Description
“Study of Indian Shipping Industry & Scope of Essar shipping Ltd”
Summer Training Report
On
“Study of Indian Shipping Industry & Scope of Essar shipping Ltd”
For “ESSAR Shipping Ltd.”
Submitted for the partial fulfillment for the award of Post Graduate Diploma in Management (PGDM) 2010-2012.
Submitted to: Balaji Institute of Telecom Management, Pune
Submitted By: Aniket Mohite TM109447 BITM
ACKNOWLEDGEMENT
At the outset I would like to express my heartfelt gratitude to ‘ESSAR Shipping Ltd.’ for providing me opportunity to work with their esteemed organization. First & foremost I would like to thank Mr.P.Ramesh & Mr.Sanjeev Rathi who had been a constant source of inspiration. I would also like to thank Mr.Romesh Gupta who always supported me throughout my project & made it a great success. With their cooperation and guidance from time to time, I could understand various practical aspects of procurement department and insights of ships(fleet). Mr.Romesh Gupta, though a very busy person but still he spared his valuable time for me and shared his experiences and cleared my doubts patiently, for which I shall always remain grateful to him. He gave me courage & inspiration to work zealously on my project & do justice to it. I would also like to thank to all those people at ‘ESSAR Shipping Ltd.’ who though being total strangers to me lifted my spirits with their cheerful smiles & gave me inspiration to work harder.
Aniket Mohite BITM PUNE
Summer Project Certificate
This is to certify that Mr.Aniket Mohite Roll No. TM109447, a student of BITM, PUNE has worked on summer project titled “STUDY OF INDIAN SHIPPING INDUSTRY & SCOPE OF ESSAR SHIPPING LTD.” at ‘ESSAR Shipping Ltd.’ after semester II in partial fulfillment of the requirement for the program. This is his original work to the best of my knowledge.
DATE:
NAME:
DESIGNATION:
SIGNATURE:
SEAL
Content Page
Executive Summary Introduction of Indian Shipping Industry
• • • • • • Overview of shipping industry Economy, Trade & Shipping Global Economy Global Trade Shipping Cycles Indian Scenario
Analysis of Essar Shipping Ltd
• • • • • History Fact Sheet Fleet Analysis Operation SWOT Analysis
Conclusions & Reccomendations References
Executive Summary
The report gives an overview of the Indian shipping industry and studies the changing business environment in which it operates. As the global economy evolves from being capital-intensive to knowledgeintensive, we analyzes the industry’s competitiveness based on soft intangible parameters like human capital, information technology and expertise in addition to various traditional asset-oriented factors.
In India, there are three separate Acts which deal with regulation of vessels owned by Indian corporations: ? The Merchant Shipping Act, 1958 ? The Inland Vessels Act, 1917 ? The Coasting Vessels Act, 1838
The present study is confined to vessels registered under The Merchant Shipping Act. These vessels represent more than 95% of the cargocarrying capacity of Indian shipping tonnage and constitute around 330 cargo-carrying ships of around 11.4 million tonnes dwt and another 180 non-cargo carrying ships. Further, lack of data on vessels covered by latter two Acts, makes comprehensive analysis of the other sectors difficult.
Introduction to Indian Shipping Industry
Overview of shipping industry
The total shipping bill for India’s merchandise trade - coastal and overseas - is around USD 5.5 billion. In terms of volume, India’s imports and exports constitute around 210 million tonnes while coastal trade accounts for another 40 million tonnes. Overseas Shipping: Indian overseas trade has grown from 80 million tonnes in 1984-85 to 210 million tonnes in 1998-99, an annualized growth rate of 6.8%. Important trade routes: Crude and product imports from Gulf, Malaysia and Nigeria India imports around 40 million tonnes of crude and 20 million tonnes of products every year on a FOB basis, chiefly from Gulf, Malaysia and Nigeria. While Indian ship owners have a considerable stake in this trade, liberalization and relaxation of norms has allowed private-sector refineries to make their own shipping arrangements. Indian ship owners chiefly deploy Suezmaxes from Gulf and Aframaxes from Malaysia. Most of the vessels chartered from foreign ship-owners are large-sized VLCCs. Product imports are carried out chiefly in small vessels of around 30-40,000 dwt. Iron ore exports from India to East Asia India exports around 30 million tonnes of iron ore annually, 70 per cent of which is directed toward Japan, China and South Korea. Iron ore
exports are predominantly made on a f.o.b. basis, implying lack of opportunity for Indian ship owners. It should be noted that globally iron
ore shipments are made in large Capesize and Panamax vessels. These vessels, however, constitute a small portion of the Indian fleet. Exports from the ports of Mormugao, Chennai and Visakhapatnam are in such vessels while from New Mangalore and Paradip they are carried out in ships of Panamax vessels of upto 65,000 DWT, due to draft restrictions. Shipping Corporation of India is the only major Indian player in iron ore transportation and carries around 0.5 million tonnes to Japan from Visakhapatnam and Paradip. These Handymax vessels are deployed on a triangular route to carry coking coal from Australia and then iron ore to Japan followed by ballast to Australia on return. Coking coal imports from Australia to Visakhapatnam, Paradip and Haldia India imports around 10 million tonnes of coking coal, chiefly from Australia, by Handymax vessels for consumption by public sector steel majors like SAIL & RINL and Tata Steel. Indian ship owners, led by SCI, have a share of 4 million tonnes. Coking coal imports by Tata Steel are however made in Panamax size vessels of foreign flag. Fertilizer and fertilizer material India imports around 5 million tonnes of fertilizer and 3 million tonnes of rock phosphate and sulfur, chiefly in small size Handymax and Handy size vessels. Imports are made nearly at all the major ports of the country, of which, more than 60 per cent of the imports are routed through the East India ports. While previously Transchart used to play a major role by making around 50 per cent of the shipping arrangements for fertilizer imports, its role has come down substantially over the past few years, primarily because major portion of imports are carried out by private companies nowadays. Better infrastructure facilities at ports
such as JNPT, have led to prospects of future fertilizer imports being made in Panamax vessels to capitalize on economies of scale.
