Investors eye second hand vessel market

Even as shipping companies struggle to stay in the black, it appears that investors sitting on piles of cash are looking to buy cheap, good quality ships. Their numbers seem to have increased with the recent sectoral firming up of freight rates, although analysts warn that it is too soon to say whether the market has bottom out long term.  Worrying numbers out of the US and Europe and the continuing Greek fiasco will take time to play out, they warn; the threat of a double dip recession in parts of the developed world cannot be ruled out.

Nonetheless, there is some good news for ship-owners out there. For example, container shipping has seen a revival of sorts, with some predicting that the recovery will be well underway by early next year. Operating margins have improved considerably- freight rates on some routes have risen threefold- giving a much-needed breather to a segment that lost a reported US$ 6 billion in price wars last year. Stakeholders will continue to support the industry if this trend continues, says Alphaliner, the liner shipping experts. The stability- short lived or not- is what is encouraging investors to purchase vessels.

"If you're in the market for new buildings as well as second-hand vessels, this is the time to buy. Prices are low and demand is soft," Vice Chairman of Evergreen Marine Corp (Malaysia) Ooi Lean Hin said in an interview recently.  "If you understand the shipping market, now is the best time to buy. That's because when the market picks up, you have a higher potential to enjoy asset appreciation," he added. 

With traditional lenders chary of financing asset purchase, investors are stepping in to fill the gap. Unlike earlier recessions, though, they are mindful of the fact that fuel and environmental costs will play a big role in the economics of ship operations and are therefore looking for quality second hand vessels. Unfortunately, there is a paucity of those in the market. London based Clarkson's- the leading brokerage house- says that investor's would "willingly snap up a significant number of cheap, good quality ships if they could only get their hands on them". Although the first four and a half months of 2012 has seen 425 ships worth $5.5 billion being sold, Clarkson's says, "a re-delivery VLCC is a very different commodity from a 20-year-old vessel on the verge of being scrapped". 

Only one modern VLCC has come up for sale in 2012, it points out, with two thirds of the tankers sold anywhere between six and ten years old. A similar situation exists in the dry cargo segment.

Industry observers are confident that investors will keep on looking for good ships in the second hand market. Or even new ones- a new VLCC now costs 40% less than in 2008 and a new container vessel around 30% less. While some ship-owners are keen to get rid of old vessels, the issue seems to be more the availability of good quality vessels up for resale, with ship-owners in no hurry those. 

Clarkson's says that the cash squeeze, three years into the recession, is "still mild", and pressure on owners from banks or other lenders has reduced, with many taking a "wait and see" attitude as long as loan interest costs are covered. 

"In previous recessions, cheap prices were generally triggered by an inability to pay loan interest. Forcing ships onto the market resulting in distress sales just makes matters worse for their other loans. But this recession has been different for two reasons. First, freight rates have only touched “rock bottom” for short periods, interspersed by spells of fairly robust earnings. Second, interest costs are at a record low, which makes life easier for the banks," it says.

Better times ahead for VLCCs

A Bloomberg reports says that VLCC's may do much better going forward thanks to an increase in Atlantic-Asia movement added to the ongoing contraction in U.S. demand. London based shipbroker Clarkson says that VLCC earnings have shot up more than 30 percent this year already to $41,295- and an average of $37,933- albeit amidst high volatility. This will be good news for the many tanker operators - including large companies like Frontline- that have struggled over the last few quarters.

Bloomberg says that the biggest hedge fund in shipping is turning bullish on VLCCs after four years thanks to the fact that 'the U.S. push toward energy independence provides China with a greater share of global crude supply'. The Chinese economy, growing at three times the U.S. rate, has seen demand for tankers jump 39 percent in three years. At the same time, the U.S. push for energy independence (that it last enjoyed in 1952) has seen demand incrementally drop. Nett result: longer voyages that mean more profits for large-tanker owners. 

Hong Kong-based Tufton Oceanic agrees, saying VLCCs will do much better in the coming years.  Positive results will be felt as early as this year, for example with Frontline, the operator of 42 VLCCS, that may well reduce losses to $54.1 million compared to more than $529 million in 2011, a survey conducted by Bloomberg says. Tufton's Vergottis is advising investors to buy stock in companies that own VLCCs instead of the smaller Suezmax and Aframax tankers.

The U.S., with domestic output increasing, will net-import 1.4 million barrels a day of fuel by 2020, says Citigroup, down from almost 9 million barrels a day last year- the lowest since 1999. Another additional factor is the shooting up of domestically produced natural gas demand in the U.S. at the expense of oil. 

