Mark to market | Shipbuilding the new port of call

Mark to market | Shipbuilding the new port of call

Engineering and construction firm Larsen & Toubro Ltd’s (L&T) negotiations for $1 billion (Rs3,935 crore) worth of shipbuilding orders illustrate the opportunity that lies ahead for Indian shipbuilders.

The shipping industry is riding on the back of a huge boom in commodities and the Baltic Dry Index, which measures freight rates, has nearly doubled since June. The soaring demand for ships to transport cargo across the oceans, combined with a scarcity of shipbuilding slots in maritime strongholds such as Japan, Korea and China are helping Indian shipyards to grab more orders from fleet owners for new cargo carrying ships.

Annual global shipbuilding capacity is forecast to peak at 50 million gross tonnage (mgt) in 2010, before levelling off in the range of 40-45mgt in the next five years. The investments planned to boost capacities could double local capacity to 4mgt by 2010, putting India in competition with Vietnam for the fourth spot on the global map.

Globally, shipbuilding is a market largely dominated by Japan, South Korea and China, which together control nearly 90% share of the world market. In the last five years, the order-book position of Indian yards has grown by 1,723% from Rs816 crore in 2002 to Rs14, 877 crore. Still, India’s share of the global shipbuilding market is a paltry 0.4%. According to a report prepared by Mumbai-based consultancy firm I-maritime Consultancy Pvt. Ltd, India’s share of the global shipbuilding market, a highly labour intensive industry, is expected to reach 5% or $22 billion by 2020, aided mainly by cost competitiveness and abundant supply of cheap, skilled manpower. The labour cost per worker in India is estimated at $1,192 per year. In comparison, it is $10,743 per worker in South Korea and $21,317 in Singapore .

Though about 60% of the materials used for building ships are currently imported, this will come down drastically once ancillary industries to support shipbuilding, such as diesel engine factories and other parts making units, come up. Shipbuilding grade steel, another major input for building ships, can already be sourced locally from a clutch of local steel makers, saving builders from relying purely on imports, which was the case earlier.

Sensing the big opportunity, which is predicted to last for another seven years, local builders have lined up investments worth Rs18,500 crore over the next five-seven years to boost capacity for taking orders. These investments are expected to come from new entrants into this field such as L&T, SKIL Infrastructure Ltd (Pipavav Shipyard Ltd), Adani Group and existing private players such as ABG Shipyard Ltd and Bharati Shipyard Ltd. This is a far cry from earlier years when shipbuilding in India was dominated by a few state-owned shipyards such as Cochin Shipyard Ltd, Hindustan Shipyard Ltd, Mazagon Dock Ltd and Goa Shipyard Ltd.

Also, the industry is moving up the value chain. Traditionally, Indian yards have focused on the small and medium segments. The current order book of Indian yards is dominated by offshore supply boats and bulk carriers that carry commodities such as coal, iron ore, steel and grains. India’s very limited participation in tanker and container ship production is an area of concern as all top shipbuilding countries have a strong presence in these sectors, which bring greater commercial success.

With this in mind, the planned investments by private firms such as ABG, Bharati and L&T are targeted at building capacities that can cater to larger and complex vessels such as very large crude carriers, container ships, car carriers as well as ships that can carry LNG and CNG.

The global boom has led to super profits for shipbuilders and that has led to a corresponding rise in their stock prices. Shares of Hyundai Heavy Industries Co. Ltd, the world’s largest shipbuilder have more than tripled this year. In India, ABG’s Ebitda (earnings before interest, depreciation and tax) increased by 33% in the September quarter, compared with the year-ago period, while Bharati’s Ebitda went up 118%. Both have strong order books, providing earnings visibility for four-five years. Their stocks have had a good run, easily outperforming the BSE Midcap index, as seen from the chart.

While risks include higher raw material prices, a removal of subsidies and a steep rise in global shipbuilding capacity, a recent report by Citigroup says “the Indian shipbuilding sector offers attractive value with fundamentals remaining strong, driven by continued tightness in the global shipbuilding sector, the robust E&P (exploration and production) cycle and strong global economy fundamentals. Clarity on extension of the subsidy scheme and announcement of more new orders would be key catalysts for the stocks."

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