GE Shipping: Sailing ahead

GE Shipping hopes to cash in on the oil and gas boom

The Great Eastern Shipping Company Ltd (GESC) has chalked out a Rs 1,400 crore expansion plan which entails acquiring four MR product tankers, two Suezmax carriers and five other ships.

The company's strategy of expanding its presence in transporting petroleum products is logical given the recent drop witnessed in the dry bulk freight rates "" handymax rates had peaked at around $35, 000 per day in March-April 2004 and are currently lower by approximately 30- 35 per cent.

In FY 04 the country imported an estimated 84 million tonne of crude oil, constituting approximately 70 per cent of the total consumption of petroleum products.

And while petrol and diesel prices have been recently hiked, analysts do not expect a drop in consumption in petroleum products given the rapid growth witnessed in sales of 2-wheelers and automobiles, and given the robust growth in the economy.

Hopes of growing imports of crude oil have led freight rates in the Suezmax segment to show greater resilience vis-a-vis the dry bulk segment.

Freight rates in the Suezmax segment are currently hovering at approximately $37,000 - $38, 000 a day, a year-on-year growth of approximately 15 per cent.

Also with exports of refined oil from the country showing a growth of 50 per cent to reach Rs 16,317 crore in 2003-2004, demand from oil refiners for MR product tankers has been strong.

Analysts expect refined oil exports to grow, albeit at a slower rate, given the current expansion in capacity being undertaken by oil PSUs and private sector players. Freight rates in the segment are currently approximately $16, 000 per day, a year-on-year growth of approximately 12 per cent.

Also with oil exploration major ONGC planning to invest approximately $2 billion every two years, GES is aggressively working to ensure that it can provide the supporting shipping facilities needed. And as part of that strategy it is planning to acquire 5 offshore support vessels. In this environment, GES's strategy is well tuned to take advantage of the emerging opportunities in the oil and gas sector.

That's easily seen from the company's stock, which has outperformed the broader market in recent times, despite the Baltic Dry Freight Index dropping approximately 15 per cent in the last quarter "" the company's stock has gained approximately 35 per cent in the last 6 weeks.

Reversal in NDF market

Recent changes in the trend of rupee appreciation have been reflected in corresponding changes in the non-delivery forward (NDF) market for the rupee. These markets exist in Hong Kong, Taiwan and Singapore since the 1990s where forward dollars for any maturity are available at a premium compared to the value in the Indian spot market.

Unlike the Indian market, deals are settled on net basis and are not based on actual delivery. The net payment is the difference between the agreed forward exchange rates and the subsequently received spot rate.

Premia in the NDF market have recent gone up sharply. On Friday, while the spot rupee was at 45.85/86 per dollar, forward dollars were available at 45.74 for one month, 45.79 for three month, 45.84 for six month and 45.96 for 12 month. In the NDF market, dollars of corresponding maturity are available at 46.10, 46.21, 46.35 and 46.47, respectively.

This is in sharp contrast to the situation in April, when one month forward dollars in India were available at a discount to the spot rupee.

On the other hand, when the spot rupee was at Rs 44.50, the NDF market offered dollars till six month at 44.80/90. Further, while one year dollar was available at 44.45/50 in the Indian market, the NDF market offered one year dollars for 44.76/9.

Clearly, the NDF market offers plenty of opportunity for arbitrage. A recent paper for the Bank of International Settlements by Guonan Ma, Corinne Ho and Robert N McCauley points out that "since 2001-02, offshore positioning on further Asian currency appreciation has driven offshore implied interest rates below onshore rates for some Asian currencies.

This development is most obvious in the case of the Chinese renminbi and the Indian rupee, where the estimated onshore/offshore interest rate spreads swung widely from a negative 400-1,000 basis points in 1999-2001 to a positive 400-1,000 basis points by late 2003.

The recent developments in the NDF market, with widening spreads and implied interest rates moving up beyond onshore rates, indicates a reversal of trend.

With contributions from Amriteshwar Mathur and Anindita Dey