Containers India exports and imports around 1 million TEU’s each, mainly through Bombay, JNPT and Chennai. USA, Western Europe and East Asia is the chief destinations through transshipment ports of Dubai, Colombo and Singapore. Only one Indian player, SCI, has a role in container shipping. However, most of the leading global container lines like NOL-APL, Maersk-Sealand and P&O-Nedlloyd offer services to Indian shippers.
Economy, Trade & Shipping
A strong interdependence exists between economic growth and trade. International trade economists have long established that a liberal and Outward-oriented trade regime increases welfare and income through the following channels. The first channel for the impact of trade on growth is “investment”. Openness can affect both the level and the efficiency of investment and growth in several ways. First an open trade regime can increase market size and hence lead to investment in industries with increasing returns that would not have been viable in a closed smaller market. Openness further leads to increased investment by allowing domestic players access to capital goods that were unavailable previously or were available at too high a cost. The second channel is “productivity channel”. To the extent that open trade regimes lead to greater exposure to world stock of productivity enhancing knowledge, thus openness leads to greater growth. A third channel for the impact of trade on growth is the government policy. If
and to the extent that trade openness creates incentives to policy makers to pursue virtuous macroeconomic and regulatory policies, then it can lead to higher growth. Economic growth determines the level of competition and investment in an economy. Rising income of people and investments by firms, lead to a greater demand for goods and services. As industries relocate according to competitive advantage (for example ship breaking - a relatively unskilled labor intensive activity shifted from developed countries to developing countries where unskilled labor are abundantly present), such rising consumption levels would lead to greater flow of goods to meet such demand. The Asian countries provide an example of such linkages between economic growth and trade. Structural imbalances caused a meltdown in the economy leading to lower investments in infrastructure and industries. This in turn led to lower imports of raw materials and other goods. In the recovery phase, increased competitiveness of the currencies (as a result of depreciation) promoted exports, leading to accumulation of foreign exchange reserves and builds up of investor’s confidence. This led to renewed investments and hence economic growth.
Global Economy
The global economy has recovered strongly from economic meltdown that was triggered by the Asian crisis in the middle of 1997+ and spread to Brazil and Russia in 1998. The emerging economies in Asia have, for the most part, staged a strong V shaped recovery, the Latin American countries are gradually stabilizing, the impressive growth in United
States is now the longest on record and the outlook has also improved for Europe. World output growth, which fell from 3.3% in 1997 to 1.9% in 1998, is estimated to have accelerated to 2.6% in 1999. Growth in developing countries increased to 3.8% in 1999 from 3.2% in 1998 and expected to touch 5.4% in 2000, which is just marginally below performance achieved in 1998. Amongst developed countries, Japan grew by 0.3% in 1999 and expected to grow by 0.9% this year, against a contraction of 2.5% in 1998. Overall, developed economies grew by 3.1% in 1999 against 2.4% in 1998. Crude steel production, an important indicator of economic performance, grew by 1.1% in 1999 after a fall of 3.9% in the previous year. The remarkable turnaround in economic conditions has been caused primarily by the strength of the US economy where burgeoning domestic demand provided a market for products of crisis hit countries. Further, the relatively easy monetary policies followed in Europe and Japan has led to acceleration in growth in the former and reversal of recessionary trend in latter. Finally, the stabilization policies and reform processes implemented in the crisis-hit countries have also been largely successful. Fears of global recession of intensity equivalent to the Great Depression of 1930 proved unfounded and most developmental economists agree that the world is strongly back on the growth path. The recovery in global activity has been accompanied by a more than tripling of oil prices since early 1999, mainly due to production curbs by the Organization of the Petroleum Exporting Countries (OPEC) and several other oil producers. To a large extent, the rise in oil prices represents a recovery from exceptionally weak prices in early 1999, and
this recovery has brought prices back closer to a long-term equilibrium. With oil having become a less important factor in the world economy since the 1970s, the consequences of the recent price increase for oil importing countries are smaller than they would have been in the past. In addition, the price rise is contributing to significant improvements in external balances and fiscal positions of oil ex-porters, including Russia, many countries in the Middle East, East Asia and some African countries. Most economists are of the opinion that prices would eventually fall to more comfortable levels, although in the unlikely state of this not happening, much of the recovery could falter.
Global Trade
Concomitant to economic growth revival, world trade has also shown signs of recovery. In volume terms, world trade growth accelerated to 4.9% in 1999 from 3.8% in 1998. In 1997, trade had grown by a record of 10%. In terms of value measured in US dollars, world trade in goods (excluding services) fell by only 0.8% against a fall of nearly 6% in the previous two years. The fall is chiefly due to the fall in commodity prices especially oil, where prices touched historical lows in the beginning of 1999.
Shipping Cycles
FY1998-99 represented a tough go for the dry bulk markets as freight rates touched 10-year low levels. Fall in steel production globally, led to lower iron ore and coking coal trade, which had a dampening effect on Capesize and Panamax vessels. However, increased trade in steam coal and grain provided some support. Mini bulk commodities, especially
steel products and cement, also witnessed a fall in trade and thus negatively affected Handymax and Handy size vessels. However, economic revival witnessed amongst various developing countries since beginning of 1999, has led to improvements in dry bulk trade and hence dries bulk shipping markets. From 10-year lows in the beginning of the year, the freight rates across nearly all dry bulk segments have touched new highs, as greater industrial activity in developing countries and renewed investment in infrastructure projects have led to a greater demand for steel, which in turn has resulted in increased trade in iron ore and coking coal. All these have had favorable impact on dry bulk tonnage demand. Overall, the average freight rates in FY1999-2000 for every dry bulk segment are higher than the same in FY1998-99, and expected to cross the average levels of FY1997-98. A much more robust cycle is being observed in the tanker markets. Not withstanding the dramatic decline in oil prices, which fell to a 25-year low, crude oil demand and hence trade also witnessed decline. Economic revival has seen increase in demand, although impact on shipping markets has been with a much greater lag than in dry bulk carrier market. Freight rates across tanker segments have increased in the last three months of FY1999-2000. Average Aframax and Suezmax freight rates in FY1999-2000 are touching 10-year highs and expected to continue to appreciate as demand for tonnage outstrips supply.
