The Hindu Business Line : Shipping cos in no hurry to buy assets

Correction foreseen
Great Eastern Shipping has made use of the high asset prices to book profits by selling ships in the last few months, waiting for a market correction to happen before replenishing their fleets.
In the tankers segment, the asset values will remain strong for the rest of this calendar year, with correction in values commencing sometime in 2007.
On the bulk carrier front, expectations are that the correction in asset values may take place a little earlier, perhaps in the last quarter of 2006.

Mumbai, June 6

With new ship prices internationally continuing to rule high on the back of rising interest rates and steel prices, Indian ship owners do not seem to be in a hurry to acquire new assets immediately. Instead, most shipping companies are waiting for an anticipated correction in ship prices towards the later part of the year before they resume shipping.

In fact, some companieslike Great Eastern Shipping have made use of the high asset prices to book profits by selling ships in the last few months, waiting for a market correction to happen before replenishing their fleets.

GE Shipping sold six ships last fiscal — three tankers, including its first VLCC (very large crude carrier), and three dry bulk ships — clocking a profit of about Rs 331 crore, which accounted for about 12 per cent of its total revenues.

In the first quarter of the current fiscal, it sold another product tanker, the 1996-built Jag Prachi.

Shipping analysts feel that in the tankers segment, the asset values will remain strong for the rest of this calendar year, with correction in values commencing sometime in 2007.

"To what extent is difficult to say at this stage, but it would depend on the spot market trends and interest rates," according to an analyst.

Bulk carrier front

On the bulk carrier front, expectations are that the correction in asset values may take place a little earlier, perhaps in the last quarter of 2006.

Analysts also feel that there could, however, be some reorientation in ownership, which the market could witness on the new building deliveries that were booked on speculative basis in 2004 (at the market peak) by investors.

Investors may decide to sell off these assets to bankers rather than take delivery and face a declining earnings market. This, however, will remain the opportunity buys for some of the hawk-eyed shipowners.

Summing up the thinking at GE Shipping, Mr Rajat Dutta, the company's General Manager, said: "For 2006-07, we have not really planned much, because asset value continue to remain high. We are hoping that in dry bulk, values may correct in the summer months or later during the year. And if that happens, we will buy. At the current values, we are a little reluctant to do anything too aggressively, because based on the forward curves, investments at today's values will probably not give you much more than a five to six per cent return."

Capex programme

The company's committed capital expenditure programme for its shipping division is $268 million in new building orders for seven product tankers, with deliveries between February 2007 and September 2009.

Indeed, new building prices of ships have remained at historical high levels, mainly due to speculation of strong future earnings, shortage of berth supply and rising steel prices. With order book continuing to expand by the week, shipyards the world over are inching towards completing all deliveries by 2009. In short, the shipbuilding market continues to be tight.

Further, on April 1, the Common Structural Rules for tankers took effect and their implementation has put pressure on asset prices.

The joint tanker project, under the auspices of Lloyd's Register, American Bureau of Shipping and Det Norske Veritas, made concerted efforts in standardising the structure for enhanced efficiency and increased safety by addressing key design parameters.

This is expected to increase the overall requirement of steel per ship and contribute to the rising ship prices.