Weathering lows — that's what the shipping industry was struggling to do during whole of 2011. And that is what it may be doing in 2012 too. The waning freight market, shrinking demand for ocean transportation of commodities, over-supply of new vessels, volatile forex market and a squeeze on earnings — these were the challenges faced by shipping companies in 2011, considered one of the worst years for the industry in the last 20 years or so.
With the dawn of the New Year, ship-owners are bracing themselves for another turbulent year, even as they anxiously scour the globe for any hint of a demand pick-up.
With the global economic outlook not appearing much healthier than what it was in the year that went by and increasing supply of new ships hitting the market, ship-owners feel 2012 may be even worse.
Industry players say owners may be forced to continue to keep a part of their fleet idle, as they did last year when freight rates hit the floor, several notches below the cost of operation. It is estimated that some 160 container vessels and another 150 in the bulk trade globally are getting mothballed as the prevailing rates hardly cover the fuel costs.
Mr K.M. Sheth of Great Eastern Shipping, a veteran in the industry, says next year will continue to be bad as chances of recovery in the global economy appear weak. Supply pressure will continue to affect freight market. LNG is the only sector where freight rates remain attractive but Indian lines do not own LNG fleet.
Globally, the year started with Korea Line, Korea's second largest bulk carrier, filing for bankruptcy as it was unable to staunch the financial bleeding for two years.
Back home, India's flagship carrier, Shipping Corporation of India (SCI) posted three consecutive quarters of net losses in 2011— Rs 6.17 crore in Q1, Rs 6.86 crore in Q2 and Rs 140 crore in Q3 (the September quarter loss included a notional forex loss).
Mr S. Hajara, Chairman and Managing Director, SCI, sees a tough year ahead for shipping. “The coming year will also see a growth in supply of 5-8 per cent, whereas the growth in demand is expected to be about 2 per cent or thereabouts, due to various reasons such as Euro zone problems and the US economic slowdown”.
Time charter yield
The best way to trace the fall in freight market is through the average TCY (Time Charter Yield). A domestic shipping company, for instance, started the year with a TCY of $23,072 a day for crude carriers in the opening quarter, which retreated to $20,097 and $17,254 in the subsequent two quarters.
Similarly, on the dry bulkside, the TCY dropped from $18,153 a day to $16,569 and $14,223 respectively. “The industry will continue to face turbulent times ahead, with depressed demand and oversupply of vessels. 2012 will be as bad as, or even worse than, 2011,” admits Mr Anil Devli, CEO of the Indian National Shipowners Association (INSA). The year had started off on a weak note. Australian floods devastated the coal trade during the first quarter, with the earthquake and tsunami in Japan further hitting coal and iron ore trade in March.
The trend spilled over to the second quarter, with tanker freight rates taking a blow as Japanese crude imports thinned and oil demand from developed economies remained stagnant due to the MENA crisis.
The third quarter saw crude carriers struggling to cover operating expenses as rates further sank. There was some hardening of rates due to hurricane Irene and marginal increase in crude imports from Latin America, but this was soon drowned by higher supply of vessels.
The charter rates for a very large crude carrier (VLCC) slipped from an average of $9,305 a day in Q1 to $1870 in Q2 and rose marginally to $3951 in the next quarter. The lowest was in April and May when it averaged just $552 and $1073 per day respectively. Compare this with the boom period of 2008 — that May, the daily VLCC rate had averaged $1,14,782!
Oversupply
More than a depressed demand, ship owners fear that oversupply of ships will pin down freight rates this year, even though scrapping between January and October 2011 crossed 20 million DWT. Says Mr Devli: “Newbuilds will join the existing fleet in 2012 — fresh additions are expected to be at the rate of one vessel a day this year.
China has set a target of carrying 50 per cent of its coastal trade in Chinese-flagged vessels and therefore it has embarked upon a massive ship-building exercise.”
Echoing similar sentiments, Mr A.R. Ramakrishnan, Managing Director of Essar Shipping, estimates that an excess tonnage of about 15-20 per cent is floating in the global market today.
Analysts say it will take another year of bad rates before there is some significant scrapping, as ships of 20-25 years of age are still floating in the market today.
The sinking freight market and resultant stressed assets have brought down the prices of ships, which makes it a good time for buying. However, Indian companies are charting a cautious course in regard to acquisitions, with the domestic fleet growing marginally by one million DWT to 11 mn DWT in 2011, as many shipping companies prefer to conserve cash to face the anticipated tough times ahead. “The biggest problem is access to capital. We (INSA) will be seeking some budgetary allocation as equity to help companies buy assets,” Mr Devli said.