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Can India propel growth in shipping industry?
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted November 20, 2006
Given the boom time in economy and natural advantages, will India becoming a leading maritime power - the answer has many ifs and buts.
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The natural advantage of an extensive coastline of 7,517 kilometers requires India to use sea transport for the bulk of cargo transport. Following the policy of liberalization, the Indian shipping industry and major ports have been thrown open to the private sector.
Shipping activity is buoyant and the number of ships registered under the Indian flag has reached 480. The average age of the shipping fleet in India is 13 years, compared to 17 years of the international shipping fleet. India is also among the few countries that offer fair and free competition to all shipping companies for obtaining cargo. There is no cargo reservation policy in India.
However, the shipping industry doesn't move faster. The Indian shipping industry needs to ensure a level playing field. The biggest challenge in the future will not be the quality of ships, but the sea-farers who are moving to tax-free havens.
Government Apathy
Shipping in India is not growing as fast as shipping in other countries due to non-conducive fiscal and regulatory policies, says Kiran Dhingra, Director General of Shipping. "The efforts of the shipping industry would lead to changes in policies, which will let it grow bigger and faster. The government would adopt a positive attitude towards the Indian shipping industry because of the economic growth that has taken place due to its greater efficiency in operations," she said.
Dhingra said that shipping has a multiplier effect on the Indian economy. "Indian shipping has kept abreast of the changes in technology and efficiency. Turnaround time in ports has been drastically reduced," she pointed out.
The Industry body CII has called for evolving a new mechanism for reviving India's maritime sector to increase private sector investments and enable more efficient management. Development of core infrastructure, port sector in particular, is crucial for the sector to become globally competitive, CII said in a release.
The chamber said that with the increase in the number of ships at the Indian ports, providing facilities like ship repair would not only strengthen the sector but also result in generating job opportunities for the local population. The chamber said that though Indian ports have a price advantage over other international ports, there is a need to develop conducive policies to provide growth opportunities to private players so that they are at par with the international players.
The Planning Commission of India also agrees that the shipping industry was performing below its potential as the government failed to respond to the changing market scenario and suggested that the problems impeding the sector's growth needed due attention. The need for increased government support - particularly in regard to the various taxes imposed on the shipping industry, has been noted by analysts too.
"The shipping sector has been dominated by the public sector and they (government) did not respond to market changes. The role of the government policy has to be driven to all these sectors (ports, shipping etc)," Commission Deputy Chairman Montek Singh Ahluwalia said.
Seeking enhanced participation from the private sector, he said resources available with the government are very limited as massive resources were needed for social sector projects. "Whatever can be done by the private sector should be done," he suggested.
He pointed out that by the end of the 11th Plan the ports would double their handling capacity but major investment in upgradation of ports was being done by the public sector. Currently the country's share in the world sea-borne trade stood at 13-14 percent, he said.
Ports and yards
The ports sector is ideal for private sector initiatives and recent limited experiences have been very encouraging.
India has 12 major ports and 187 minor ports. The 12 major ports carry about three fourths of the total traffic, with Vishakapatnam being the top traffic handler in each of the last five years.
The Government of India has chalked out investment plans for the port sector in the country. The Government expects an investment to the tune of $7.6 billion from the private sector out of a total $12.4 billion required by the port sector through private public partnership (PPP) in the country.
India has four major ship building yards at Mazagon in Mumbai, Kochi in Kerala, Hindustan Shipyard at Visakhapatnam and Hooghly Dock at Kolkata. There are 28 shipyards in the country, seven under Central public sector, two under state government and nine under private sector.
India's government decided to set up two shipbuilding yards, one each on the West and East coasts, at a cost of US$ 1.57 billion. This decision was made largely in response to the global shipbuilding boom and the starkly inverse lack of facilities in India.
As many established world centers are at new build capacity, ship-owners are looking more and more to alternative providers. India's yards have proved to be excellent builders of smaller craft and this is leading to increased confidence in their ability to handle larger vessels. Cochin is currently the largest of the nine state-run yards.
Of the remaining 14 privately owned yards, ABG and Bharati are among the most successful. Both yards announced firm orders for small vessels from companies in the Netherlands, Cyprus and Norway, and were already planning large-scale expansion. ABG, the largest shipbuilder outside government control, had orders in hand worth US $502 million. Its representatives explained that the yard planned to raise as much as US $125 million by external commercial borrowing.
