Profits of shipping companies to remain under pressure

Amit Mitra Hyderabad | Updated on May 23, 2011 Published on May 23, 2011

SCI-owned VLCC

Profits of shipping companies are expected to remain under pressure this fiscal in the wake of a drag in the freight market.

Even though there has been a marginal recovery in freight rates, over supply of ships globally are keeping a lid on the rates. Analysts do not expect a full recovery in the market before 2013.

“Despite the pick-up in trade growth, the net addition to fleet during 2011-12 would be significant and the world trade growth is unlikely to be able to absorb the incremental capacity, notwithstanding the cancellations and slippages. The downtrend in the shipping industry is likely to be prolonged,” a recent report by ICRA points out.

The VLCC (Very Large Crude Carrier) rates, for instance, nudged up from an average of $ 2754 a day in January this year to $ 10,683 and $ 14,477 in February and March respectively, before tumbling to $ 552 last month. Currently it is hovering around $ 1,000 a day. Similarly, the Baltic Dry Index has been hovering between 1350 and 1490 mark in the last four months, as against 3297 in the April-June 2010 quarter.

The fall in charter rates had prompted some of the domestic ship owners, which had their fleet on long term contracts, to renegotiate rates. “From the perspective of the industry, we continue to have a cautious outlook for the freight market for the next six to 12 months. But as a company, we are well hedged, as almost our entire fleet of 25 vessels are on long term contracts ranging from three to five years,” Mr A.R. Ramakrishnan, Managing Director of Essar Shipping Ltd, told Business Line.

On the dry bulk side, the massive order book of about 54 per cent of the existing global fleet size has been having an impact on tonnage balance, with impact on freight rates for the larger carries expected to be more pronounced. On the tanker segment, ICRA believes that recovery will be slow, with the Baltic clean Tanker Index sliding by about 75 percent from their peak levels before recovering in early 2010. “The ongoing Middle East and North Africa crisis has led to increase in crude prices—if the situation escalates and rise in oil prices go beyond a reasonable level, it could lead to destruction in demand growth,” the ICRA report points out.

However, container vessels may chart a better recovery course, with the present container idle ratio being 1.5 to 2 per cent, significantly down from 10 percent in 2009. The global container fleet is currently about 4719 carriers, with a total capacity of about 14 million TEUs and an order book of 4.7 million TEUs as on January 1, 2011.

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Published on May 23, 2011
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