Indian Scenario
The Indian economy has shown fall in the growth from 6.8% in FY199899 to 5.9% in FY1999-2000. The fall mainly reflects a slow down in agricultural production after previous year’s bumper harvest. However, activities in the industrial and services sector strengthened during year, buoyed by a revival of exports and the pickup in domestic demand. Thus, the growth in GDP from the industrial sector accelerated to 6.9% from 4.0% in the previous year, while services grew at last year’s level of 8.2%. Both imports and exports measured in USD have grown by 8% in FY1999-2000. In contrast, exports fell by 4% in 1998-99 while imports grew by less than 1%. This trend is reflected in terms of volume of cargo handled by major ports, which grew by 8% in FY1999-2000 against stagnation in the previous year. The buoyancy is explained partly by the revival of world trade on the heels of the East Asian recovery and a modest recovery in some global commodity prices. Low inflation in the domestic economy may have also strengthened the competitiveness of India’s exports in global markets. Growth in imports is primarily due to rise in oil prices even though oil import volumes have not increased. The non-POL imports have, however, remained sluggish in the current financial year with a marginal increase of 1.1 percent in the nine months, as compared to an increase of 15.8 percent in the corresponding period last year. Indian exports increased at a compounded growth rate of 7.22 per cent and imports at a compounded growth rate of 7.71 per cent during the
period 1950-99. The world exports during this period, however increased at a compounded growth rate of 9.62 per cent. The growth rates were the maximum during the decade 1970-80. With the current ongoing liberalization of Indian economy, India’s share in world export is expected to accelerate in the years to come.
Analysis of Essar Shipping Ltd
HISTORY
Essar Shipping Limited (ESL) came into existence in 1983 with the merger of Essar Bulk Carriers (formed in 1969) and Karnataka Shipping Co. Ltd. The company belongs to the Rs 38 billion Essar group, which consists of other companies like Essar Steel and Essar Oil. The promoters acquired management control in South India Shipping Corporation (SISCO) in 1991, and finally merged it with ESL with effect from April 1, 1996. ESL also has two wholly owned subsidiaries, Essar Tankers Limited (ETL), and Essar International Limited (EIL). ETL is yet to commence operations, while EIL is engaged in owning and chartering of ships, ship broking and related activities.
FACT SHEET
? Registered office: 2/3, Main Guard Cross Road, Bangalore - 560 001, India Tel : +91-22-559 1382 Fax : +91-22-559 1650
? Corporate office: Essar House 11, Keshavrao Khadye Marg, Mahalaxmi, Mumbai - 400 034, India Tel : +91-22-495 0606 Fax : +91-22-495 4312/ 495 4330
? Promoter: ? Ruia family
? Board of Directors: ? ? ? ? ? ? ? ? ? ? Shashi Ruia (Chairman) Ravi Ruia (Vice Chairman) Sanjay Mehta (Managing Director) Capt. B. S. Kumar R. N. Bansal N. N. Kampani O. P. Khaitan S. K. Poddar S. Doreswamy (ICICI Nominee) M. P. Modi (ICICI Nominee)
? Subsidiaries: ? Essar Tankers Limited, Chennai, India Business: Yet to commence operations ? Essar International Limited, London Business: Is engaged in owning and chartering of ships, ship broking and related activities ? Essar International Limited has two subsidiaries: o Greywood Maritime Inc, Liberia o Redwing Navigation Limited, Liberia
? Major events at a glance: ? 1969 - Essar Investment Limited (EIL) sets up Essar Bulk Carriers (EBC) as a wholly owned subsidiary ? 1975 - Karnataka Shipping Corporation (KSC) Limited established by Karnataka Government ? 1983 - EIL acquires KSC. Merger of EBC and KSC to form Essar Shipping Limited ? 1988 - Essar International Limited formerly Essar Guernsey Limited, the wholly owned subsidiary of Essar Shipping Limited, incorporated ? 1991 - Company acquires management control of South India Shipping Corporation (SISCO) ? 1994 - Joint venture with Poompuhar Shipping to form Essar Poompuhar Shipping Company Limited with the ? purpose of carrying out coal shipments for Tamil Nadu Electricity Board ? 1996 - SISCO merged with Essar Shipping ? 1998 - Takes over Vadinar port project from Essar Oil
Distribution of equity shareholdings
Category I. Foreign Holdings II. Govt./Govt. sponsored Financial institutions III. Corporate Bodies (Not covered under I & II) IV. Directors & their relatives V. Top 50 shareholders (Not covered under I, II, III, IV) VI. Others Total
% share holding 27.02 18.11 30.51 0.01 0.79 23.56 100.00
FLEET ANALYSIS
ESL has a well-diversified fleet of about 36 vessels operating in the overseas and coastal segments. In addition, it has around 41 barges for coastal trade. This aggregate fleet is inclusive of all the vessels under lease and Bareboat Charter cum Demise (BBCD) agreement. The company has 6 modern Suezmax double hull tankers and 11 minibulk carriers. Of the overseas vessels, 26 percent are crude oil tankers and 26 percent of dry bulk carriers. The non-cargo carrying fleet constitutes 30 percent of ESL fleet strength. The table below exhibits the fleet of 23 ships owned by ESL and registered under M. S. Act. The total deadweight tonnage under the command of ESL is around 1.4 million tons. The overseas vessels account for 90 percent of the tonnage. The share of the coastal cargo carrying vessels in the total tonnage capacity is 2.2 percent.
