Mumbai: With demand soaring and the waiting period for ships extending beyond three years anywhere in the world, engineering major Larsen & Toubro (L&T) is drawing up plans to make an initial investment of Rs1,000 crore in building India’s largest shipyard.
The new shipyard is likely to come up in the southern port city of Chennai by the end of 2008 or in early 2009, and will be the country’s first shipyard equipped to build very large crude carriers (VLCCs) with a capacity of 3-3.5 lakh dwt (dead weight tonnage or tonnes, a measure of the cargo-carrying capacity of a ship). A team led by S. Sreekumar, former director of operations at Cochin Shipyard, has already begun work on the yard.
“The greenfield yard, spread across 1,500 acre, will have the capacity to build five very large crude carriers, 20 Suezmax carriers and repair 50-60 ships a year,” said sources familiar with the development. A Suezmax carrier is a tanker that can pass through the Suez Canal when fully loaded and usually has a capacity between 1.2 lakh dwt and two lakh dwt. When contacted, a L&T spokesperson said, “nothing has been finalized yet”.
L&T’s decision to build a shipyard comes at a time when global shipyards are booked until 2009-2010. According to the Korean Shipbuilder’s Association, Koshipa, the order-book-to-sales ratio of the industry was 3.5 in 2005, far higher than the historical average of 2.1. The gap between the industry’s output and its order book has also been increasing.
Apart from the growth in world trade, the mandatory phasing out of older ships, especially tankers—most ships have a useful life of between 25 years and 30 years—and the price of steel are factors that have a bearing on the demand for ships. Fleet owners prefer to replace their ships when steel prices are high, as this leads to a consequent increase in the value of scrap.
With capacity in traditional ship-building countries such as Japan, Korea and Norway booked for the next few years, fleet owners have started looking at new destinations such as China and India. In 2005, Japanese and Korean shipyards accounted for 73% of the ships produced that year, followed by China at 13.5% (up from practically nothing), according to figures provided by Koshipa.
Last year, the government announced it would invest Rs10,000 crore in building two shipyards. “We are going in for global expression of interest to appoint consultants as also prospective investors for establishing the yards in the east and west coasts, which will be of world-class standards,” shipping minister T.R. Baalu had told the media then.
The government extends a 30% incentive to ship builders on all export orders and also on orders for domestic ocean going vessels. A yard that wins an export order of $100 million, for instance, will earn an incentive of $30 million from the government. And the state-owned Steel Authority of India Ltd has started making shipbuilding-grade steel which used to be imported.
Together, these translate into a 30-40% profit margin on ships built in India, another reason for L&T’s emphasis on the business.
The country has around 20 shipyards, the majority state-owned, but none has the kind of capacity L&T is talking about. Cochin Shipyard Ltd, which can build the largest ships currently, can build ships of a capacity up to 1.1 lakh dwt.
L&T plans to hire an international consultant and, according to the sources, rope in a Japanese or Korean shipyard as a technology partner. The company ventured into shipbuilding last year by converting part of its heavy engineering facility at Hazira near Surat in Gujarat into a yard that could build three mid-size ships, of up to 150m in length, and with capacities of between 15,000dwt and 20,000dwt in a year. It is currently building four ships valued at Rs440 crore for Netherlands-based Rolldock (formerly Zadeko Ship Management Company) at the yard.
Although the company is now expanding the capacity of this yard to make eight ships a year, it cannot make bigger ships there. The yard opens into a river that has limited draft (depth, in shipping terminology). That explains its decision to build a new yard at Chennai.
Indian ship builders, including private sector ones such as Bharti Shipyard and ABG Shipyard, have been expanding their capacities to take advantage of the global boom in ship-building.
And although Indian shipyards once had a reputation for making poor-quality ships and missing delivery deadlines, they are now improving on their delivery schedules and beginning to compete with global yards, according to T.V. Shanbhag, a former shipping ministry official who serves as advisor to Mumbai-based shipping firm Mercator Lines.