Oslo based Arctic Securities thinks that China will overtake the U.S. as the biggest customer for tankers in 2013; the country meets less than half its demand from domestic sources. The consequences of this changing scenario are already being felt, with pressure coming on smaller tankers that operate from West Africa or South America to Europe and the U.S. Larger vessels are required for the passage to China, and economies of scale favour the VLCCs here. Vergottis thinks that about 700,000 barrels a day has shifted from the intra- Atlantic trade onto the Asia-Atlantic route. 

Clarkson reports that Suezmax rates have fallen because of shifting demand. Even though VLCC rates are rising, the broker says, they are still below the 10-year average of $56,666- and way below the $97,154 average of 2008. 

“Increasing self-sufficiency in U.S. energy diverts more crude to China from the Atlantic just as long as China’s own use keeps growing,” Simon Newman of ICAP Shipping International Ltd. told Bloomberg. “More Atlantic- to-Asia business is definitely one of our factors in the market recovery going forward.”

P&O Cruises- short-changing Indian crew?

P&O Cruise's decision to withhold passenger tips unless 'performance targets' are met has not gone down well with their mainly Asian crew. The majority of these are Indians working as stewards and in restaurants, according to British newspaper reports. Unsurprisingly, P&O rubbishes the criticism, claiming instead that the new regime is aimed to "make crew more responsive" and offer protection to them since passengers- often paying thousands of dollars for the cruise- are not tipping as much as they used to. 

David Dingle - CEO of Carnival UK that is in charge of P&O Cruises- has rolled out a programme that may severely affect the take home pay of most of its Indian and Filipino crew, many of whom are working 11 hours a day for as little as 75p an hour. In addition to making tips electronic, P&O will not pay bonuses if passenger feedback does not exceed internal targets, "some of which stand at 96%". Stewards getting an approval rating of below 92% will lose their bonuses- 15% of their basic salary. P&O has also reportedly told the crew that the scheme "is dependent on the passengers paying their auto gratuities".

The Guardian reports that passengers on the P&O Oriana ship said members of the mainly Indian crew "seemed upset by the deal".  Passenger Rob Bygrave added that it was an "absolute scandal" and that one crewmember told him "grown men were in tears at a meeting where they were notified of the new arrangements".

Dingle contradicted this, saying that the crew is "much happier" since they have some protection now. "You've got staff from eastern Europe in restaurants in Britain – why? Because it's great money. Yes, the minimum wage is more than we pay, but this is a global industry, our businesses have to remain competitive. Let's not forget the level of take-home pay for our staff, the vast majority of whom come from India. Look at hotels in Goa. The earning ability is greater on our ships".

"We have a manning office in Mumbai. There are queues out on to the street. It clearly is of value to these people."

Brendan Barber, General Secretary of the British Trades Union Congress- that has 58 affiliated unions representing over 6 million workers- has condemned the P&O move. He said, "Holidaymakers will be horrified to learn that some of the seafarers on their cruise ships are paid so little. It is high time the disgraceful practice of allowing the shipping industry to pay poverty wages to workers who don't live in the UK was stopped. Exploitative rates of pay for those working on British ships have no place in a modern society."

Not that the cruise industry is without other public relations issues. P&O is part of the Carnival Corporation of the Costa Concordia fame. As if that were not enough, a subsidiary of Carnival- Princess Cruises- has been under fire recently for allegedly leaving two fishermen to die.

Mahindra and Mahindra to roll out unmanned Sea Surveillance Vessels

                                Rafael's 'Protector 2'

Indian auto major Mahindra & Mahindra Ltd. is entering the coastal surveillance craft business. The country's biggest SUV manufacturer will collaborate with an Israeli company Advanced Defense Systems Ltd. to set up a facility in Pune towards this end.  

Although details have only recently been made public, the initial announcement of the Joint Venture was made at Delhi's DefExpo exhibition at the end of March. Rafael currently manufactures the 'Protector', a 9 metre long stealthy, fast (50 knots) and highly manoeuvrable remotely controlled USV (unmanned surveillance vessel) with surveillance, identification and interception capabilities; the company says that its new version will be longer with wider weaponry.  It is equipped with a Mini-Typhoon stabilised weapons system, an electro optic day or night surveillance and targeting system, laser rangefinders, GPS, Radar, inertial navigation and a public address system. Remotely controlled from ashore or another ship, it is meant to act as a country's first line of defence.  

