The shipping industry is going through a rough patch for a while now with global oversupply of ships putting pressure on freight rates. (The shipping industry is going through a rough patch for a while now with global oversupply of ships putting pressure on freight rates.)
The shipping industry is going through a rough patch for a while now with global oversupply of ships putting pressure on freight rates.
(The shipping industry is going through a rough patch for a while now with global oversupply of ships putting pressure on freight rates.)

Shipping Corporation: increase in rates offers scant comfort

While it’s difficult to foresee whether the current increase in rates will make the segment profitable, it should help reduce the losses

Shipping Corp. of India Ltd (SCI) has raised container freight rates on the Indian subcontinent to Europe service from 1 September. Of course, with increasing operational costs, the company had to resort to rate hikes. This is a positive development for SCI and particularly the liner business, which includes the container transport segment.

In the June and March quarter, the liner business posted a loss at the earnings before interest and tax (Ebit) level of 5 crore and 36.7 crore, respectively. While it’s difficult to foresee whether the current increase in rates will make the segment profitable, it should help reduce the losses.

In any case, industry fundamentals have not turned around. Accordingly, SCI posted a loss in the June quarter and for the last two financial years as well. The company’s major segment, the bulk segment, which accounted for about two-thirds of the June quarter revenue, too, hasn’t been profitable in the June quarter and last financial year. The bulk segment includes tankers (both crude and product), dry bulk carriers, gas carriers and phosphoric acid carriers.

The shipping industry is going through a rough patch for a while now with global oversupply of ships putting pressure on freight rates. The SCI stock reflects the poor operating environment. In the last one year, it has sharply underperformed the benchmark Sensex. What’s disappointing is that the outlook remains grim.

Sure, the Baltic Dry Index (BDI), which tracks transport costs on international trade routes for dry bulk commodities such as coal and iron ore, has increased by about two-thirds in 2013 so far. But then, one must remember at its peak in 2008, the BDI index stood far above current levels. Nor is the situation improving anytime soon.

According to ICICI Securities Ltd, “The shipbuilding index showed a spike of 8% month-on-month growth in July. However, the global cargo demand data does not support such high level of shipbuilding activity. Data from China still remains dampened amid decline in iron-ore imports from its top four importers by 9% for July 2013 and marginal de-growth (0.6% in July 2013) in iron-ore inventory at 71.1 million tonne."

Tanker rates, too, improved in July. Unfortunately, the vessel addition in the segment is expected to cap any meaningful improvement in tanker rates in the days to come. All this means that there could be few takers for the SCI stock even if valuations are depressed.

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