A recent and steep fall in freight rates has hit state-owned Shipping Corporation of India (SCI) much more than private lines.
Rates for both dry bulk carriers and the tanker segment fell sharply in the past one and a half months. SCI is facing the heat due to its high exposure to the spot market. Private competitors such as GE Shipping, Mercator Lines and Essar Shipping are largely insulated, as they have most of their vessels chartered on long-term contracts, of about a year.
Chinese demand for iron ore and coal, the key commodities for the dry bulk market, has slackened in recent weeks. Besides, many tankers have completed long-term contracts to store oil. Both markets have also seen significant ship deliveries impacting the overall supply of vessels.
“It is bad,” said K S Nair, director of the bulk carrier and tanker segment for SCI. “Freight rates are falling very badly now.”
The company has 75 vessels, of which 18 are bulk carriers and 40 are tankers. It has its entire fleet of bulk carriers on the spot market and 40 per cent of the tankers.
Freight rates for Capesize vessels, the largest dry bulk carriers, have fallen to $23,000 a day from $60,000 a day in mid-May. The Baltic Dry Index, the global benchmark for the freight rate of dry bulk carriers, was at 1,902 last Friday, from 4,209 on May 26, a 55 per cent fall in six weeks.
“In China, real estate demand is down, so they are importing less of iron ore for making steel and that is driving the demand downward for dry bulk carriers,” said Param Desai, an analyst with Angel Broking.
The rate for very large crude carriers (VLCCs), the largest tankers, have fallen to $20,000 a day from a peak of $75,000 a day for one of the routes in early June. The Baltic Dirty Tanker Index, global benchmark for VLCC freight rates, dropped to 796 on Friday from 1,122 on May 20, a fall of 29 per cent in about 50 days.
“Till last year, about six per cent of the world’s fleet of tankers was used for storage purposes. As those tankers come out of contracts, supply of vessels are increasing in the market and that is pulling down the freight rates,” said Desai.
The stock of SCI rose two per cent in the past 45 days to Rs 160.5 a share on the Bombay Stock Exchange (BSE). The Sensex, benchmark index of the exchange, gained nine per cent to 17,833 in the same period.
Private shipping companies are not hit much now, but as their contracts come for renewal, they will be affected. Essar Shipping has its seven dry bulk carriers and two tankers on a contract of over a year and that has protected it against the sharp fall. Its stock rose eight per cent to Rs 85.3 on the BSE in the past 45 days.
“We have to wait and watch the situation to see where the freight rates settle,” said A R Ramakrishnan, chief executive officer, Essar Shipping. “The new deliveries from the yards in 2010 and 2011 are expected to keep the rates under pressure.”
Mercator, with 16 bulk carriers and eight tankers, has about 80 per cent of its fleet on contracts of over a year. Its stock was up by 7.2 per cent to Rs 47.6 in the past 45 days. Similarly, GE Shipping, with six dry bulk carriers and 29 tankers, has very limited exposure to the spot market. The stock of the company rose six per cent to Rs 300.2 a share in the past 45 days.
