The shipping industry is possibly one of the few sectors where the operating environment has shown signs of worsening over the past few months.
The shipping industry is possibly one of the few sectors where the operating environment has shown signs of worsening over the past few months in broad contrast to a few other sectors where there seems to be signs of green shoots of the economic recovery. For instance, in the tanker segment where nearly two-thirds of fleet capacity of leading players such as Shipping Corporation of India (SCI) and GE Shipping are focused upon, spot freight rates have weakened on a sequential and year-on-year basis.
In the case of tanker segments like very large crude carriers (VLCC), which are used to transporting crude oil from the Middle East to North American refiners, spot freight rates in the last week of September were at $9,330 per day levels compared with the average spot freight rate of $67,208 per day in the September 2008 quarter, according to officials in shipping companies. In the June 2009 quarter, the average spot freight rate in VLCC segment was $11,210 per day. For VLCC vessels, the daily operational cost is at $8,000 per day, said analysts tracking the sector. OPEC in its September report had highlighted the fact that global crude demand in CY09 is expected to contract by 1.56 million barrels per day to 84.05 million bpd. Besides, according to senior officials in GE Shipping, sluggish demand conditions continue for vessels to transport crude oil from the Middle East to other parts of the world.
In other tanker segments like Suezmax, the spot freight rate is at $7,975 per day compared with the average spot freight rate of $51,143 per day in the September 2008 quarter. To combat this, GE Shipping in the June 2009 quarter had nearly 55% of its fleet on long-term contracts, while SCI has 60-65% of its fleet on long-term contracts. Also, GE Shipping has been expanding its presence in the offshore segment in a bid to counter the cyclical nature of the shipping industry.
In the dry bulk segment, where the movement of iron ore and coal is key, the Baltic Dry Index in the last week of September was at 2,163 compared with the average of 7,104 in the September 2008 quarter. In the June 2009 quarter, the Baltic Dry Index averaged 2,714. Analysts tracking this sector point to large quantities of iron ore that had been purchased by Chinese steel mills from Brazil and Australian suppliers in the first half of CY09, and until that gets run down, demand for vessels in this segment would be sluggish. SCI, at Rs 140.2 on Thursday, gets a P/E of 7.8. GE Shipping, at Rs 272.6, gets a P/E of 4.5.