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“The only relieving factor is that the US economy seems to be picking up and once a steady pick-up is there, we can say it will reflect in the market,” says Sunil Thapar, director, bulk carriers and tankers, The Shipping Corp of India Ltd (SCI). “For that, it will take another six months, so I do not think the worst is over .”
SCI, the country’s largest shipping company, has 16 dry bulk carriers, 23 crude oil carriers and 15 product tankers. The public sector company estimates that at the 1,100 level of BDI, some shipping companies will start making operational profit, depending on the bunker price and age of ship. (FREIGHTED WITH CRISIS)
According to analysts, the operational break-even comes in the range of $1,500 to $2,000, while the net level break-even comes at $2,500 to $3,000, depending on the cost of ship, including the borrowing for its purchase.
“The current spurt in the BDI is due to a drop in coal and iron ore prices in dollar terms. This has seen a spike in demand from China for the commodity,” says Vikram Suryavanshi, an analyst at domestic brokerage firm Antique Stock Broking.
The shipping industry saw the sharpest rise in freight rate when the index touched 11,793 in May 2008, up from 2,468 in January 2006. Freight rates rose as China imported record iron ore and coal prior to the 2008 Beijing Olympics to build infrastructure across the country.
This made shipping companies book record profit, largely used to order new ships. However, the party ended with the sub-prime crisis hitting the US economy, followed by the economic slowdown in China and Europe’s sovereign debt crisis.
Meanwhile, yards started delivering the orders and the worldwide fleet of bulk carriers rose to 679 at the end of 2012, up from 393 in 2007. Moreover, this is expected to see growth of 10 per cent and five per cent in the next two years, respectively, before it tapers to two per cent in 2015.
“Overcapacity is real ,” says a senior executive at The Great Eastern Shipping Co Ltd, the largest private sector shipping company in India. However, commodity prices going down is good for shipping as it encourages China to substitute its domestic low-grade iron ore with importing high grade ore from as far as Brazil. The company was prudent during the boom period of shipping and brought down its fleet from 49 in 2007 to 30 now, comprising nine dry bulk carriers, nine crude carriers, 11 product tankers and one liquefied petroleum gas carrier.
While the bulk carriers have been going through a severe crisis, crude tankers have not performed better. The US has become self-sufficient for crude, because of its own shale oil.
US imports of crude oil have gone down very significantly by almost 4 to 4.5 million barrels a day. That is not being made up by other areas that are growing in import demand. That has a negative outlook on the crude tanker segment.
On the flip side what has happened is the US’ refineries are working extra and that has helped product trade pick up significantly.
This has led to companies like Great Eastern Shipping putting more focus on the product tanker segment. “It’s the only segment that remained profitable in the last few years,” says the company executive.
The Baltic Clean Tanker Index, the benchmark for product tankers, was 561 on Tuesday, down from 1,505 in January 2006. It had touched its peak of 1,929 on October 24, 2005. The worldwide fleet increased to 136 in 2012 from 106 in 2007.
The Baltic Dirty Tanker Index, the benchmark for the freight rate of crude carriers, has come down to 609 on Tuesday from 1,893 in January 2006. It had peaked to 3,194 on November 17, 2004. The analysts and companies did not provide the average break even level for these two indexes.
Another private sector shipping company, Mercator Lines has also reorganised itself by bringing down its dry bulk fleet to 14 vessels; it sold a vessel and concluded termination of contracts on three in chartered vessels in the last quarter of 2012-13.
“Mercator has reorganised its assets and is today better positioned to face the low freight rate scenario in the industry,” says Prasad Patwardhan, chief financial officer . The company also sold one crude tanker and transferred another very large crude carrier to its Singapore subsidiary to bring down finance cost. This leads to a total tanker fleet of five vessels and it is looking to add one product tanker to this fleet soon.
“Plans to add another medium-range tanker is a positive as the segment is expected to record improvement in rates over the next one year,” said Chetan Kapoor, analyst at domestic brokerage IDBI Capital.
