Monday, 31 December 2012

Gas tanker market faces multi-year downturn, experts warn

The gas tanker market faces tough challenges over the next few years, a Reuters report reveals. Amongst the reasons analysts mention for this pessimism are delays in Australian gas projects, an oversupply of tonnage and the fact that not enough of the tankers in the market- or those entering it- are fixed long term. The only saving grace seems to be that analysts expect gas tankers to earn more than other commercial ships till ‘at least 2016’, even as they forecast a multi-year downturn, followed by a gradual recovery, for these ships.

The think not so long ago was that gas tankers, especially LNG tankers, would continue to do well for some time on the back of rising demand, particularly from Japan after the devastating Tsunami last year. The sudden spurt in LNG demand then led to a rush of newbuild orders for LNG ships- these were supposed to do well in a world that was looking for cheaper and cleaner fuels. Fleet capacity was stretched as LNG routes became longer. Unsurprisingly, rates shot up, ‘quadrupling in the years since 2010’, the report says.

However, there has been a perceptible and subtle shift in the market in recent weeks. Rates seem to be levelling off, even stagnating. Analysts expect the rates will actually decline further from here until at least 2014 or 2015. 

 “If you look at the pure fundamentals, there is some ground to think there will be oversupply,” a source from a major LNG shipping brokerage is quoted as saying.

Experts say that the LNG market can get choppy very quickly. In the absence of long term charters, they say, a large number of vessels in the market will totally depend on spot rates. As many as a third of the approximately eighty five ships ordered since 2011 (at a total cost of around $17 billion) fall into this category, brokers warn. 

To add to these tanker owners’ woes, LNG projects are suffering inordinate delays, especially in Australia. This will be a double whammy for many tanker owners, analysts feel- the drop in overall freight demand coupled with particular pressure on spot freight rates may well prove to be crippling, especially if brand new vessels are left unutilised. Although brokers are understandably chary of predicting rates, some say that daily hire rates could drop to as much as $100,000/day in 2015; this, when rates earlier this year had touched $160,000/day.

“In 2013 there are still a number of LNG vessels delivering that don’t have employment yet. Ten out of the 25 vessels expected next year haven’t been fixed,” the same broker said. “In 2014 the situation will be even worse.. more than half (of new LNG ships) won’t have employment.”

The good news for LNG tanker owners is that they can make money even at lower rates than those forecast, something their friends in other trades can only envy. Says and expert from Arctic Securities, talking to Reuters, “Even if rates come down to $85,000 a day, investors are still looking at a 12 per cent annual return.” In contrast, a five-year charter returns 7 to 8 per cent, and a VLCC returns 8.5 to 9.5. “Beyond 2015, LNG tankers will earn comparatively less “mostly due to the fact that dry bulk and tankers will rise more than LNG rates”, the Arctic Securities broker said.

Another piece of good news- LNG owners seem to have learnt from the mistakes made by dry bulk and tanker owners, whose greed for tonnage has led to the present oversupply situation. Talking about LNG newbuilding, one expert said, “Last year there was a lot of ordering, but this year that has significantly reduced.” 


‘Lack of foresight’ to blame for SCI’s financial crisis, says Parliamentary report

The Parliamentary Standing Committee on Transport, headed by Sitaram Yechury, has pulled up the Shipping Corporation of India for lack of foresight and blamed the PSU giant’s ambitious plans for its  ongoing financial woes. The Indian Government, however, disagrees with these findings, saying instead that depressed market conditions are to blame for the crisis. 

“The Committee finds the lack of foresightedness on the part of SCI as it could not sense the steep decline in the ship prices in the international markets thereby throwing SCI into deep trouble and huge financial losses in the form of ship purchase order,” the Committee said in its latest report, and has demanded to know “under what circumstances such an ambitious project was initiated.” 

