The Hindu Business Line : GE Shipping's bet on single-hulls pays off

SOME major corporate decisions initially appear to be laden with risk, causing eyebrows to be raised in the market. But in the course of their implementation, when the returns are tangible, it becomes evident that the decisions were an upshot of painstaking research, elaborate analysis and calculated risk. And this is precisely what Great Eastern Shipping, India's largest fleet owner in the private sector, has proved.

When the company opted to buy eight single-hull tankers last fiscal, many eyebrows would have been raised, as this category of tankers is on its way to the scrap yards the world over due to the IMO decision to replace all single-hull tankers with double-hull tankers by 2010. But the company has shown that it made better economic sense to buy these tankers, instead of the costlier double-hull tankers — in the last five months of operation the company has already recovered 25 per cent of the investment on them.

Says Mr Bharat Sheth, the company's managing director: "When we studied the tanker market, we noticed that there was a mismatch in prices of single-hull and double hull tankers of nearly the same age to the extent of almost 40 per cent in asset value that was not getting translated into earnings. It was then that we decided to go in for the single-hull vessels for better leveraging of the capital."

Of the 11 tankers that the company added to its fleet last fiscal, eight were the single-hull type, which involved a total capital cost of Rs 490 crore. And it paid off, as is evident from the fact that during the last five months the tankers were in operation, they earned an operational profit of Rs 122 crore.

"This, in other words, means a 25 per cent return in five months, or 60 per cent return on an annualised basis. We are confident that we will recover the entire investment for these tankers by 2005," says a senior company official.

Given the fact that the tankers still have a residual life of an average of seven years and the IMO having agreed to give each country a window to extend the 2010 deadline for total phase-out of single hull tankers by another five years, the GE Shipping tankers will be bringing in handsome profits during their remaining operational life.

"This is particularly so, as we believe that the tanker freight market will continue at a steady pace in the coming years. As per estimates, oil demand is expected to grow by 2.1 per cent in 2004, with about 35 per cent of the incremental demand flowing from China. It is also expected that there will be no tonnage supply overhang in 2004, as increase in supply will be easily absorbed by the demand, keeping the freight rates firm at a level higher than the five-year average," said the official.