Age profile: The average age of ESL vessels is 11.5 years. The average age of ESL overseas fleet is 11 years. The average age of crude oil tankers is 8.5 years. However, its coastal fleet is quite old with the average age of 22.2 years. In the ESL fleet, 69% of the gross tonnage is between 5 to 9 Years. ESL is having 71.6 percent of its overseas tonnage between the age of 5 to 9 years and about 22.9 percent of the vessels are between 15 to 19 years of age. In the coastal fleet about 65 percent of the tonnage is above 20 years. This table exhibits the age profile of ESL fleet.
Operations:
ESL is the second largest private operator with a diversified fleet of bulkers, tankers and OSV’s. The company has a policy of maintaining its vessels on an optimum mix of time and voyage charters to maximize revenue and to protect against the cyclical fluctuation in the shipping industry. Majority of the company’s vessels is employed on long-term / medium-term time charters. The company has shifted its focus to energy transportation and has integrated logistics solutions to its Clients. The crude carriers account for 68.9% of the total gross tonnage and are deployed mostly on the long-term time charter, indicating a more stable income stream. Their average age of 8.5 years, augurs well for the company in view of the expected increase in crude oil imports to service the needs of various oil refineries which have come up in the recent past or expected to come up in the near future. Four of the 6 crude carriers, each with a carrying capacity of 154,970 dwt are the largest vessels in the Indian fleet after M.T. Kanchanjunga (DWT of 276,755 tonnes) belonging to SCI (which SCI is planning to scrap). To capitalize on the economies of scale, ESL intends to phase out its small and old bulk carriers and offshore supply vessels. It is planning to acquire a second-hand Capesize vessel. While this is commendable, it should be noted that the Reliance refinery at Jamnagar is importing oil in VLCCs because of economies of scale.
Similarly, in case of the upcoming Essar Oil refinery in Vadinar, VLCCs could achieve better economies of scale. Unlike SCI and Great Eastern, a very small portion of Essar’s tonnage consists of product tankers. This augurs well for the company, due to changing nature of the products’ trade. Essar Shipping has formed a joint venture with Malaysia International shipping Corporation (MISC) to bid for the Petronet LNG transportation contract.
Ports:
The company is implementing all-weather, natural deep-water port at Vadinar for handling of crude oil & products to cater chiefly to Essar Oil’s upcoming refinery nearby. The total cost of the project is expected to be around Rs 15 billion. The project that was taken over from Essar Oil led to a downgrading of credit rating by CRISIL. We believe that the project could accrue lot of benefits to the company, despite short-term financial problems.
Tonnage acquisition:
The company has grown aggressively in the last decade. With a total tonnage of 1.4 million tonnes under command, it is now the third largest shipping company in India. The ESL will be gradually phasing out its existing fleet of product tankers, bulk carriers and minibulk carriers and over the next few years it will be acquiring younger and large-sized Capesize vessels (150,000 DWT) and VLCCs.
SWOT ANALYSIS
STRENGTH:
? Management is strong in managing the regulatory environment. ? Company’s fleet is quite young (11.5 years) and hence it is able to deploy the fleet in a better way and charge higher charter rates. ? Part of the Rs 38 billion Essar Group. Has received, and is expected to continue to receive in future, considerable support from group companies. ? The company has an experience of 28 years in shipping ? A continuous dividend track record
WEAKNESSES:
? Declining volume of fixtures through Transchart company’s future earnings have greater fluctuations in line with international freight rates. ? Being part of the Essar group is also a weakness, especially so after the recent default on a FRN issue by Essar Steel. ? In the past few years, a substantial portion of company’s profits have come from non-recurring asset transactions with subsidiaries. ? A weak credit rating. ? The company has weak financials that is low liquidity and high debt-equity ratio of about 1.6. Hence its earnings are susceptible to ups and downs of internal and international shipping cycles.
OPPORTUNITIES:
? The company may find long term opportunities in LNG transportation. ? Company may find long term opportunities in shipping related areas like ship repair, ship building, ship breaking and port development.
THREATS:
? With progressive liberalization of the regulatory environment governing Indian shipping, the company may find increased level of competition on its tanker and offshore segments. ? In another 5 years more than 50 percent of the fleet will be more than 20 years which need to be augmented with new vessels or require repairing and maintenance. ? Product imports are expected to undergo a major change with the coming up of new private sector refinery. Hence there exists uncertainty over the future deployment of company’s product tankers.
Conclusions & Recommendations
CONCLUSIONS:
The competitive advantage enjoyed by Indians has changed over the years due to both systematic and unsystematic factors. The following reasons can be attributed for this: ? The last five years have not only seen one of the most severe depressions hitting the shipping market, but also stringent norms being passed by various bodies increasing operating costs under most heads. The ship owners are facing the twin dilemma of rising operating expenses and low freight rates. ? Most expenses like repairs and maintenance, insurance etc. being largely inflexible, ship owners have to cut salaries to improve profit margins. Ship owners world over are thus gradually lowering the number of crew and also shifting to seafarers from such countries like Russia and Philippines. And compared to Indians, these seafarers are available at considerable low salaries. ? Competitive advantage of Indians & seafarers of other developing nations in terms of the knowledge of English and technical qualification is gradually waning away. ? In the rating market, Filipinos are usually preferred because of their low salary expectations, command over English and better communication skills.
RECOMMENDATIONS:
? They should keep themselves abreast with new technologies and trends in the shipping industry and always be at the higher side of quality standards prescribed by apex bodies and ship owners. ? For the safety of the ship, the commitment and devotion of the seafarers towards the work is most important. Indians should always maintain the heritage of commitment, reliability and devotion. ? On board behavior, politeness, good relation with employer and manning agent, will help them to get respect and job satisfaction. ? As the seafarers from other developing countries are available at much competitive rate, to catch up the market in this depression, Indians must be more flexible on their wage expectations. ? The government as well as industry participants must strive to increase awareness on the maritime sector amongst people.