Recommending immediate corrective measures, the report said that revenue generation was adversely affected at SCI, and that the company was “in depletion of reserve(s).” The report also expressed surprise at seeing “nil” new acquisition proposals for the next year, agreeing with last year’s CAG audit that SCI did not pursue acquisition plans to augment and modernise its fleet . SCI had plans of buying more than sixty ships in the five years ending 2012; it acquired only about two dozen. The CAG had said that the shortfall in acquisition had ended up costing the company Rs 2,100 crore in cost overruns, adversely impacted SCI’s business growth and delayed modernisation when Indian trade was growing at 8.5 per cent annually.

The government, in its response, has said that SCI’s actions were correct, and acquisition plans had been postponed given the present global conditions of gross tonnage oversupply. The reason for the fall in SCI’s revenues, it stated, were the depressed conditions prevailing in the freight markets.  

The Committee noted, however, that SCI had not been able to meet even the 10 per cent vessel requirement of the all PSUs taken together. “SCI should make efforts to ensure that at least the PSU orders should not slip from their hands” due to lack of its business-oriented approach,” it said.


Thursday, 27 December 2012

Five Indian crew taken hostage from tanker off Nigeria

Close on the heels of the kidnap of four foreigners working at a construction site onshore- believed to be South Koreans working for Hyundai construction- heavily armed pirates have ransacked a tanker in the Niger Delta and kidnapped five Indians from amongst its crew. Media reports say that Medallion Marine of Mumbai has confirmed that the 7,654 DWT product tanker SP Brussels was attacked on 17 December about 40 miles off the Niger Delta. The ship was ransacked before the crew were taken ashore. Medallion is a ship management company that sourced the crew aboard the ill-fated tanker.

The SP Brussels is reported to be safe in Lagos with the remaining crew. “Everything possible is being done to ensure the safe return of those crew members taken from the vessel,” Medallion said in a statement. “Nigerian naval vessels are assisting with this process.”  

In the absence of pirate ‘safe havens’ where hijacked vessels can be taken, pirates in the region usually loot the ships they board and steal its cargo. There are also reports of rising violence against crew, an increasing number of whom are being taken as hostages to be released after a ransom is paid. A week earlier in the same area, a fire-fight between gunmen and armed private security guards on the offshore support vessel PM Salem ended with one security guard dead, killed by pirate machine gun fire, and another two wounded. Security experts say that the same pirate group could be behind this spate of recent attacks.

Nigerian officials have declined to comment on the incident so far, but it is an open secret that foreign companies operating in Nigeria's troubled oil rich Niger Delta- an area the size of Portugal- often pay ransom to free kidnapped employees. The taking of foreigners for ransom, a crime hitherto confined mainly to land, has expanded in recent times to include maritime kidnapping. About two months ago, seven seafarers- six Russians and an Estonian- were kidnapped from aboard a ship belonging to a French company; they were later released presumably after a ransom had been paid. 

Maritime security experts AKE say that the risks of maritime kidnapping are now high off the Niger Delta.  The West African country ranks in the top ten countries that export crude oil. It also imports more than three quarters of its fuel requirements, thanks to the fact that it has a woefully inadequate refining capacity at home. It also has, in the Niger Delta, appalling poverty that, combined with powerful and shadowy figures in Nigeria, fuels this kind of crime.


Thursday, 20 December 2012

Proposed EU regulation “potentially devastating,” says the Baltic Exchange

The Baltic Exchange is getting increasingly concerned that business will move out of Europe with the EU’s plans to tighten regulation of the financial markets. The Baltic sees itself as the heart of world trade; established in the mid-18th century, it continues to be a prominent player even today, publishing daily indices that are commonly used to settle contracts and set freight rates for up to three quarters of global seaborne trade.

The EU wants to put in place systems to eliminate what it sees as market manipulation. The European Commission is reviewing trade data and how it is used to set benchmarks; if these include shipping indices, says the Baltic, some maritime companies would leave for Asia. 

Brussels’ intention to regulate is seen by many as a natural fallout of the recent scandal over the rigging by a dozen well known banks of the London Interbank Offered Rate (Libor).  As a result, the EU wants to propagate new rules on the compilation of market indices, and has invited market stakeholders to comment on the possible new rules.

“Any attempt to impose a regulated responsibility for contributions risks either driving businesses out of the jurisdiction or reducing the quality of contribution,” the Baltic Exchange said in a submission to the EU. “Government intervention in the production or distribution processes would be potentially devastating, with unpredictable consequences.”

