The Hindu Business Line : Shipping cos gain on firm freight rates

Shipping stocks have been gaining steadily on the bourses of late. According to analysts tracking shipping industry, the sudden upsurge of freight rates in the global market appears to have improved earnings outlook for shipping companies in the near term. From a level of $50,000 per day in the beginning of August, the Very Large Crude Carrier (VLCC) rate surged to $62,303 per day on August 10.

Market sources attribute the firmness to shortage of crude due to the partial shutdown of British Petroleum's (BP) Alaska (Prudhoe Bay) oil field. "The gap in supply is being augmented by OPEC crude," an industry source said.

The stock of GE Shipping ended at Rs 253.80 on the BSE. The counter has appreciated by 13.35 per cent week-on-week. Mercator Lines has appreciated by more than 35 per cent week-on-week and 25 per cent month on month. The stock closed at Rs 39.90, up 19 per cent on Monday on the BSE. SCI ended the day at Rs 140.70 (BSE), gaining 4.5 per cent week on week and 9 per cent month on month.

BP shuts down

The shutdown has reportedly occurred on account of corrosion of pipelines. Lost production has been estimated at 400,000 barrels per day (bpd) and BP has not announced a re-start keeping in mind the environmental hazard, analysts said. Prudhoe Bay reportedly accounts for eight per cent of total production in the US department of energy.

Even as BP faces probe over the issue, shipping companies, which have a large part of their fleet in the spot market, appeared to be all set to gain from the current `spike'. "While long term contracts will not be impacted by this spike, those in the spot market will benefit," an analyst said.

GE Shipping has almost 45 per cent of its fleet in the spot market and if the rates sustain for another month or so, it will impact the bottomline of the company positively. "One could see operating margins go up by Rs 40-50 crore," said market sources.

Other companies that would benefit from this sudden surge in freight rates globally are Mercator Lines and the Shipping Corporation of India, which have some amount of cargo on spot.

`One-time factor'

Analysts maintain that traditionally September is a weak quarter for shipping companies. However, this `one-time factor' may improve earnings outlook for the next seven-eight months for shipping companies. "In fact, this period is considered a lean period for the freight market. It usually picks up in the winter months when there is increased movement of oil for heating purposes. In other words, it is expected that the freight rates will go up further in the coming months," said an analyst.

At the beginning of the first quarter of the financial year, the market was weak, but subsequently there was a steady rise in the freight rates and, concomitantly, the earnings of shipping companies. Recovery of refineries after their seasonal maintenance and robust demand for gasoline and jet fuel pushed refiners to increase throughput, which resulted in additional demand for shipping tonnage.

Rising demand

The average freight rates in the months of May and June in the VLCC segment were $37,854 and $49,706 per day, as against $26,103 and $19,201 per day in the corresponding months of last financial year, respectively.

There was a similar trend in the dry bulk sector, especially in the wake of increased movement of commodities. Also, there was a surge in US steel and cement imports due to rebuilding activity in US Gulf following the devastating hurricane.

Further, grain trade, especially Brazilian soybean exports have been on the rise, backed by the US grain exports. "With India reducing iron ore exports to China, there was also a shift in the trade route from Brazil, resulting in higher tonne mile demand. This was further supported by delay in Australian lean ports during the quarter," an analyst said.

The Baltic Supermax Index (BSI), which was 1,768 on April 3, 2006, rose to 2,227 on June 30 and 2,326 in the last week of July. From an average of 2,442 and 2,738 in the months of May and June, the Baltic Dry Index (BDI) rose to 3,981 on August 10.

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