The Hindu Business Line : SCI gets nod for VLCC acquisition — But has the freight opportunity sailed away?

THE Union Government's recent decision allowing Shipping Corporation of India (SCI) to acquire two Very Large Crude Carriers (VLCCs) has not come a day soon. It took a long time for the Government to make up its mind on the company's proposal for these acquisitions. Not without reasons though.

On paper the company has the power to, at a time, take decision up to the value of Rs 300 crore ($70 million approximately) but there are still procedures involving government approvals at various stages before any decision can really be taken by the company and there is no way one can bypass these procedures. The process, thus, is tardy. But the shipping market is not the kind of place where one can afford the luxury of tardiness.

In the case of VLCCs, there is yet another problem. Their prices having skyrocketed, from around $65 million apiece a couple of years ago to more than $100 million now, there was little the company could do even within its powers in matter of acquisition. Government's clearance, therefore, was a must. Ergo, no escaping the delay.

When these two VLCCs come on board, SCI's VLCC fleet will double. The first of the two in-service VLCCs, Desh Ujala, joined the fleet in January and the second, Desh Vaibhav, in August. With these two vessels, SCI was back in the select club of VLCC owners.

Ever since its last VLCC, Kanchenjunga, was scrapped in 2000, SCI's fleet had been without a tanker of this size. But the two vessels joined the fleet at a time when the tanker boom has ended. Now a VLCC fetches $30,000/35,000 a day compared to $280,000 last December. The public sector shipping company thus failed to cash in on the boom on the freight front in respect of both VLCCs and capsize bulk carriers; nevertheless it acquired two LNG carriers, four Aframax and four Suezmax tankers in past couple of years.

The orders for these vessels were placed quite some time ago. For example, the orders for Desh Ujala and Desh Vaibhav were placed as early June 2003.

Right now SCI's tonnage totals to around 4.9 million DWT, comprising more than 3 million DWT of crude tankers, 450,000 DWT of product tankers, 1 million DWT of bulk carriers and 120,000 DWT of specialised vessels such as LPG and chemicals carriers. The company also owns three container vessels of 1600 TEUs each and charters other vessels for liner services.

At one time, SCI's fleet size was four times that of the country's second largest shipping company, Great Eastern Shipping, but the gap has now narrowed down to 1.5 times. The reason: For three years the state-owned shipping company was not allowed to acquire any tonnage.

In early 2002, SCI was put on the disinvestment list and a moratorium was declared on all acquisitions. This continued for three years before it was scrapped. And those three years were the golden period of the shipping industry.

The company thus missed the opportunity. Had it been order for some new buildings at that time, the situation would have been very different from what it is now.

The moratorium was unnecessary, as SCI's immediate past Chairman and Managing Director was quoted as saying in a recent interview. By the time the review was done, it was too late. The boom in freight had gone while the asset prices had skyrocketed.

The Government's clearance of two VLCCs comes at a time when SCI has before it plans for acquiring as many as 26 ships of various types — four Aframax tankers (1.3 lakh DWT each) six LRI product tankers (70,000 DWT each), two Suezmax tankers (1.6 lakh DWT each), two Capesize vessels (1.7 lakh DWT each), four Panamax vessels (75,000 DWT each) and six Handymax bulk carriers (53,000 DWT each) besides two container vessels of 4300 TEUs capacity each. The cost of these vessels is estimated at Rs 6,500 crore to be funded by a mix of debts and internal accruals. When and how these acquisitions will materialise is, of course, anybody's guess.

Will SCI go for new builds or second-hand tonnage while acquiring the VLCCs just cleared by the government? The question is important because right now ship prices are high, yards full and lead times to delivery long.

Therefore, there have been suggestions to go for second-hand tonnage. But there is a problem. As a public sector company, SCI is constrained by the fact that second-hand acquisitions are generally negotiated deals and not on tender basis; a government company has to go through the tendering route.

In government circles, negotiated deals concluded in the second-hand market are generally viewed with suspicion. This is in sharp contrast to practices by private shipping firms. Private Indian shipping companies have made huge profits buying/selling assets at the right time. This is not possible for a government-owned company. Thus, SCI is believed to have finalised negotiations with a Korean yard for the VLCCs with deliveries in 2009/2010

Much has been said and written about the timing of the tonnage acquisition, which everyone recognises as crucial but few believe is an applied science. The leading ship-owners would attribute their decisions on when to buy and sell to "instincts". But one thing seems certain: The better practitioners devote much of their time interacting with those whose decisions influence trade flows.

With the growth of the Indian economy also arises the need for a strong national fleet, more so because as much as a third of the national fleet needs to be replaced.

For the Government to ensure smooth growth of the national tonnage, it will have to listen to what the ship-owners say. Perhaps, it is already doing so, but, more important, it has also to take the right decisions and on time.

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