Pipavav Shipyard has plans to build large commercial vessels after a deal made with an unspecified South Korean company. Another private sector engineering giant Larsen & Toubro, announced that it planned to invest US $400 million in its shipbuilding facility.
The market
The shipping market is cyclical in nature and freight rates generally tend to be highly volatile. Freight rates and earnings of shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth (growth in world trade) and trade patterns, the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.
Indian shipping companies have gained in their earnings during second quarter of 2006-07. The rise in their net and income has been attributed to strong, unseasonal freight market, especially in the tanker segment. Generally, freight market is soft during July-September period and earnings of shipping companies are generally low during this period. However, rise in crude oil prices during the last few months have build up the inventories due to speculation of further surge in crude oil prices, which soared the tanker freight market.
Foreign shipping lines are cashing in on the boom in the Indian container market. All global container carriers are either starting new services or enhancing their services connecting India, China and the Far East.
Going by preliminary estimates, foreign shipping lines are expected to start at least 10 new container services by the end of the year. The Shipping Corporation of India (SCI) is also in the process of tying up with overseas partners. Sources said Gateway Terminals India, the third container terminal at JN Port, operated by Container Corporation of India and Danish shipping line Maersk, has received over 40 applications from overseas shipping companies for berths.
Financials
After a strong 2005, which saw oil demand grow at its fastest pace in almost a quarter century, 2006 has been pretty volatile for the shipping companies, especially those operating in the tanker segment. For 2006, while the International Energy Agency (IEA) has projected oil demand to grow by 2%, tanker supply is expected to outstrip the same, thus leading to a continuance in pressure on rates.
During second quarter of 2006-07, crude tankers earned an average Time Charter Yield (TCY) of around US$32,015 per day, rise of 60% against the average TCY of US$19,847 per day in corresponding quarter of the previous fiscal.
Up to December 2005, cargo handled by major ports registered a 12.4 per cent growth, compared to 11.3 per cent observed in 2004.
During the second quarter of 2006-07, Shipping Corporation of India has recorded an outstanding growth rate of 115% and 47% in net profit and income respectively against the same period of the previous year. Similarly, Great Eastern Shipping has also recorded an excellent 51% and 26% hike in net profit and income respectively against the same quarter of the previous year. While Varun Shipping recorded higher growth rate of 40% in their income against the same period of the previous year; Essar Shipping and Mercator have also witnessed an excellent growth rate of 91% and 68% respectively in their income during the second quarter as compared with the same period of the previous year.
During Apr-Sep 2006-07, cargo traffic at 13 major ports in the country has recorded a growth rate of 6.13% against the same period previous year. During the first half of this financial year, total cargo handled by major ports has stood at 214.64m tonnes against 202.22m tonnes during the same period previous year. However, the cargo volume was quite short of the target of 227.91m tonnes fixed by the Shipping Ministry for the period. Kochi Port witnessed the highest growth rate of 28.51% among all major ports at 7.8m tonnes against 6.1m tonnes during the same period of the previous year.
Conclusion
Freight rates are expected to remain firm over the next 2 years, given the current high rates, an ageing fleet, and tightening regulations (leading to higher scrappage). Demand-supply is expected to remain favorable, as significant fleet replacements are due for single hull tankers in line with mandated safety norms, and fresh supply is expected to hit the markets by around 2007. Analysts expect the freight rates to correct post-2007 as fresh supply hits the market.
According to the Indian National Ship-owners Association (INSA), the Indian shipping industry is planning for major fleet renewal. In India, 56% of the ships will have to be scraped over the next five years. The average age of Indian fleet is around 18 years, and over 40% of the ships in India are more than 20 years. Internationally, the average age of retiring ships is 22 years. Ships over 17 years old should be overhauled, if they have to continue in service, but they can serve only up to 25 years. Moreover, Indian ships owned by private companies are mostly single-hull, and all of them have to be phased out by 2010, as per the commitment made to the International Maritime Organization. Therefore, for expansion and replacement, Indian shipping companies require an investment of US$4 billion by 2009.
Major Players
Essar Shipping Ltd
Great Eastern Shipping Co Ltd
Mercator Lines Ltd.
Shipping Corporation of India Ltd
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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