The Mini Typhoon is the remote-controlled weapon station aboard the Protector. It can be fitted with a .50 calibre machine gun or a grenade launcher and is highly accurate- it will keep the weapon aimed to within 500 mm at a target 1000 metres away. 

Rafael, established as a part of the Israeli Ministry of Defence, has manufactured high tech defence systems for air, land, sea and space applications. The company will now invest in Mahindra's existing Naval Systems division in Pune, holding a 26 percent stake in the outfit. Anand Mahindra, Vice Chairman & Managing Director, Mahindra & Mahindra Ltd. says, "Our Joint venture with Rafael signals our strategic entry into a wide range of high tech-defence solutions which will enable the Mahindra Group to become a leading defence systems integrator in India." 

Brig (Retd) KA Hai, Chief Executive, Mahindra Defence Systems, said, "This JV will enable Mahindra Defence Systems to further leverage its innovative solutions in the maritime domain, enhance its product offerings, and present it with new avenues for growth. We intend to further expand into air, land, and aerospace defence solutions." The unit has been a longstanding supplier of armoured Mahindra vehicles to the Indian Ministry of Defence.

Mahindra hopes that the JV will further reduce the nation's dependence on foreign suppliers for critical equipment needed for India's security. The country is the world's largest arms importer, with about 40 percent of its equipment made indigenously- up from 30 percent. It will spend almost 2 trillion rupees a year on defence this year. Besides Mahindra, the Tatas and Ashok Leyland are also expanding their defence equipment businesses.

India's push to boost maritime security after the 2008 Mumbai terrorist attacks is no secret. Although unmanned patrol vessels are new to the country, experts agree that they will prove very useful in patrolling India's 7500 km long coastline. Brig Hai told Bloomberg, “Unmanned patrol vessels will be needed in large numbers to protect from infiltration by terrorists, protect our offshore assets and patrol vital coastal assets such as nuclear plants.”

Supreme Court bans former "Exxon Valdez" from entering Indian breaker's yards

                                              Exxon Valdez spill , 1989

India's apex Supreme Court has banned the 'Oriental Nicety'- the Exxon Valdez in a previous notorious avatar- from entering the country's ports, saying the ship should have been decontaminated first. The ship was in Indian waters headed for Alang, Gujarat to be scrapped when the Court asked that its voyage be stopped 'midway.' The Exxon Valdez was involved in the second biggest US oil spill in history back in 1989. Authorities in Gujarat, including the pollution control department, have now "withdrawn permission" for the vessel to be anchored at Alang for dismantling.   

The Supreme Court asked the Government to take action after an environmentalist group filed a Public Interest Litigation against the ship being allowed to be broken up in India. Activists have long alleged that ship breakers in India ignore safety, exposing workers and the environment to toxic materials. The Research and Science Foundation (RSF) claimed that the Oriental Nicety had changed names many times to distance it from the 1989 disaster- the Exxon Valdez, Exxon Mediterranean, Sea River Mediterranean, S/R Mediterranean, Mediterranean, and Dong Fang Ocean.- before been bought by a subsidiary of Priya Blue Industries based in Gujarat for dismantling.. 

The Supreme Court has now issued notices to the Shipping Ministry to inform it about the steps it has taken to cut short the "Oriental Nicety's" voyage. RSF lawyer Sanjay Parikh told reporters that the vessel was a "trespasser as she doesn’t have the sanction to berth” at any breaker's facilities. 

RSF alleges that the Indian government is slack in applying the Basel Convention laws to ship breaking. India is a signatory to that convention, which lays down norms for the minimisation of generation of hazardous wastes, and calls that toxic wastes be disposed “as close to the source of generation as possible”. The Supreme Court had said in 2007 that the authorities should ensure that a vessel arriving for dismantling be free of any hazardous material, including radioactive material, and that the pollution control boards should confirm she is "properly decontaminated". Mercury, arsenic, asbestos and residual oil are common contaminants found aboard ships.

RCF's Parikh claims that the Court's 2007 directive has been largely ignored, including in this case. “Though it has not yet been allowed to berth in any of the ports, the ship, which is alleged to be contaminated, has entered Indian waters without taking proper steps for decontamination in the port of export,” he said.

The Gujarat company that hoped to dismantle the former Exxon Valdez will appeal the Supreme Court ruling. "We will abide with the Supreme Court order. We are studying the order, and will appeal," said Harshadbhai Padia, a partner in the company.

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