References
? ? ? ? ? ? www.essargroup.com www.docstoc.com www.businessreviewindia.in www.google.com www.wikipedia.com ESSENCE- monthly journal of ESSAR
doc_814670157.pdf
“Study of Indian Shipping Industry & Scope of Essar shipping Ltd”
Summer Training Report
On
“Study of Indian Shipping Industry & Scope of Essar shipping Ltd”
For “ESSAR Shipping Ltd.”
Submitted for the partial fulfillment for the award of Post Graduate Diploma in Management (PGDM) 2010-2012.
Submitted to: Balaji Institute of Telecom Management, Pune
Submitted By: Aniket Mohite TM109447 BITM
ACKNOWLEDGEMENT
At the outset I would like to express my heartfelt gratitude to ‘ESSAR Shipping Ltd.’ for providing me opportunity to work with their esteemed organization. First & foremost I would like to thank Mr.P.Ramesh & Mr.Sanjeev Rathi who had been a constant source of inspiration. I would also like to thank Mr.Romesh Gupta who always supported me throughout my project & made it a great success. With their cooperation and guidance from time to time, I could understand various practical aspects of procurement department and insights of ships(fleet). Mr.Romesh Gupta, though a very busy person but still he spared his valuable time for me and shared his experiences and cleared my doubts patiently, for which I shall always remain grateful to him. He gave me courage & inspiration to work zealously on my project & do justice to it. I would also like to thank to all those people at ‘ESSAR Shipping Ltd.’ who though being total strangers to me lifted my spirits with their cheerful smiles & gave me inspiration to work harder.
Aniket Mohite BITM PUNE
Summer Project Certificate
This is to certify that Mr.Aniket Mohite Roll No. TM109447, a student of BITM, PUNE has worked on summer project titled “STUDY OF INDIAN SHIPPING INDUSTRY & SCOPE OF ESSAR SHIPPING LTD.” at ‘ESSAR Shipping Ltd.’ after semester II in partial fulfillment of the requirement for the program. This is his original work to the best of my knowledge.
DATE:
NAME:
DESIGNATION:
SIGNATURE:
SEAL
Content Page
Executive Summary Introduction of Indian Shipping Industry
• • • • • • Overview of shipping industry Economy, Trade & Shipping Global Economy Global Trade Shipping Cycles Indian Scenario
Analysis of Essar Shipping Ltd
• • • • • History Fact Sheet Fleet Analysis Operation SWOT Analysis
Conclusions & Reccomendations References
Executive Summary
The report gives an overview of the Indian shipping industry and studies the changing business environment in which it operates. As the global economy evolves from being capital-intensive to knowledgeintensive, we analyzes the industry’s competitiveness based on soft intangible parameters like human capital, information technology and expertise in addition to various traditional asset-oriented factors.
In India, there are three separate Acts which deal with regulation of vessels owned by Indian corporations: ? The Merchant Shipping Act, 1958 ? The Inland Vessels Act, 1917 ? The Coasting Vessels Act, 1838
The present study is confined to vessels registered under The Merchant Shipping Act. These vessels represent more than 95% of the cargocarrying capacity of Indian shipping tonnage and constitute around 330 cargo-carrying ships of around 11.4 million tonnes dwt and another 180 non-cargo carrying ships. Further, lack of data on vessels covered by latter two Acts, makes comprehensive analysis of the other sectors difficult.
Introduction to Indian Shipping Industry
Overview of shipping industry
The total shipping bill for India’s merchandise trade - coastal and overseas - is around USD 5.5 billion. In terms of volume, India’s imports and exports constitute around 210 million tonnes while coastal trade accounts for another 40 million tonnes. Overseas Shipping: Indian overseas trade has grown from 80 million tonnes in 1984-85 to 210 million tonnes in 1998-99, an annualized growth rate of 6.8%. Important trade routes: Crude and product imports from Gulf, Malaysia and Nigeria India imports around 40 million tonnes of crude and 20 million tonnes of products every year on a FOB basis, chiefly from Gulf, Malaysia and Nigeria. While Indian ship owners have a considerable stake in this trade, liberalization and relaxation of norms has allowed private-sector refineries to make their own shipping arrangements. Indian ship owners chiefly deploy Suezmaxes from Gulf and Aframaxes from Malaysia. Most of the vessels chartered from foreign ship-owners are large-sized VLCCs. Product imports are carried out chiefly in small vessels of around 30-40,000 dwt. Iron ore exports from India to East Asia India exports around 30 million tonnes of iron ore annually, 70 per cent of which is directed toward Japan, China and South Korea. Iron ore
exports are predominantly made on a f.o.b. basis, implying lack of opportunity for Indian ship owners. It should be noted that globally iron
ore shipments are made in large Capesize and Panamax vessels. These vessels, however, constitute a small portion of the Indian fleet. Exports from the ports of Mormugao, Chennai and Visakhapatnam are in such vessels while from New Mangalore and Paradip they are carried out in ships of Panamax vessels of upto 65,000 DWT, due to draft restrictions. Shipping Corporation of India is the only major Indian player in iron ore transportation and carries around 0.5 million tonnes to Japan from Visakhapatnam and Paradip. These Handymax vessels are deployed on a triangular route to carry coking coal from Australia and then iron ore to Japan followed by ballast to Australia on return. Coking coal imports from Australia to Visakhapatnam, Paradip and Haldia India imports around 10 million tonnes of coking coal, chiefly from Australia, by Handymax vessels for consumption by public sector steel majors like SAIL & RINL and Tata Steel. Indian ship owners, led by SCI, have a share of 4 million tonnes. Coking coal imports by Tata Steel are however made in Panamax size vessels of foreign flag. Fertilizer and fertilizer material India imports around 5 million tonnes of fertilizer and 3 million tonnes of rock phosphate and sulfur, chiefly in small size Handymax and Handy size vessels. Imports are made nearly at all the major ports of the country, of which, more than 60 per cent of the imports are routed through the East India ports. While previously Transchart used to play a major role by making around 50 per cent of the shipping arrangements for fertilizer imports, its role has come down substantially over the past few years, primarily because major portion of imports are carried out by private companies nowadays. Better infrastructure facilities at ports
such as JNPT, have led to prospects of future fertilizer imports being made in Panamax vessels to capitalize on economies of scale.
