Shipping firms grapple with low freight rates

Domestic shipping companies such as Shipping Corporation of India and Mercator Lines are grappling with spot freight rates that continue to weaken in the key tanker segment and in many cases, are even lower than those prevailing in the third quarter of financial year 2006-07.

The weakening of spot freight rates is attributed to delayed winter in the northern hemisphere, and the resulting build-up in inventory levels of heating oil and other allied products at refiners in western countries, shipping company executives said.

Spot freight rates in the very large crude carrier (VLCC) segment are currently at $26,860 a day compared with the average of $33,185 in the December 2006 quarter, analysts of domestic brokerage houses said. Spot freight rates in the VLCC segment a year ago were at $55,000 a day level. Also in the Suezmax (ships used to transport products for relatively shorter journeys) segment, spot freight rates are currently at $ 30,538 a day level against the average of $ 35,425 a day level in third quarter of FY07. Suezmax freight rates were $51,532 a day a year earlier.

To minimise the impact of the weakening spot freight rates, shipping companies typically have long-term contracts with their large customers. For instance, GE Shipping's long-term contracts helped its operating profit margin grow 140 basis points y-o-y to 45.6 per cent in the December 2006 quarter.

However, in the dry bulk segment, freight rates continue to strengthen. The Baltic Dry Index is currently at 4265 compared with an average of 4161 in third quarter.

The index was around 2223 level a year earlier. The continuing strength in the Dry Bulk Index is attributed to strong demand for transporting Chinese steel products across the globe.