Mumbai / Bangalore: Indian shipping companies plan to offer their clients fixed-range pricing on long-term contracts—five or more years—to carry high-volume cargo such as crude oil, coal and steel, in an attempt to deter foreign competition and add a measure of stability to their often volatile business.
The move will also raise Indian carriers’ shipping capacity for international cargo, coming into or leaving India. For local importers and exporters, hiring ships on a long-term basis would provide a cushion against the volatility in ocean freight rates.
Indian-owned ships now have to pay 12 different taxes that foreign ships are exempt from, making quotations from Indian carriers less competitive than those of their overseas rivals. Long-term contracts would help local shipping lines offset that impact.
“The representatives of domestic shipping companies met officials of state-run oil marketing companies last month to lobby for long-term contracts having a freight rate band,” said an executive with a Mumbai-based shipping firm, who did not want to be named.
Shipping firms are working on a mathematical formula to fix the price range, the executive said, and this will be ready once the firms reach a consensus with clients. The freight rate band will have fixed upper and lower limits, depending on cargo and tonnage, designed for long-term contracts. A global practice, longer-term contracts allow buyers and sellers to secure comparatively lower rates while ship owners benefit from assured cargo.
“Assuring long-term contracts is one way of inducing investments into (the) Indian shipping industry since the cost of financing ships will also come down,” said S. Hajara, chairman and managing director of the state-owned Shipping Corp. of India Ltd.
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S.S. Kulkarni, secretary general, Indian National Shipowners Association (Insa), agreed assured business would help ship owners access better financing options from lenders.
“This will help local shipping companies increase the number of Indian vessels,” he said. “The share of international cargo carried by Indian vessels has slipped to just 13% from about 25% a few years earlier.”
The move came after the Planning Commission noted that crude transportation costs were volatile and asked state-run oil firms to make long-term arrangements to secure lower freight rates. The Directorate General of Shipping, or DGS, India’s maritime regulator, now permits local entities to hire foreign ships for a maximum of two years.
“The oil companies are pushing for a change in the guidelines to permit chartering of ships for five years or more, which Insa is resisting toprotect the interests of the Indian shipping fleet,” said V. Ashok, chief financial officer, Essar Shipping Ports and Logistics Ltd. While hiring Indian ships does not require permission from DGS, foreign ships need a no-objection certificate from Insa.
Some, however, see the move as anti-competitive. “The move by Indian owners to fix a freight band is aimed at preventing foreign ship owners from cornering this contract. That is not competition,” said an executive at a Mumbai-based ship broking firm who did not want to be named.
Oil firms, meanwhile, justify demands for lower-cost, long-term contracts, given that state-owned Indian Oil Corp. Ltd (IOC) alone spends about Rs1,400 crore annually to import about 40 million tonnes (mt) of crude. Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd import about 12mt each.
With single-bottomed ships to be phased out by 2010, as mandated by the International Maritime Organization, the cost of short-term hiring of modern double-bottomed ships will also be higher.
With IOC’s imports slated to rise, it does not want to be at the mercy of spot market risks. “We are telling the maritime regulator that some kind of a shipping tonnage security should be available to IOC,” said an IOC executive, who declined to be named, explaining why it wanted to be able to hire ship for longer term.