Ship freight market in revival mode

The shipping freight market is turning the corner after some trying times. The sector is now considering what might happen from next year, when some new regulations would take effect. RAJESH BHAYANI writes

The shipping freight market is turning the corner after some trying times. The sector is now considering what might happen from next year, when some new regulations would take effect.

Benaifer Jehani, director at CRISIL Research, says, “The sector will see fortunes turning better. Freight charter rates have seen an increase of 35 per cent in the dry bulk segment and of 30-35 per cent in the container segment.”

Ranjeet Singh, earlier chief executive at Essar Shipping, says: “The momentum seen in the global shipping freight market will also benefit Indian companies.”

However, the tanker segment is yet to pick up, with rates having fallen by five to 10 per cent in the recent past. Those for very large crude (oil) carriers have fallen even more. Indian shipping has a larger dependence on tankers (these are 60 per cent of fleets here), with the high oil import dependence.

Benaifer says the dry bulk segment, 45-50 per cent of the world fleet (in deadweight tonnage), saw a 35- 40 per cent increase in charter rates during January-April this year, compared to last year. The rise is due to import of higher quality coal and iron ore in East Asian nations, substituting for earlier use of lower grade coal and ore, for environmental reasons. Iron and coal are almost half of the global dry bulk trade.

Pradeep

Rajan, senior managing editor for Asia-Pacific shipping & freight at S&P Global Platts, says: “Shipping companies’ earnings should look decent in the next four to six quarters. Many indicators are turning positive.”

A major sign of turnaround is bigger- size ships getting higher rates.

It was the other way round in 2016 but turned positive in recent quarters.

Rajan says the tanker segment is over-supplied, with a rise in new tonnage at a time when Opec, the exporting nations' cartel, has cut production, requiring less ships for transport.

Another healthy sign, he added, is that global growth rate is pegged at 3.8-4 per cent, after many years. High growth will increase global trade and shipping will benefit.

The challenges ahead are the coming regulatory changes, how new capacities are added and scrapping of older ships which fail to meet new regulations or become unviable in the wake of high investment requirement for upgrading.

The first regulatory change is coming from January 2020. According to the International Maritime Organisation's International Convention for the Prevention of Pollution from Ships, these will have to comply on reducing sulphur content in the fuel oil used, from the current 3.5 per cent to a new limit of 0.5 per cent by mass. From 2019 on, companies and countries will start implementing this. Taiwan will be implementing it from next year.

Companies have the options of new ships which comply or upgrading the older ones by installing scrubbers. Rajan says: "Companies have to check the viability of ships for an upgrade; younger ones might be upgraded.” What is the final tonnage kept and what is sent for scrap will be known after a year.

Anther regulatory change is implementing a Ballast Water Treatment System — treating this water to remove, kill and/or inactivate organisms prior to discharge.

To comply, additional investment of $0.5-2.5 million per ship would be needed. Says Ranjeet Singh: “After such a huge investment, if five to seven years of residual life of ship is there, it will be viable.”

Noel Vaz, senior analyst at IIFL, says, "The shipping sector remains a mixed bag. Bulk and container shipping have seen firm charter rates as global economic activity has picked up. However, tanker and offshore rates remain weak ,as supply overhang remains an issue. There are some green shoots as crude oil prices have moved beyond their 2015 highs, indicating higher tanker rates sometime in the next 12 months. We recommend investors to adopt a wait and watch attitude till tanker rates revive, as weakness in these over the near term would hit earnings."

The challenges ahead are the coming regulatory changes, how new capacities are added and scrapping of older ships which fail to meet new regulations or become unviable in the wake of high investment need for upgradation