Shipping industry just can’t float despite govt support
November 3, 2009
The shipping industry is somewhat of a blot on the India growth story. It hasn't added any significant tonnage in over 14 years as compared to the growth in most areas of business. And this, despite a large number of tax incentives, benefits and facilities doled out by the government in every annual budget over this period. In 1996, the industry carried 30% of India's foreign trade; this is now down to just 13% while the rest has gone to foreign shipping companies.
The world sea borne trade has increased by CAGR of 3.6% from 4900 million tonne in 1996 to 7000 million tonne in 2006, at the same time India's sea borne trade has also galloped by CAGR of 10% from 166 million tonne in 1996 to 471 million tonne in 2006, while our GDP has quadrapuled in the period to $ 1100 billion(2007); but Indian shipping has failed to take advantage of this growth. The overall capacity of Indian shipping increased by CAGR of just 2.2% from 7.05 million GT (Gross Tonnage) in 1996 to 9.06 million GT in 2007. This is mainly due to the greed of Indian shipping companies who are active in buying and selling ships at every profit opportunity, rather than expand the freight business. There are however a couple of exceptions such as GE Shipping and Varun Shipping.
Public sector companies like Shipping Corporation of India (SCI) had around 117 vessels of 5.1 million DWT (Dead Weight Tonnage) in 1996, that increased to 5.35 million DWT (87 vessels) in 2009. In effect, they added only 0.2 million of gross tonnage during last 14 years. Most ships purchased in this period were to replace old ships and maintain the age profile of the fleet – this too has remained constant in 14 years with no increase whatsoever. The present age profile is 18 years, which is the same as in 1996. The company’s annual investment has only gone into age profile maintenance.
In the shipping industry, tankers are usually replaced in 25 years and bulk carriers in 20 years. SCI Chairman S C Hazara told Moneylife Digital that the company plans to spend $ 4 billion on 68 ships by 2014. He says that 32 ships are likely to be delivered by 2012 and the remaining will come in by 2014 – this will expand SCI's capacity to 9 million DWT. By 2014, the average age profile of its existing fleet would have increased from 18 years currently to 23 years and will again need replacement and reduce overall capacity. In other words the same story will be repeated over and over again where new ships only replace old ones without any significant increase in gross tonnage. SCI's pervious chairman had also talked about expansion plans but did not delivery and capacity expansion.The saving grace is that SCI does not trade in its ships like other ship owners, but that is only because of the tiresome and time consuming process of getting approval from the shipping ministry.
However, there are plenty of trading opportunities for private companies. Ship valuations move in sync with the freight market, when the freight market slows down, ship valuations decline and offer excellent buying opportunities. When freight market improves, ship prices increase and private shipping companies are quick to sell off ships to make a quick profit.
Essar Shipping used to have 39 ships worth 1.5 million DWT in 1996, now their capacity is down to 1.39 milion DWT in 2007.
GE Shipping had 64 ships worth 1.59 million GT in 1996, it has doubled capacity to 2.84 million DWT with average age of 10 years in 2009 despite taking advantage of trading opportunity. This is probably due to their strategy of buying mainly old ships, which they are quick to trade. Varun shipping had 13 ships for 0.28 million DWT, it has more than doubled capacity in LPG carriers. Today they have 20 ships worth 0.63 million DWT.However, the two private companies were hardly able to create the capacity required to expand India's overall shipping tonnage despite large business opportunities.
Consider this: In 1996, Indian shipping company carried 10.4 % of general cargo, 14.5% of dry bulk and 54% of petroleum products and crude. This has declined to around 4% of general cargo, 8% of dry bulk and 26% of petroleum products and crude – the rest of the business has gone to foreign shipping companies.
Shipping ministry's plans for major investment in capacity have gone haywire. Whether it is boom times or depression, over a longer term, India's total tonnage has remained constant. For instance, between 1996 to 2004 the industry saw the deletion of 2.78 million tonne of capacity as against an addition of just 2.29 million tonnes.
This was followed by unprecedented boom in shipping time during 2005-08 when freight prices rose and triggered high valuation of ships. In fact, second hand ships were more expensive than new ships, which had a waiting period of two to three years for delivery. Consequently, that period say an addition of 4.99 million tonnage against deletion of 2.7 million tonnes. Yet, over the 14 year period, we are terribly short of what we needed to command a respectable shipping tonnage and that has reduced the share of Indian shipping to just 13 % of tonnage of total foreign trade.