‘Fairly positive outlook in offshore drilling market'

Mr A.R. Ramakrishnan, Managing Director of Essar Shipping Ltd, sits in an envious location at the company's headquarters in Mumbai. From the 14th floor of the Essar House, he has a bird's eye view of the Bombay Race Course and a breathtaking view of the Arabian Sea — a visual treat for visitors.

As part of the $17-billion Essar Group, Essar Shipping has a fleet of 27 vessels, including very large crude carriers, mini-bulk carriers, Supramaxes, tugs and Capesizes with a combined tonnage of 1.8 million. It has an order book of 12 new building vessels.

In an interview with Business Line recently, Mr Ramakrishnan discusses on various industry issues and the Essar's bet on shipping in the long run.

Is the industry looking at a prolonged cycle?

These are tough times for shipping, which has traditionally seen cyclical times, but the present state looks like a prolonged cycle. It has been a bit unusual in the longevity of the cycle from 2008. In 2009, people were apprehensive; in 2010 it eased up a little bit and in the last few months, things are bad. But all these sentiments can ease if something happens. For example, two to three months of China lifting iron ore can swing the market in a positive direction. Consumer sentiments need to come back. There is a huge interlink as to what happens in Europe and what happens in China. In the past, the trend in each segment, whether it is container, bulk or tanker, could be different. While some could be positive and some negative. But, today, there is pressure across all segments.

What are the challenges?

It is the least interesting times as the world is going through lot of challenges whether it is on the fate of countries like the US or the euro-zone crisis or growth sustaining in India or China at 8-9 per cent. There is always an excitement about China, whether its energy consumption will come down or [there will be] some cap on its reality market. Shipping, being a global business and closely inter-linked to trade [as over 90 per cent of the world trade is transported by ships] gets affected when there is a minor turbulence — starting from a storm in the US or Gulf to the North America's winter. Anything can affect the global trade in terms of the need for commodity and translates to shipping.

What uncertainties do you see?

There is always the demand uncertainty in certain geographies. For example, in 2008-09 there were negative sentiments in the US and Europe leading to poor consumer offtake. This was followed by the crisis in Europe, and today there is still question mark over recovery in Greece, Spain and Italy. These affect global demand for shipping. On the supply side you have excess tonnage coming in terms of new buildings. The rush of orders that happened in 2007 and 2008 are culminating into physical deliveries. That will go on during this calendar year, and especially the larger vessels. It is tapering on next year. This is one major aspect that will affect the supply.

How do imbalances in supply and demand affect the industry?

In shipping, even a slight imbalance in cargo demand and supply can create high degree of volatility in freight rates. If there is cargo to be lifted in an oil terminal but there is hardly any ship around, then the freight rate spikes there. Or if there is uncertainty about crude oil movement through a particular channel, then again things will pick up. At the same time, excess tonnage in a particular area pushes down the freight rates. So, the swing is pretty high, which you do not expect in most of the industries.

How far is a recovery in global trade?

Towards the later part of the year we should start seeing a positive move once there is lot more certainty in regions like Iran. At times, geopolitical issues help the freight market a lot. For example, [if there is an] unrest in Middle East, people will build crude oil inventory; there will be lot of crude movement and the tonnage will go up, therefore, freight rates will move up; crude oil prices will also move up. The other part is that crude oil price is hovering at $105 and $110 consistently. So, you see a lot of activity happening in the drilling space. That's why we believe there is a fairly positive outlook in the offshore drilling market.

What about the long-haul trade?

One sector that will help the market is the long-haul trade. The crude oil movement is mostly from the Middle East to India, China or Japan. But with newer refineries coming up in India, refining there will be a shift from Middle East crude to Latin American crude, which is dirtier crude but gives higher levels of margins. Therefore, the movement from Middle East will shift to LatAm. This means, long-haul trade for which more ships will be required and the tonnage will go up. China is doing this already by moving crude from West Africa and now looking at countries like Venezuela to reduce the offtake from the Middle East. All these will translate in to long-haul movement, increase in tonnage and better freight rates.

What strategy is Essar going to adopt?

Essar has followed the strategy of non-speculative acquisition of assets. In other words, we will not go and buy assets (ships) as it is available at a cheap rate. We would rather see if we have cargo and contracts, and place the assets. That gives you a lot of comfort in terms of visibility or revenues and the visibility to write down debts in the initial years and it is a big comfort to the lenders also. We have followed this concept in backing assets with cargos and, therefore, we have not been led in a speculative spin, as this could put in tremendous pressure as it is today with some companies that have exposure to the spot markets. It is good to have a philosophy, to have a better view in the longer term and get you steady and assured revenue stream. There is enough cargo, which will come our way.

> raja@thehindu.co.in