Indian steel makers and power producers such as Steel Authority of India Ltd (SAIL), Tata Power Ltd and Reliance Energy Ltd that entered the ship-owning business or announced intentions to do so during the height of the cargo boom a few months back to cut their logistics costs may now have to revisit their strategy after the shipping rates for so-called dry bulk commodities plunged by as much as 90% in the shadow cast by the coming slowdown in Western economies.
The Baltic Dry Index, a benchmark for shipping tariffs for bulk commodities such as iron ore, coal or grains, tumbled to 925 points on 29 October, its lowest level in more than six years.
From a high of 11,893 points on 20 May, the index has lost at least 90% of its value in less than five months. It has literally plumbed the depths less than six months after witnessing all-time highs. And there is no respite in sight.
The last time the index fell below 1,000 points and reached its lowest level of 554 points was in July 1986.
In money terms, SAIL now pays $10 (Rs498) per tonne for shipping coking coal from Australia (spot rate). The spot rate was a high $85 per tonne around six months back. When rates were at their peak, SAIL used to pay about $80,000 per day to hire a ship for a one-year period to bring coking coal. This has now dropped to $6,645 per day.
Tata Power has already finalized contracts to buy at least four big dry bulk ships called capsize vessels and hired another four on long-term basis to ship coal to the power plant it is building at Mundra in Gujarat.
State-owned SAIL has announced a shipping joint venture with Shipping Corp. of India Ltd, another state-owned company, to own and operate dry bulk ships to cut its huge shipping bill, while Anil Ambani’s Reliance Energy is weighing options on whether to buy ships or hire them on long-term contracts from specialist shipowners to haul coal to its power plant that will come up at Krishnapatnam in Andhra Pradesh.
One common factor encouraged these companies to enter shipping—the need to have strategic control over a key raw material without being subjected to spot market risks.
Ship financiers say that in a difficult financial market, there is no need for such companies to rush into buying ships when they can very well hire them on long-term basis. This will not only save them from committing huge money upfront to buy ships but also allow them to hire ships—and at rates that are much lower than what they were at the beginning of the year. Hiring ships on a long-term basis also costs less than hiring them on spot basis.
Power producers such as Tatas and Reliance that are bound by the fixed tariff quoted in the competitive bidding process for their power projects may find this a better option than buying ships that currently cost around $93 million.
Such long-term contracts would also facilitate easy financing because bankers are looking for stable revenues from shipping assets before sanctioning loans due to the turmoil in the global financial markets. And if such long-term contracts are executed with sound credit-worthy customers such as Tatas and Reliance, then financing ship purchases could prove to be even more easier for builders and specialist ship owners.
Not surprisingly, South Korea, the world’s biggest shipbuilding nation, is trying to grab whatever new orders it can lay hands on from prospective Indian clients as orders for new ships slow.
In the past few days, executives from South Korean shipbuilders such as STX Shipbuilding Co. Ltd, Hanjin Heavy Industries and Construction Co. Ltd and Daewoo Shipbuilding and Marine Engineering Co. Ltd have visited Mumbai to discuss a possible contract with Reliance Energy, which is looking to buy as many as six big dry bulk ships to haul coal to its Krishnapatnam power plant, which is scheduled to start operations in 2012.
This is a far cry from the situation that prevailed a few months back when these shipbuilding giants were not entertaining orders for new ships because their yards were full. Now, they are willing to go to any extent to get business from financially sound customers.
Nervous bankers are now asking shipowners to get the credit-worthiness of those hiring their ships rated by Standrad and Poor’s or Moody’s to gauge their capability to pay.
The situation also presents a big opportunity for specialist local shipping firms to strike competitive long-term deals with commodity importers and partly tide over a financial crunch that has the potential to spoil their mega $20 billion fleet acquisition plan over the next five years.
This could be a win-win situation for both parties instead of shipowners questioning the rationale behind non-specialists encroaching on the shipping territory.
Also Read P Manoj’s earlier columns
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org