Shipping firms' sales seen flat on sinking freight rates

Indian shipping companies are expected to report flat sales in 2005-06 (April-March), with analysts ruling out any dramatic recovery in freight rates in the near future. And with companies worldwide expanding their fleet to meet demand, freight rates are seen slipping further over the next 12-18 months.

Crude oil prices may firm up briefly, with the onset of winter in Europe and the Americas. Commodity demand from China, especially for iron ore, will be crucial for dry bulk freight rates. China watchers expect a decline in iron ore imports by the country in 2006.

Dry and wet bulk freight rates had leapt to record highs in December 2004, as huge demand for oil and commodities in China and India coincided with a phase of demand-supply mismatch of vessels. But with order books rising over the last few months, shipping companies were forced to add to their fleet, leading to fall in freight rates.

"Rising or high order-book to fleet ratio should be followed by a strong surge in deliveries, which should ultimately put downward pressure on rates," said a Deutsche Bank report.

"Even considering the slower rate of vessel deliveries (due to shipyard backlogs), there are simply too many ships on order," the report said.

Shares of Indian shipping companies have under-performed the broad-based indices over the last 12 months, mirroring the downtrend in global freight rates.

From December 1, 2004 to date, Great Eastern Shipping shares have risen 16%, compared to a 31% increase in the benchmark 50-share Nifty. Shipping Corp. of India shares have fallen around 14% during the same period, while Mercator Lines has gained around 38%. Analysts opine that upsides in these stocks, if any, would be driven by developments like sale of vessels, restructuring or overseas acquisitions.

GE Shipping is expected to report earnings per share of 43 rupees in 2005-06, up 1 rupee over 2004-05. "The company is expected to record a minor fall in revenue, but its net profit is expected to be boosted by a sharp jump in other income, driven by sale of vessels," said Kanan Shah, analyst with Networth Stock Broking.

Shah estimates GE Shipping's 2005-06 other income to rise five-fold to 2.7 billion rupees. Analysts expect activity in GE Shipping shares over the next few months, ahead of the listing of the demerged entities in April.

The company on September announced the decision to demerge into two entities-shipping and offshore. Shareholders of GE Shipping will receive one share of Great Offshore for every five shares held and retain four GE Shipping shares.

Analysts are placing bets on the offshore division, including drilling services, marine logistics, marine construction and port or terminal services, which is seen as the focus area for the company in the future.

"The price at which the offshore division would be listed would be the most crucial," Shah said.

Shah estimates the price to earnings of the offshore division at about 15-18 times of the estimated earnings for 2005-06, against 4-5 times FY06 estimated earnings of the combined entity.

Shipping Corp.'s revenues are seen flat due to lack of adequate capacity addition. For Mercator Lines, analysts said the biggest trigger would be the announcement of the much-talked about overseas acquisition.

Freight rates of very large crude carriers fell to US $79,165 a day in November, from an average $152,855 a day same period a year ago. In October, it was around $35,000 a day.

These rates are expected to strengthen, once the winter intensifies in the US and Europe, the world's biggest winter heating fuel markets. Industry players, however, do not expect freight prices to touch the previous year's high.

"The freight rates (crude oil freight rates) will be softer this year, as the Incremental oil demand is lesser and due to addition of more tonnage," an official from GE Shipping told CRISIL MarketWire.

The company derives 70% of its revenue from tankers. Crude prices fell to a 4-month low of $56.93 a barrel Friday on the New York Mercantile Exchange on reports of milder winter this season coupled with higher inventory in the US.

However, the freight rates for very large crude carriers, post-winter, may not be sustainable due to the increased supply of tankers. "VLCC freight rates are expected to settle around $40,000 a day after winter," said Aditya Sood, strategist, Fortis Securities.

The Baltic Dry Index, a barometer of the cost of moving dry-bulk cargoes around the world, fell to 2,935 on November 8, from an average of around 5,538 in December 2004.

In an analyst conference call after the second quarter earnings, Bharat Sheth, vice chairman and managing director, GE Shipping, said, "It will depend on how people see iron ore prices. Clearly, about 90% of the incremental trade that is taking place in the dry bulk is taking place only in iron ore."

Sheth believes that demand for iron ore from China will be the major growth driver for dry bulk freight rates.

"Everything hinges on China in dry bulk, unlike tankers where you have many more players. So if the Chinese government decides on a strategy to reduce imports, so that they can keep the price of iron ore to a low level, then you might not see any further increases in the dry bulk earnings," he said.

Galbraith's, a London-based shipbroker and international shipping consultant, sees lower dry bulk freight rates in 2006, compared to the previous two years.

At 1526 IST, GE Shipping shares were up 3.4% over Monday at 229 rupees. Shipping Corp. of India shares were up 0.1% at 154.35 rupees, while Mercator was up 1% at 116 rupees.