"What concerns us is ... the idea that we might get caught up accidentally in regulatory change which is being imposed across the piece," CEO of the Baltic Exchange Jeremy Penn says. The Exchange feels that its time-tested system of self-regulation makes it a special case, and that shipping- a private, global market- should be treated differently. “Unilateral action by the EU would either support the production of rival indices in Asia or drive the Baltic Exchange production process outside the jurisdiction," Penn said.

In summer this year, Barclays was fined $465 million by US and British authorities for manipulating the benchmark Libor. Penn says that, although there are issues with some benchmarks, “it would be a great shame if there was some assumption that all markets should be treated in the same way. The risk is they make it very difficult for the Baltic to produce what are well respected, heavily used benchmarks."

The Baltic Exchange's indices and rates were launched in 1985 and are put together by a global panel of shipbrokers- who do not trade in the market. The Baltic’s dry freight index, the BDI, is an undisputed global benchmark. "It is a fair reporting system that is robust and has passed the test of time for almost 30 years," says Professor Nikos Nomikos of the  Cass Business School. 

The larger threat of EU regulation may be faced by the couple of hundred ship broking firms in London. With an estimated $1.5 billion turnover on UK operations alone, any dilution of the Baltic’s importance will almost certainly have a fallout here. Shipbrokers in London say that the Baltic is independent and should be left alone. They fear that the rise of Asia is a threat to their businesses in any case, and the EU’s moves will only make matters worse. 

"The opportunity for third parties to produce alternative benchmarks is there at any time," Penn 


Friday, 14 December 2012

Goa struggles as mining ban bites.

With the Supreme Court ruling that the ban on mining in Goa is to continue, the port of Mormugao says it is in dire financial straits, struggling meet the salary and pension costs for its 2600 employees and 4000 pensioners.

“Our financial position is very precarious,” Deputy Chairman Biplav Kumar told LiveMint. We are currently earning about 10 crore per month without any iron ore.” Mormugao needs to generate Rs 15 crore a month just to pay salaries and pensions. “At this rate, our cash surplus will be depleted in another three months,” he added. The port was earning almost Rs 40 crore a month before mining was banned, when iron ore contributed 80% of the port’s cargo- 50 million tonnes per year at the peak. In contrast, no bulk carriers have called Mormugao since September this year.

With a 30 per cent revenue gap, the situation is so dire that the Goa Government plans to export ore that has been dumped at pit heads over decades. Chief Minister Manohar Parrikar told the Hindu Business Line that these dumps would be cleaned up over the next three to four months “taking due care of the legal formalities. We have huge ore dumps – some of six-decade vintage – dotting the State with tiny land mass and population. We need to clean this mess up,” he said.

Mormugao is now trying to move to other cargoes like food grains, pharmaceuticals and granite. The Food Corporation of India may export wheat through the State, and granite from Karnataka is being exported through the port after two decades, although there are complaints that infrastructure bottlenecks are holding things up.

 “These are the small things we are trying to do. Then, again, this will not give us that much money compared to what we were earning from iron ore,” said Kumar. “Besides, there are challenges in getting new cargo. The condition of the roads connecting the port with its hinterland in southern Maharashtra and northern Karnataka is very bad.”

The port is also getting ready two schemes to shed employees. An ‘Extraordinary leave scheme’ will allow them to take up jobs outside the port for up to six years and then return. Under another- a voluntary retirement scheme- employees who quit will be paid 45 days salary for each completed year of service. Kumar says the proposals are with the Shipping Ministry for clearance. 

Meanwhile, Chief Minister Parrikar is quietly critical of the ban that led to the crisis. “The irregularities (if any) were going on for years. Suddenly the pendulum swings to another extreme,” he said, talking about concerns about illegal mining in the State that led to the ban.

AJ Peters, Secretary of the All India Port and Dock Workers Federation, seems to agree. “Mormugao port is going through very difficult times, and a solution to this can come only from the Supreme Court which is hearing the cases related to mining in India,” he says.