Shipping cos: Firm freight rates fuel earnings

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INDIAN SHIPPING companies could notch up higher Q2 earnings, due to the unseasonally strong freight market sentiments, especially in the tanker segment.
INDIAN SHIPPING companies could notch up higher Q2 earnings, due to the unseasonally strong freight market sentiments, especially in the tanker segment.

Amit Mitra

Fears of crude oil prices soaring further have driven countries to build up inventories in the last few months. And this was precisely why the tanker freight market was unexpectedly high this summer.

For shipping companies, this meant good business. Freight markets being generally soft between July and September, earnings of shipping companies are usually low during this period. But, Indian shipping companies could notch up higher earnings in the second quarter of this fiscal, due to the un-seasonally strong freight market sentiments, especially in the tanker segment.

Good and bad news

That is the good news for shipping companies. The bad news is that there could be a possible dip in the tanker freight market in the coming months, as there has been a distinctly lower demand for ships last month, with oil-importing countries drawing from their inventories, instead of going in for fresh imports.

According to analysts, the tanker markets will remain weak this quarter, with possibility of a pick-up only in early 2007. However, the positive for shipowners is that, the dry bulk market that was soft in the last quarter, is expected to remain strong for the next couple of quarters.

Shipping Corporation of India (SCI) net profit and income in the last quarter rose to Rs 321 crore and Rs 1,129 crore respectively from Rs 149 crore and Rs 767 crore in the year-ago quarter.

Similarly, Great Eastern Shipping reported a 51 per cent and 26 per cent rise in its second quarter net profit and income to touch Rs 235 crore and Rs 593 crore respectively compared to the second quarter of last fiscal.

While Varun shipping's income increased to Rs 204.8 crore from Rs 146.2 crore, that of Essar Shipping rose by 91 per cent to Rs 298 crore during the just-ended quarter. Mercator also posted an income of Rs 295 crore during the quarter, against Rs 178 in the corresponding previous quarter. Clearly, the second quarter of this fiscal brought significantly higher earnings for shipping companies compared to the second quarter of the last few years.

According to Mr Bharat Sheth, Vice-Chairman and Managing Director, Great Eastern Shipping : "Clearly what happened in the just-concluded quarter astounded everybody with the strength of the market. And that was driven also by disruption at one of the big oil companies in Prudhoe Bay, problems in West Africa and stronger tonne-mile demand emanating out of China."

Drawing from inventories

He pointed out that, traditionally, markets are soft in the July-September period only to pick up from October. "But this year around, in anticipation of potential high crude oil prices and bad weather in the previous two years (when there were disruptions due to hurricanes), lot of countries built up inventories. As a consequence, today people are drawing from their inventories as opposed to importing oil."

Reports indicate that crude tankers earned an average TCY (Time Charter Yield) of about $32,015 per day in the last quarter, up 60 per cent compared to the average TCY of $19,847 per day in the second quarter of last fiscal.

The Baltic Clean Tanker Index rose from 1076 on July 3 to 1116 on September 29, after which it fell to 903 on October 26, 2006, indicating the subsequent softening of the market.

Shipping companies are likely to be compensated for a weak tanker market by a relatively stronger dry bulk freight market in the coming months, especially based on projections of a sustained growth in China. "We think China will continue to require large quantities of iron ore. I think what is equally interesting is that the three large iron ore suppliers are in an expansion mode and the bulk of this expansion is coming through in 2008. If they are expanding, it stands to reason that they believe they will be able to sell this ore. And this is good for us," points out Mr Bharat Sheth.

As far as steel is concerned, export of Chinese steel has been growing, with the biggest market being the US this has added significantly to the tonne-mile demand. This was one factor that pushed up the dry bulk market towards the end of the second quarter and remained strong this quarter.

(This article was published in the Business Line print edition dated November 6, 2006)
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