Power, steel companies look to profit from lower freight rates

Power, steel companies look to profit from lower freight rates
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First Published: Fri, Mar 21 2008. 12 47 AM IST

Lock-in time: A ship approaches the Jawaharlal Nehru Port in Navi Mumbai. Long-term charter works out cheaper than spot hiring.
Lock-in time: A ship approaches the Jawaharlal Nehru Port in Navi Mumbai. Long-term charter works out cheaper than spot hiring.
Updated: Fri, Mar 21 2008. 12 47 AM IST
Bangalore: Power producers and steel makers are hiring ships for longer periods than usual to transport thermal and coking coal into the country, taking advantage of an unexpected drop in freight rates, to insulate themselves from potential rate increases.
By hiring ships for 5-10 years, these companies plan to save on ocean freight by locking in the rates. The Baltic Dry Index, a measure of rates for shipping dry bulk commodities such as coal, iron ore and steel, has dropped 10% since January after doubling in 2007.
Lock-in time: A ship approaches the Jawaharlal Nehru Port in Navi Mumbai. Long-term charter works out cheaper than spot hiring.
“When you go in for long-term chartering of ships, the rates are less compared with hiring of ships on spot basis,” said T.V. Shanbhag, who headed the government’s ship chartering division, Transchart, from 1995 to 2005. The rates are less in such cases because it gives assured, long-term business for the ship owners.
In the current market, a panamax ship, which can carry 70,000 tonnes of cargo, will fetch a day rate of $30,000 (Rs12.15 lakh) in rent for a 10-year period. If the contract is for two years, the rate goes up to about $70,000.
State-run Steel Authority of India Ltd (SAIL), the country’s biggest steel maker, is looking to hire ships for 15 years to transport some portion of its annual coal imports of about 13-14 million tonnes (mt), said a company official, who did not want to be named.
Similarly, power producers such as Reliance Energy Ltd and Tata Power Co. Ltd, who have won rights to run three coal-fired ultra mega power plants, are also in discussions for long-term shipping contracts to transport coal.
“India’s coal imports are projected to grow by 12% a year,” said Sriram Ravi Chander, chief operating officer, Visakha Container Terminal Pvt. Ltd, in Mumbai recently.
On Monday, the JSW Group, which runs power plants and makes steel, concluded a $2 billion 10-year contract with Japan’s K Line for bringing coal from Australia, Indonesia, Mozambique and China.
The Baltic Dry Index fell as disruptions to coal and iron-ore supplies reduced cargoes, a Bloomberg report said. “There are just slightly too many ships for the spot market and not as many spot cargoes on the horizon,” Susan Oatway, an analyst at Drewry Shipping Consultants Ltd in London, told the news agency on Wednesday. The decline is, however, not part of an “ongoing trend”, Oatway added.
Rates for shipping dry bulk cargo rose by more than 100% over the past year on the back of a surge in global trade, particularly in China and India.
Inadequate facilities and congestion at Australian and Brazilian ports, which have restricted the availability of ships for carrying cargo, also contributed. Ocean freight for importing coal from Australia had jumped to about $70 per tonne till recently from $25-29 per tonne a year earlier, making coal imports costlier.
Some coal importers have even set up their own shipping divisions or are in the process of doing so to cash in on the boom in shipping rates.
Tata Steel Ltd has formed a 50-50 joint venture shipping company with Japan’s NYK Line for operating dry-bulk and break-bulk vessels to transport raw material and finished steel, giving it a strategic control over logistics. This venture will cater to the requirements of other companies as well. Tata Power is separately venturing into the business of owning and operating ships, to meet the requirements of its power unit.
SAIL uses a combination of spot and long-term charters ranging from one to five years. The firm was paying about $25-26 a tonne on freight till last year for bringing coal from Australia. It is now paying about $58 a tonne on a spot basis, while the rate was $70 a tonne a couple of months ago.
Recently, the company concluded a five-year charter for transporting about 2-3mt of coal from Australia at about $34 a tonne. The rise in shipping rates had almost doubled SAIL’s annual freight bill to nearly $500 million.
Rashtriya Ispat Nigam Ltd, which runs the 3mt capacity Visakhapatnam Steel Plant, is now paying about $52-55 a tonne on a spot basis to transport coal from Australia, a company official said. The rate was about $65-68 a tonne till a few months ago.
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First Published: Fri, Mar 21 2008. 12 47 AM IST
More Topics: Power | Steel | Freight | Vessels | Port |