A tough year ahead for shipping

If 2011 was bad for the shipping sector, 2012 could be worse. Too many ships and too little cargo are expected to keep the freight market low, putting pressure on the margins of shipping lines. Mr Sabyasachi Hajara , Chairman and Managing Director of Shipping Corporation of India, the country's largest shipping company, sees a tough year ahead for the industry. Besides the impact of the economic slowdown, the shipping industry will also continue to face problems of excess capacity, at least till the end of 2012, said Mr Hajara, in an interview to Business Line.

Excerpts from the interview:

What is the outlook for shipping in 2012?

I can't say it is very optimistic because, unfortunately, the supply pressure (with new ships) will continue even in 2012. Last year we saw a historic high for ship deliveries, arising out of historically high orders placed in 2007. The growth in supply continued in 2011, but was slightly lower than last year.

The coming year will also see a growth in supply of anywhere between 5 per cent and 8 per cent, whereas the growth in demand is expected to be just about 2 per cent, or thereabouts, because of various reasons such as Euro zone problems and the US economic slowdown. Even China and India, which are expected to fuel the world economy, are under pressure.

So, we are going to face a very tough year for shipping.

Is the present situation worse than in 2008?

Yes, in many ways. First, the supply-demand situation then was not as bad as it is today. Second, shipping companies then had more cash surplus.

Third, what we saw in 2008 was more of a financial market crisis and less of a commodity market crisis, whereas today it is more of commodity market crisis. A financial crisis hurts shipping companies less than a commodity market crisis. So, in every way, we find today's situation worse than in 20008-09.

When do you think the supply pressure will ease?

Since 2009, orders for new ships were meagre; so supply of fresh tonnage will be limited from 2013. Things should look up from then on.

Do you see any silver lining for Indian lines?

Indian shipping lines will be slightly better off than their counterparts in terms of deployment of tonnage, as the growth in India will definitely be better than most other countries, other than China.

Vessel idling may be less for Indian lines but this may not translate into much topline or bottom-line growth for them, because freight rates will be governed purely by the international market. There are no Indian freight rates per se .

Which segment is worse off?

The situation is bad everywhere. The tanker segment seems to be the worst hit. MISC (Malaysian shipping company) has decided to wind up its container business. It is a government-owned company, yet it could not withstand the pressure.

There are signs of consolidation everywhere. The recent tie-up between MSC and CMA-CGM is nothing but an effort to stand up to the pressure of Maersk, which is going in for capacities like 18,000 TEU vessels. There are signs of consolidation even among shipyards.

What about the offshore sector?

Yes, players that have slightly bigger exposure to the offshore sector are better off. This is the only segment which has not really suffered. Offshore rates remain firm on the back of high oil prices. There has been much exploration and production activity in the offshore oil sector all over the world, particularly in Brazil, India and the Middle East.

Deep-sea E&P activities keep up the demand for offshore services. So those having offshore services along with shipping would have benefited to that extent.

Another segment that is doing fairly well is LNG. After the Japanese nuclear crisis, LNG rates have shot up. But this does not have any major consequence for Indian shipping.

But SCI does have some LNG carriers…

We have part ownership of three vessels; we operate two of them, and the third will also come into our fold in 2012. But that is a very small segment of our business. Going forward, we hope that we will be the natural choice for Petronet's Kochi project, and for other LNG projects in the country.

Can Indian lines do anything to reduce the impact of current market conditions?

Why Indian? No company can think of going for long-term charters today; nobody is going to offer a decent rate. So we have to simply keep our ships deployed on short-term charters, and hope that the situation will improve. We don't know when it will improve; it could be end of 2012 or sometime in 2013.

What can SCI do?

Be it SCI or any other company, we have to see how we can cut expenditure. On the freight or charter rates, we have no control. So I don't see that there is anything spectacular that one can think of. We have to face the market and its ups and downs. Profit and loss are factors of the market. Many companies are making losses. There could be a company which, fortunately, has a long-term charter concluded two or three years back. As far as SCI is concerned, we don't have any such long-term charters tied up. We just have to conserve our cash and wait for the market to improve. There is nothing else that anyone can do.

Do you to need to rework your strategy to cope with the current market situation?

There is nothing to rework. There is no need to tweak our long-term plans. What we are seeing today is a temporary phase; it may be there for another year or so.

Our internal resource generation and margins have suffered due to the bad market. So we have to adjust our short-term plans. In any case, we have 27 vessels on order, and they will be delivered. When it comes to ordering more ships, we will have to follow a cautious approach, at least in the immediate future.

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