Do ‘Eco ships’ make financial sense?

Recent analysis by BIMCO says that the new generation of ‘Eco ships’- cost effective and environmentally friendlier because of lower fuel consumption- may make  economic sense in the not too distant future despite costing about 25% more to build. The present freight rates may not appear to justify the additional investment, but, according to BIMCO’s chief shipping analyst Peter Sand, “ECO ships seem to be the best profitable choice for the future fleet.”

Sand backs up his opinion with numbers. "Our calculations show that, should you choose to invest in an ECO MR2-tanker, you could pay up to 25% more for your vessel before settling for a non-ECO MR2-tanker,” he says. “BIMCO has been looking at the basic economics of this development and can conclude that a fairly large premium can be paid on newbuildings to operate ECO ships instead of traditional ships. The calculations that are based on our assumptions, disclose that a 15% savings on fuel, potentially enables the owner of the ECO ship to charge extra up to the amount that is saved in fuel – which is USD 2,197 more per day than what a regular vessel can ever get. The extra income means that a ship-owner can pay up to USD 8.31 million more for an ECO ship for the investment to be equally good or better off as compared to a standard tanker. That is a premium of 25% when the standard vessel is priced at USD 33 million" he said.

Sands did not elaborate on the additional advantage that Eco ships have- compliance with the ever tightening emission regulations that makes older ships much more expensive to run, especially if they have to be retrofitted with expensive machinery. Analysis indicates, though, that a rough thumb rule could be used by shipowners to determine how much more they should pay for new Eco ships and still come out ahead. “Based on the same fuel consumption and fuel prices assumptions, a ship-owner can pay up to USD 5.5 million more for an ECO ship for every 10% of fuel savings – or 17% more when a standard vessel is priced at USD 33 million”.

Of course, rising bunker prices make Eco ships even more attractive, but the analysis implies that this assumption can be sometimes misleading, considering the initial investment involved. “The bunker price has to exceed USD 1,060 per tons to make a new ECO ship an investment, with a positive NPV, if the ECO ship is priced at USD 33 million,” it says. "At the current 1 year time-charter rate of 12,750 USD/day, a standard vessel does not meet its cash-breakeven rate making the investment unprofitable with an NPV loss of USD 13.5 million – more than the initial equity outlay. Even if we were able to secure the ECO ship at a cost of USD 33 million the investment will still be unprofitable, despite being able to charge a fuel-savings premium of 2,197 USD on top of the time-charter rate, making an NPV loss of USD 5.2 million. The bunker price has to exceed USD 1,060 per tons to make a new ECO ship an investment, with a positive NPV, if the ECO ship is priced at USD 33 million.”

This could change, quickly, says the analysis, as “higher freight rates are expected to be part of not too distant future.” Today, though, an Eco ship should not cost “more than USD 27.8 million to be a profitable investment for a ship-owner. Comparably a standard vessel must cost as little as USD 19.5 million to be profitable in today’s market.”

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Finally, Cabotage laws relaxed for Vallarpadam ICTT

The Union Cabinet made the decision, four days ago, to relax Cabotage laws for three years to benefit the International Container Transhipment Terminal (ICTT) at Vallarpadam, Kochi. Cabotage, meant to protect domestic shipping, effectively bars foreign vessels from operating between domestic ports. Under the new Cabinet ruling, foreign vessels will now be allowed to operate feeder services for three years, something that will immensely benefit the Vallarpadam ICTT.

The move has been welcomed by large sections of industry, especially in Kerala. The Vallarpadam terminal is being operated by Dubai Ports World, which had consistently asked for a relaxation in the country’s Cabotage laws that were enshrined in the 1958 Merchant Shipping Act. This would allow foreign vessels to tranship Export-Import containers to and from the Vallarpadam ICTT.  Because of these laws, they argued, India was unable to compete with Colombo that tranships 2 million twenty foot equivalent units (TEU) from India annually. Vallarpadam is handling just 20,000 a year, according to media reports. Encouraging mainline foreign ships at Kochi would boost the sector and bring down costs, many claimed, pointing out that about half the country’s containers were transhipped in foreign ports.

Head of DP World Asia region Anil Singh is understandably happy at the Union Cabinet decision, saying that the ruling would greatly help Indian trade and reduce freight costs. “It is good news and the Government has taken the right decision. As you know, huge investments have gone into the project, not from us alone. The Government also invested a lot. Erosion of these investments hurt all stakeholders,” he told the Hindu Business Line. 

