The Hindu Business Line : Weak freight takes wind out of shipping firms' sails

Expectations in the shipping sector are that the tanker market may not pick up in the coming months. As this would keep earnings tight, shipowners are hoping for a firming up of the dry bulk market.

A soft freight market, especially in the tanker segment, accentuated by the entry of newbuildings and reduced scrapping of old ships in the global market, has impacted the incomes and profits of Indian shipping companies.

Expectations in the industry are that the market may not pick up in the coming months; this would keep the earnings of shipowners tight. Save for Essar Shipping, which notched up a 39 per cent jump in its third quarter net profit compared to corresponding previous period, most shipping companies reported a dip in earnings and profits.

While Mercator Lines reported a 72 per cent drop in its third quarter net, at Rs 15.38 crore, from Rs 55.23 crore in the same period last year, Shipping Corporation of India (SCI)'s drop was 15 per cent at Rs 226.6 crore (Rs 268 crore). Similarly, Varun's net dropped by 25 per cent to Rs 39.6 crore (Rs 52.7 crore), while GE Shipping reported a marginal, 1.8 per cent, slip (Rs 152.9 crore (Rs 162.8 crore). Net profits of shipping companies usually include profit from sale of ships, which some companies had resorted to this fiscal to counter the weaker freight earnings.

VLCC market goes soft

The industry experienced a lower freight market, especially in the Very Large Crude Carrier (VLCC) segment, which even now is cold. "At the moment the VLCC market remains pretty soft. We obviously need OPEC to get back to increasing production because, as you know, there is a very close co-relation between OPEC production and VLCC earnings. So unless OPEC really gets back some more oil into the market, I think the VLCC market will continue to remain soft," says Mr Bharat Sheth, vice-chairman and managing director of GE Shipping.

Industry analysts say that spot earnings in the tanker segment were lower during the quarter compared to the previous period, which forced companies to go in for period charter renewals to make up for the drop. For example, GE Shipping had about 38 per cent of revenue days in the third quarter on the spot market against 41 per cent in the corresponding previous quarter.

Dry bulk firms up

Analysts say what could help shipping companies make up for the weak tanker market is the firming up of the dry bulk market.

This market is being fuelled by increased movement of commodities — and this is not confined to iron ore and steel, but also includes commodities such as coal, cement clinker, bauxite, rock phosphate and fertilisers. Another factor hotting up the dry bulk segment is that about 28 per cent of the world's dry bulk fleet is more than 20 years old.

Given that dry bulk movement involves hauling commodities over longer distances and hence longer turnaround time for ships, this factor is expected to keep the dry bulk freight rates tight, analysts say.

What could, however, strengthen the tanker market is US inventory levels, which at the moment still remain relatively high compared to their five-year average, as refineries had stocked up oil in the second quarter of this fiscal on the back of fears of a further rise in prices.

"Another thing is OPEC's action — whether, in case crude oil goes back to the $60 a barrel, OPEC is prepared to bring back on stream the 1.2 million barrels that it has actually taken off from the supply," points out Mr Sheth.

Yet another factor that could have a bearing on the freight market is the entry of new ships in the global market, although asset prices continue to remain high. I

New Vessels

Indeed, except for single-hull tankers, which mirrored a 20 per cent dip in prices in the last quarter, dry bulk assets had in fact moved up by about 20 per cent. The ensuing fiscal may see some amount of capacity coming through in the tanker side, which would further weaken tanker earnings in 2007, compared to 2006 or 2005.

The balancing factor for the shipping industry could be the possibility of more scrapping of old tankers, with 11 per cent of the world's tanker fleet being over 20 years old.