Bangalore: Global shipping is in troubled waters. The “financial tsunami”, as the doyen of Indian shipping, K.M. Sheth, 76, puts it, and its impact on global trade have wreaked havoc on shipowners, cutting freight rates and scuttling construction of new ships, bringing a five-year dream run to an end. Sheth, the executive chairman of Great Eastern Shipping Co. Ltd, Indian’s largest private ocean carrier by fleet size and revenue, talks to Mint about the last crisis and looks ahead into the future. Edited excerpts:
When was the last time you saw such a steep fall in freight rates?
In my shipping career spanning 58 years, the last time I saw such a steep fall in freight rates was during the oil crisis in 1976. The oil prices shot up to such an extent that major oil firms which had contracts with shipping firms to supply bunkers (ship fuel) could not honour the contract; thus, some ships had to be idled.
Tough call: Sheth expects 30% of shipbuilding orders to be cancelled. Abhijit Bhatlekar / Mint
What led to this crisis?
In 1976, the Saudi Arabian oil minister Sheikh Yamani drastically cut down oil production to get better price for oil, and also for some political reasons. Oil prices went up really high and firms could not honour contracts.
How long did this slump last?
It went on for nine years and then things slowly started improving from 1985 onwards.
What happened then?
During those years, most of the Indian shipping firms had taken loans to buy ships from the Shipping Development Fund Committee, or SDFC, (it was wound up in April 1987). Out of the 35 shipping firms then, 33 defaulted on repayment of loans taken from SDFC and the total industry default went up to about Rs800 crore.
Great Eastern was one of the two firms which did not figure in the defaulters list at the time. I don’t remember the other company.
What did the Indian shipowners do?
Expecting huge losses, the defaulting companies requested SDFC to reschedule the loans by extending the period of repayment.
Did Great Eastern also seek rescheduling of loans?
When Great Eastern’s financial position also started weakening, I pleaded with the two nominee directors of SDFC on my board (all firms which had taken loans from SDFC had two nominee SDFC directors on their board) to agree for a rescheduling of loans. But they said that unless you fall sick, the question of giving medicine does not arise. So I didn’t bother to pursue the matter.
What did you do to tide over the crisis?
I sold all valuable assets, including one premises at the world trade centre in Colaba (Mumbai). Because of the oil crisis, the industry was not doing well, the kitty was running dry, I did everything possible not to default. I sold the property to State Bank of India for a throwaway price, to service the debt and not commit a default. I sold the ship models in the office to various schools. I stopped all flower arrangements in the office, cut down on tea and coffee for staff, travel was limited to economy class for chairman and other senior executives, put a ban on buying new cars, reduced salaries and stopped giving bonus. I took all drastic measures to reduce our overall expenses to survive.
Is Great Eastern cancelling or postponing delivery of new ships?
So far, we have not given a thought to that. At the moment, we are in a comfortable position.
Will the revival of the Transchart system help tide over the crisis?
The crisis has led to a clamour among Indian owners for the revival of the Transchart (the centralized chartering wing of the Union government) system for government cargo support. Transchart is controlling the movement of government cargo. This system will ensure financial safety; you will receive your freight charges. When you are dealing with international charterers, you are not sure financially what will happen. Some people may become bankrupt, some others may default and it may lead to litigation.
So, the Transchart arrangement will lead to financial safety, provide employment to Indian ships, provided you are competitive on freight (the policy on finalizing transportation arrangements for government-owned/controlled oil cargo through Transchart was discontinued for state-owned oil firms last year. This system gave first preference to Indian ships for moving the cargo. The local shipping industry now wants the Centre to revive this policy for oil cargo).
How long do you think the present crisis will last?
One thing looks to be certain, this will last the whole of 2009, and some part of 2010.
What’s the difference between the 1976 crisis and the current one?
The 1976 crisis was for entirely different reasons—shortage of ship fuel. The current crisis is a financial tsunami that started from the US, the financial markets have dried up to such an extent, shaken up the financials of banks so badly, there is no inter-bank lending today and banks are refusing to open letters of credit. As a result, traders are unable to buy goods. The bulk shipping market has collapsed to record low levels. A Capesize bulk carrier that, about two months back, fetched a daily charter rate of about $230,000 (Rs1.12 crore now) for its owner is today earning just about $9,000 a day. There’s no employment for ships and my understanding is that, globally, about 200 are being laid up by the owners.
Because of the global economic boom, shipping firms, many of them family-owned, placed orders for new ships on a speculative basis. But the financial tsunami has caused such a problem that a number of owners are willing to forfeit their deposits and cancel orders. I expect nearly 30% of the present global shipbuilding order book will be heading for cancellation.
What should the Indian owners do to come out of this situation?
They should drastically cut down on all expenses, economize fleet operations and look for support from Transchart.