The Hindu Business Line : Sustained buoyancy in shipping industry

The protracted buoyancy in the shipping market has attracted the interest of general investors with the result that shipping stocks are ruling high.

Sabyasachi Hajara

Since 2003, the world economy has been experiencing a growth phase, the rate of growth varying between 4-5 per cent, and this has helped the shipping industry to have arguably the best period ever.

The protracted buoyancy in the shipping market has attracted the interest of general investors with the result shipping stocks are ruling high. There is a feeling now that shipping is unlikely to face the kind of slumps experienced earlier.

Ship-owners today are, therefore, willing to pay skyrocketing prices to acquire the existing tonnage and the tremendous ordering frenzy has resulted in slots in all established shipyards being booked till almost the end of 2011. The year 2007 has been more or less an extension of this trend prevailing in shipping markets since 2003.

The Chinese economic boom particularly influenced the dry bulk market with rates in almost all segments going through the sky. The strength of the market can be gauged from the fact that the average Baltic Dry Index crossed the 10,000 mark for the first time in its history. The reported per-day one-year period charter rates from modern Handymax/Panamax and Capesize bulk carriers moved by about 35 per cent by mid-2007 and finally more than 100 per cent by the end of the year over the levels of $30,000 and $60,000, respectively, in the beginning of the year. As usual, the volatility of spot rates was maximum in the larger segment of Capers than Handymaxes.

Although the tanker market was subdued as compared to the dry market, the earning levels were still relatively high by historical standards. After a reasonable robust first two quarters, the tanker market weakened during the third quarter, with rates falling to the lowest levels since 2003. To a large extent, the tanker market’s weakness was due to a counter seasonal drawdown in OECD oil inventories which suppressed the tanker demand, further exacerbated by accelerating new building deliveries.

However, towards the end of the year, the markets showed sudden recovery and the rates rose dramatically from mid-November, more so because the charterers developed apathy towards single hull tankers in the wake of the oil spill off the South Korean coast.

TANKER MARKET

The depressed tanker market, coupled with booming dry-bulk market led many owners to opt for conversion of their ageing single-hull VLCCs (very large crude carriers) into ore carriers, but then the sudden shooting up of VLCC rates, possibly the best ever December in history, has made the conversion economics not so attractive.

In the container market, freight, as well as charter rates, showed steady improvement with both moving above 2006 highs in the third quarter of 2007.

A common theme underpinning the growth has been the soaring volume in the Asia-Europe corridor. However, slowing of the US economy has been a matter of concern.

The introduction of tonnage tax in 2004 gave an impetus to growth in Indian tonnage and in 2007 Indian flag crossed nine million gross tonnage mark for the first time in the country’s maritime history.

However, despite the more benign tonnage tax being in place of normal corporate tonnage tax system, a host of other taxes, subsequently introduced in the Indian fiscal regime, have worked to the disadvantage of Indian ship-owners.

Indian flag is now deprived of a level-playing field vis-À-vis foreign flags and the Indian private sector shipping companies have even started flagging out through their foreign subsidiaries.

The spectacular economic growth and rapidly increasing sea-borne trade has definitely fuelled a high growth phase for the Indian maritime sector. There is undoubtedly simultaneous buoyancy in all important maritime segments such as shipping, ports and ship-building.

Under the National Maritime Development Programme, the government has laid down a very ambitious programme for development of Indian ports, shipping and ship-building to the extent of over Rs 1,00,000 crore over the next few years.

Ship-building, both in the public and private sectors, has also experienced spectacular growth in the last couple of years with India now producing well over 1 per cent of the world shipping tonnage as against barely 0.3 per cent a couple of years ago.

Thus overall, 2007 was a very satisfactory year and Indian shipping companies continue to be quite bullish on tonnage acquisition on the strength of a very good financial performance over the last two three years.

Scanning the horizon

The shipping market is expected to remain reasonably buoyant in the coming year on the strength of continued world wide economic growth and increasing sea-borne trade. Nevertheless, crystal ball gazing is rather difficult in view of the volatility and cyclic nature of the shipping industry.

The volatility is borne out by the fact that the ship-owner who is prepared to pay $90 million for a 10-year old capsize bulk carrier today would possibly not have been prepared to pay even $25 million for the same bulk carrier, then only five years old, in 2002. The spot charter market for Capers in the same period jumped from $12,000 to $1,50,000 per day.

Despite the sky-rocketing new building prices, the frenzy of ordering ships continues unabated, presumably because ship-owners are convinced that the market will stay at these levels in future also.

Since a large segment of the dry bulk tonnage is 20 years old, it is likely that the scrapping would mostly offset the supply side pressure through new building deliveries. The structural change in the tanker market due to relocation of the refineries to developing countries is also expected to help push demand in tonne miles for both crude and products.

The increased trade in finished goods with the emergence of India and China as the manufacturing hubs is also likely to add further impetus to the growth in demand in the container segment. All these factors and realistic expectations due to the growth of the world economy could make 2008 another decent year for the world as well as Indian shipping.

(The author is CMD, Shipping Corporation of India.)