Mumbai: A drop in tanker freight rates and weak oil is likely to hurt profitability of the Indian shippers in the next few quarters as rates may not touch the 2008 peaks very soon, officials said.
On an average, freight rates of tankers, a cargo ship used to carry crude oil and liquids, have fallen about 40-60% over last year. Though there are signs of a recovery, rates are not seen touching their 2008 peak, they added.
“We believe the tanker market is going through an unusual period because of inventories and summer (weak seasonal demand) - both the factors compounding at the same time”, Yuddhishthir Khatau, managing director of Varun Shipping said.
“I don’t see a recovery going back to the previous periods.”
Weak oil demand, with major world economies slipping into recession, and a cut in crude oil supply are pressurizing the rates and corporate earnings.
Oil prices have slumped from a peak of over $147 a barrel hit in July 2008 to around $60 as the global financial crisis dealt a sharp blow to demand and investments in the sector.
Indian shippers saw poor numbers in the Jan-March quarter on weak freight and charter hire income with Great Eastern Shipping Company, Essar Shipping and Mercator Lines seeing a fall in profits or muted growth.
Shippers will continue to bleed even in 2009 as freight rates will remain low and vessel utilization will drop, analysts said.
“Annual growth is expected to become positive only well beyond 2009. Even if recovery starts in early 2010, recovery for shippers will be delayed till the excess capacity is soaked up,” Manish Sharma, a director at KPMG Advisory, said in an e-mail.
Mumbai-based brokerage Gupta Equities has downgraded Great Eastern Shipping, which is trading at over 40% discount to its net asset value, to ‘neutral´ after its results and a bleak outlook.
ICICI Direct has also downgraded the stock after its results while Pinc Research is pessimistic about Mercator Lines, Reuters data showed.
“The ongoing time for shipping industry is not favourable due to global slowdown. Because of this, the short term visibility of the business is not that optimistic,” a recent report by Gupta Equities, said.
Companies, who were on a shopping spree for new assets, have cut down their investment plans for 2009-10 on higher interest costs and valuations, as they await asset prices to slip.
While Varun Shipping has slashed its acquisition budget by three fourths to $100 million, GE Shipping will buy just a tanker worth $52 million in the year.
“We are looking at a pretty dark tunnel. 2009 is almost going to be a washout in terms of recovery. 2010 - it is very difficult to know what will happen,” Bharat Sheth, managing director of GE Shipping said at a conference call recently.