Containers India exports and imports around 1 million TEU’s each, mainly through Bombay, JNPT and Chennai. USA, Western Europe and East Asia is the chief destinations through transshipment ports of Dubai, Colombo and Singapore. Only one Indian player, SCI, has a role in container shipping. However, most of the leading global container lines like NOL-APL, Maersk-Sealand and P&O-Nedlloyd offer services to Indian shippers.
Economy, Trade & Shipping
A strong interdependence exists between economic growth and trade. International trade economists have long established that a liberal and Outward-oriented trade regime increases welfare and income through the following channels. The first channel for the impact of trade on growth is “investment”. Openness can affect both the level and the efficiency of investment and growth in several ways. First an open trade regime can increase market size and hence lead to investment in industries with increasing returns that would not have been viable in a closed smaller market. Openness further leads to increased investment by allowing domestic players access to capital goods that were unavailable previously or were available at too high a cost. The second channel is “productivity channel”. To the extent that open trade regimes lead to greater exposure to world stock of productivity enhancing knowledge, thus openness leads to greater growth. A third channel for the impact of trade on growth is the government policy. If
and to the extent that trade openness creates incentives to policy makers to pursue virtuous macroeconomic and regulatory policies, then it can lead to higher growth. Economic growth determines the level of competition and investment in an economy. Rising income of people and investments by firms, lead to a greater demand for goods and services. As industries relocate according to competitive advantage (for example ship breaking - a relatively unskilled labor intensive activity shifted from developed countries to developing countries where unskilled labor are abundantly present), such rising consumption levels would lead to greater flow of goods to meet such demand. The Asian countries provide an example of such linkages between economic growth and trade. Structural imbalances caused a meltdown in the economy leading to lower investments in infrastructure and industries. This in turn led to lower imports of raw materials and other goods. In the recovery phase, increased competitiveness of the currencies (as a result of depreciation) promoted exports, leading to accumulation of foreign exchange reserves and builds up of investor’s confidence. This led to renewed investments and hence economic growth.
Global Economy
The global economy has recovered strongly from economic meltdown that was triggered by the Asian crisis in the middle of 1997+ and spread to Brazil and Russia in 1998. The emerging economies in Asia have, for the most part, staged a strong V shaped recovery, the Latin American countries are gradually stabilizing, the impressive growth in United
States is now the longest on record and the outlook has also improved for Europe. World output growth, which fell from 3.3% in 1997 to 1.9% in 1998, is estimated to have accelerated to 2.6% in 1999. Growth in developing countries increased to 3.8% in 1999 from 3.2% in 1998 and expected to touch 5.4% in 2000, which is just marginally below performance achieved in 1998. Amongst developed countries, Japan grew by 0.3% in 1999 and expected to grow by 0.9% this year, against a contraction of 2.5% in 1998. Overall, developed economies grew by 3.1% in 1999 against 2.4% in 1998. Crude steel production, an important indicator of economic performance, grew by 1.1% in 1999 after a fall of 3.9% in the previous year. The remarkable turnaround in economic conditions has been caused primarily by the strength of the US economy where burgeoning domestic demand provided a market for products of crisis hit countries. Further, the relatively easy monetary policies followed in Europe and Japan has led to acceleration in growth in the former and reversal of recessionary trend in latter. Finally, the stabilization policies and reform processes implemented in the crisis-hit countries have also been largely successful. Fears of global recession of intensity equivalent to the Great Depression of 1930 proved unfounded and most developmental economists agree that the world is strongly back on the growth path. The recovery in global activity has been accompanied by a more than tripling of oil prices since early 1999, mainly due to production curbs by the Organization of the Petroleum Exporting Countries (OPEC) and several other oil producers. To a large extent, the rise in oil prices represents a recovery from exceptionally weak prices in early 1999, and
this recovery has brought prices back closer to a long-term equilibrium. With oil having become a less important factor in the world economy since the 1970s, the consequences of the recent price increase for oil importing countries are smaller than they would have been in the past. In addition, the price rise is contributing to significant improvements in external balances and fiscal positions of oil ex-porters, including Russia, many countries in the Middle East, East Asia and some African countries. Most economists are of the opinion that prices would eventually fall to more comfortable levels, although in the unlikely state of this not happening, much of the recovery could falter.
Global Trade
Concomitant to economic growth revival, world trade has also shown signs of recovery. In volume terms, world trade growth accelerated to 4.9% in 1999 from 3.8% in 1998. In 1997, trade had grown by a record of 10%. In terms of value measured in US dollars, world trade in goods (excluding services) fell by only 0.8% against a fall of nearly 6% in the previous two years. The fall is chiefly due to the fall in commodity prices especially oil, where prices touched historical lows in the beginning of 1999.
Shipping Cycles
FY1998-99 represented a tough go for the dry bulk markets as freight rates touched 10-year low levels. Fall in steel production globally, led to lower iron ore and coking coal trade, which had a dampening effect on Capesize and Panamax vessels. However, increased trade in steam coal and grain provided some support. Mini bulk commodities, especially
steel products and cement, also witnessed a fall in trade and thus negatively affected Handymax and Handy size vessels. However, economic revival witnessed amongst various developing countries since beginning of 1999, has led to improvements in dry bulk trade and hence dries bulk shipping markets. From 10-year lows in the beginning of the year, the freight rates across nearly all dry bulk segments have touched new highs, as greater industrial activity in developing countries and renewed investment in infrastructure projects have led to a greater demand for steel, which in turn has resulted in increased trade in iron ore and coking coal. All these have had favorable impact on dry bulk tonnage demand. Overall, the average freight rates in FY1999-2000 for every dry bulk segment are higher than the same in FY1998-99, and expected to cross the average levels of FY1997-98. A much more robust cycle is being observed in the tanker markets. Not withstanding the dramatic decline in oil prices, which fell to a 25-year low, crude oil demand and hence trade also witnessed decline. Economic revival has seen increase in demand, although impact on shipping markets has been with a much greater lag than in dry bulk carrier market. Freight rates across tanker segments have increased in the last three months of FY1999-2000. Average Aframax and Suezmax freight rates in FY1999-2000 are touching 10-year highs and expected to continue to appreciate as demand for tonnage outstrips supply.
