total owned capacity to 2.27 million dwt. These twelve vessels are expected to be delivered from December 2009 onward to January 2012.

"We are planning to acquire five vessels in the next financial," said Sanjay Mehta, managing director, Essar Shipping. "It could be newly built or in- water or combination of both," he added.

It usually takes twelve months for a new vessel to be delivered from a shipyard. However, the rising demand for such vessels has created a waiting period of eighteen to twenty four months.

This has also pushed the price of old vessels higher as it would provide instant earning. The company plans to acquire two capesize bulkers for which it has kept a target of $260 million, similarly for two Supramax, it has the target cost of $140 million and for one VLCC it has the target cost of $150 million.

"We expect 75-80 per cent of financing for these five vessels through debt and 20-25 per cent through equity," he added. The company did not disclose the capacity that it was likely to add with these five new vessels.

India's largest private shipping company Great Eastern Shipping has 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.