Indian Scenario
The Indian economy has shown fall in the growth from 6.8% in FY199899 to 5.9% in FY1999-2000. The fall mainly reflects a slow down in agricultural production after previous year’s bumper harvest. However, activities in the industrial and services sector strengthened during year, buoyed by a revival of exports and the pickup in domestic demand. Thus, the growth in GDP from the industrial sector accelerated to 6.9% from 4.0% in the previous year, while services grew at last year’s level of 8.2%. Both imports and exports measured in USD have grown by 8% in FY1999-2000. In contrast, exports fell by 4% in 1998-99 while imports grew by less than 1%. This trend is reflected in terms of volume of cargo handled by major ports, which grew by 8% in FY1999-2000 against stagnation in the previous year. The buoyancy is explained partly by the revival of world trade on the heels of the East Asian recovery and a modest recovery in some global commodity prices. Low inflation in the domestic economy may have also strengthened the competitiveness of India’s exports in global markets. Growth in imports is primarily due to rise in oil prices even though oil import volumes have not increased. The non-POL imports have, however, remained sluggish in the current financial year with a marginal increase of 1.1 percent in the nine months, as compared to an increase of 15.8 percent in the corresponding period last year. Indian exports increased at a compounded growth rate of 7.22 per cent and imports at a compounded growth rate of 7.71 per cent during the
period 1950-99. The world exports during this period, however increased at a compounded growth rate of 9.62 per cent. The growth rates were the maximum during the decade 1970-80. With the current ongoing liberalization of Indian economy, India’s share in world export is expected to accelerate in the years to come.
Analysis of Essar Shipping Ltd
HISTORY
Essar Shipping Limited (ESL) came into existence in 1983 with the merger of Essar Bulk Carriers (formed in 1969) and Karnataka Shipping Co. Ltd. The company belongs to the Rs 38 billion Essar group, which consists of other companies like Essar Steel and Essar Oil. The promoters acquired management control in South India Shipping Corporation (SISCO) in 1991, and finally merged it with ESL with effect from April 1, 1996. ESL also has two wholly owned subsidiaries, Essar Tankers Limited (ETL), and Essar International Limited (EIL). ETL is yet to commence operations, while EIL is engaged in owning and chartering of ships, ship broking and related activities.
FACT SHEET
? Registered office: 2/3, Main Guard Cross Road, Bangalore - 560 001, India Tel : +91-22-559 1382 Fax : +91-22-559 1650
? Corporate office: Essar House 11, Keshavrao Khadye Marg, Mahalaxmi, Mumbai - 400 034, India Tel : +91-22-495 0606 Fax : +91-22-495 4312/ 495 4330
? Promoter: ? Ruia family
? Board of Directors: ? ? ? ? ? ? ? ? ? ? Shashi Ruia (Chairman) Ravi Ruia (Vice Chairman) Sanjay Mehta (Managing Director) Capt. B. S. Kumar R. N. Bansal N. N. Kampani O. P. Khaitan S. K. Poddar S. Doreswamy (ICICI Nominee) M. P. Modi (ICICI Nominee)
? Subsidiaries: ? Essar Tankers Limited, Chennai, India Business: Yet to commence operations ? Essar International Limited, London Business: Is engaged in owning and chartering of ships, ship broking and related activities ? Essar International Limited has two subsidiaries: o Greywood Maritime Inc, Liberia o Redwing Navigation Limited, Liberia
? Major events at a glance: ? 1969 - Essar Investment Limited (EIL) sets up Essar Bulk Carriers (EBC) as a wholly owned subsidiary ? 1975 - Karnataka Shipping Corporation (KSC) Limited established by Karnataka Government ? 1983 - EIL acquires KSC. Merger of EBC and KSC to form Essar Shipping Limited ? 1988 - Essar International Limited formerly Essar Guernsey Limited, the wholly owned subsidiary of Essar Shipping Limited, incorporated ? 1991 - Company acquires management control of South India Shipping Corporation (SISCO) ? 1994 - Joint venture with Poompuhar Shipping to form Essar Poompuhar Shipping Company Limited with the ? purpose of carrying out coal shipments for Tamil Nadu Electricity Board ? 1996 - SISCO merged with Essar Shipping ? 1998 - Takes over Vadinar port project from Essar Oil
Distribution of equity shareholdings
Category I. Foreign Holdings II. Govt./Govt. sponsored Financial institutions III. Corporate Bodies (Not covered under I & II) IV. Directors & their relatives V. Top 50 shareholders (Not covered under I, II, III, IV) VI. Others Total
% share holding 27.02 18.11 30.51 0.01 0.79 23.56 100.00
FLEET ANALYSIS
ESL has a well-diversified fleet of about 36 vessels operating in the overseas and coastal segments. In addition, it has around 41 barges for coastal trade. This aggregate fleet is inclusive of all the vessels under lease and Bareboat Charter cum Demise (BBCD) agreement. The company has 6 modern Suezmax double hull tankers and 11 minibulk carriers. Of the overseas vessels, 26 percent are crude oil tankers and 26 percent of dry bulk carriers. The non-cargo carrying fleet constitutes 30 percent of ESL fleet strength. The table below exhibits the fleet of 23 ships owned by ESL and registered under M. S. Act. The total deadweight tonnage under the command of ESL is around 1.4 million tons. The overseas vessels account for 90 percent of the tonnage. The share of the coastal cargo carrying vessels in the total tonnage capacity is 2.2 percent.
Age profile: The average age of ESL vessels is 11.5 years. The average age of ESL overseas fleet is 11 years. The average age of crude oil tankers is 8.5 years. However, its coastal fleet is quite old with the average age of 22.2 years. In the ESL fleet, 69% of the gross tonnage is between 5 to 9 Years. ESL is having 71.6 percent of its overseas tonnage between the age of 5 to 9 years and about 22.9 percent of the vessels are between 15 to 19 years of age. In the coastal fleet about 65 percent of the tonnage is above 20 years. This table exhibits the age profile of ESL fleet.
Operations:
ESL is the second largest private operator with a diversified fleet of bulkers, tankers and OSV’s. The company has a policy of maintaining its vessels on an optimum mix of time and voyage charters to maximize revenue and to protect against the cyclical fluctuation in the shipping industry. Majority of the company’s vessels is employed on long-term / medium-term time charters. The company has shifted its focus to energy transportation and has integrated logistics solutions to its Clients. The crude carriers account for 68.9% of the total gross tonnage and are deployed mostly on the long-term time charter, indicating a more stable income stream. Their average age of 8.5 years, augurs well for the company in view of the expected increase in crude oil imports to service the needs of various oil refineries which have come up in the recent past or expected to come up in the near future. Four of the 6 crude carriers, each with a carrying capacity of 154,970 dwt are the largest vessels in the Indian fleet after M.T. Kanchanjunga (DWT of 276,755 tonnes) belonging to SCI (which SCI is planning to scrap). To capitalize on the economies of scale, ESL intends to phase out its small and old bulk carriers and offshore supply vessels. It is planning to acquire a second-hand Capesize vessel. While this is commendable, it should be noted that the Reliance refinery at Jamnagar is importing oil in VLCCs because of economies of scale.
Similarly, in case of the upcoming Essar Oil refinery in Vadinar, VLCCs could achieve better economies of scale. Unlike SCI and Great Eastern, a very small portion of Essar’s tonnage consists of product tankers. This augurs well for the company, due to changing nature of the products’ trade. Essar Shipping has formed a joint venture with Malaysia International shipping Corporation (MISC) to bid for the Petronet LNG transportation contract.
Ports:
The company is implementing all-weather, natural deep-water port at Vadinar for handling of crude oil & products to cater chiefly to Essar Oil’s upcoming refinery nearby. The total cost of the project is expected to be around Rs 15 billion. The project that was taken over from Essar Oil led to a downgrading of credit rating by CRISIL. We believe that the project could accrue lot of benefits to the company, despite short-term financial problems.
Tonnage acquisition:
The company has grown aggressively in the last decade. With a total tonnage of 1.4 million tonnes under command, it is now the third largest shipping company in India. The ESL will be gradually phasing out its existing fleet of product tankers, bulk carriers and minibulk carriers and over the next few years it will be acquiring younger and large-sized Capesize vessels (150,000 DWT) and VLCCs.
SWOT ANALYSIS
STRENGTH:
? Management is strong in managing the regulatory environment. ? Company’s fleet is quite young (11.5 years) and hence it is able to deploy the fleet in a better way and charge higher charter rates. ? Part of the Rs 38 billion Essar Group. Has received, and is expected to continue to receive in future, considerable support from group companies. ? The company has an experience of 28 years in shipping ? A continuous dividend track record
WEAKNESSES:
? Declining volume of fixtures through Transchart company’s future earnings have greater fluctuations in line with international freight rates. ? Being part of the Essar group is also a weakness, especially so after the recent default on a FRN issue by Essar Steel. ? In the past few years, a substantial portion of company’s profits have come from non-recurring asset transactions with subsidiaries. ? A weak credit rating. ? The company has weak financials that is low liquidity and high debt-equity ratio of about 1.6. Hence its earnings are susceptible to ups and downs of internal and international shipping cycles.
OPPORTUNITIES:
? The company may find long term opportunities in LNG transportation. ? Company may find long term opportunities in shipping related areas like ship repair, ship building, ship breaking and port development.
THREATS:
? With progressive liberalization of the regulatory environment governing Indian shipping, the company may find increased level of competition on its tanker and offshore segments. ? In another 5 years more than 50 percent of the fleet will be more than 20 years which need to be augmented with new vessels or require repairing and maintenance. ? Product imports are expected to undergo a major change with the coming up of new private sector refinery. Hence there exists uncertainty over the future deployment of company’s product tankers.
Conclusions & Recommendations
CONCLUSIONS:
The competitive advantage enjoyed by Indians has changed over the years due to both systematic and unsystematic factors. The following reasons can be attributed for this: ? The last five years have not only seen one of the most severe depressions hitting the shipping market, but also stringent norms being passed by various bodies increasing operating costs under most heads. The ship owners are facing the twin dilemma of rising operating expenses and low freight rates. ? Most expenses like repairs and maintenance, insurance etc. being largely inflexible, ship owners have to cut salaries to improve profit margins. Ship owners world over are thus gradually lowering the number of crew and also shifting to seafarers from such countries like Russia and Philippines. And compared to Indians, these seafarers are available at considerable low salaries. ? Competitive advantage of Indians & seafarers of other developing nations in terms of the knowledge of English and technical qualification is gradually waning away. ? In the rating market, Filipinos are usually preferred because of their low salary expectations, command over English and better communication skills.
RECOMMENDATIONS:
? They should keep themselves abreast with new technologies and trends in the shipping industry and always be at the higher side of quality standards prescribed by apex bodies and ship owners. ? For the safety of the ship, the commitment and devotion of the seafarers towards the work is most important. Indians should always maintain the heritage of commitment, reliability and devotion. ? On board behavior, politeness, good relation with employer and manning agent, will help them to get respect and job satisfaction. ? As the seafarers from other developing countries are available at much competitive rate, to catch up the market in this depression, Indians must be more flexible on their wage expectations. ? The government as well as industry participants must strive to increase awareness on the maritime sector amongst people.
References
? ? ? ? ? ? www.essargroup.com www.docstoc.com www.businessreviewindia.in www.google.com www.wikipedia.com ESSENCE- monthly journal of ESSAR
doc_814670157.pdf