Industry analysts say that the idea of an ICTT at Vallarpadam was to create a transhipment hub close to the mainline trade route to compete with Colombo and, to a lesser extent, Salalah.  President of the Cochin Chamber of Commerce and Industry P. Narayan says that mainline vessels can now commence services to Vallarpadam, making delays and the consequential financial burden due to a lack of feeder vessels ‘a thing of the past’. Congestion and problems due to the need to rely on limited Indian feeder vessels will now ease, he added.

Cabotage restriction were said to be the primary reason why the ICTT Vallarpadam was languishing, but critics point out that there are other issues too, including high terminal costs, dredging costs and other logistical problems. In addition, the decision has worried many Indian ship-owners, who were lobbying hard against the relaxation of Cabotage. “Without creating a level playing field, opening up of coastal trade to foreign competition is not in the interest of the Indian shipping industry,” said one, after the announcement.

The timing of the decision seems to have been made keeping the upcoming “Emerging Kerala” investment summit in mind, but whether Vallarpadam can effectively compete with Colombo or whether the relaxation of Cabotage will prove to be a major setback for Indian shipping- suffering the high taxes and poor governmental support as it does- is something the next three years will clarify.

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Why has the “MSC Flaminia’ caused so much panic?

The ill-fated MSC Flaminia is under tow heading for Germany today, with 13 specialists from UK, France and Germany on board monitoring the mysterious cargo that seems to pose strong danger to the coastlines around the English Channel and the North Sea. Authorities and owners have been tight-lipped, but speculation is rife that possible environmental contamination by chemicals and toxic materials is the reason why the crew abandoned the vessel in the Atlantic after explosions in a hold. The vessel is being escorted in a convoy, with a German coast guard and officials of the Civil Protection and Disaster Assistance Agency on hand.  

Some analysts- particularly Russian journalist Mikhail Voytenko- have been extremely critical of the way the vessel was made to turn and hang around the Atlantic under tow, with countries wary of granting her refuge. They claim that the dangers of the cargo aboard are being hidden from the public.

The German flagged 6750 TEU Flaminia, owned by Reederei NSB, caught fire on 14 July in the mid-Atlantic. One crewmember died, one is missing- presumed dead -while the rest abandoned the vessel; Falmouth Coastguard received the mayday relay. Survivors (5 Germans, 3 Poles, 15 Filipinos and 2 passengers) were picked up by the VLCC ‘DS Crown’. The Flaminia had 2,876 containers aboard when she caught fire, 149 being classed as dangerous as per the IMDG code. She was en route from Charleston, USA and was to arrive at Antwerp on July 17. 

Voytenko later published a full manifest of the MSC Flaminia’s cargo, saying, "MSC Flaminia is actually, a big chemical, toxic and miscellaneous dangerous substances floating bomb. No wonder crew fled the vessel, no wonder EU States fear MSC Flaminia (is) just short of being a nuclear device ready to explode."

Industry watchers say that the incident on the Flaminia is symptomatic of the way the container trade operates. Quick turnarounds, sealed containers and misdeclaration of weights, contents and manifests mean that Masters have no real idea of what the ship is carrying and the dangers that the cargo may pose.  

Even so, there is something odd about the Flaminia incident, particularly the salvage operation that has been clouded in secrecy. Dangerous cargo is labelled and normally stowed on deck. We may never find out what cargo- or combination of combustible and toxic cargo- was aboard the ship and why there was panic amongst coastal states in the region. Other questions remain unanswered: the crew abandoned a presumably seaworthy vessel (she has been towed around for almost two months after the explosion from the Atlantic). In any case, the refusal of refuge led to a situation where the Flaminia, approximately a thousand miles from the UK when she caught fire and was abandoned, will take almost two months to be towed into a safe port.     

The British Maritime and Coastguard Agency says now that inspectors "are all completely satisfied that the vessel is in a safe and stable condition to make her onward journey to Germany". Owners Reederei NSB comment, somewhat cryptically, "The prevention of harm to the population and the environment is the top priority during all further stages of the salvage."

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Indian port sector: Investment woes increase as infra companies denied clearances.

graphic:Economic times

   

Reports say that some of the largest infrastructure players in India have now been banned from port projects at Goa and Tuticorin on security grounds.  Companies Adani Port and Special Economic Zone and Punj Lloyd have been stopped by the Home Ministry from involvement in the 425 crore rupee terminal at Mormugao, Goa, and Lanco Infratech, another major player, has been barred from the 200 crore cargo berth at Tuticorin. Clearances are required by private players from the Ministries of Defence, External Affairs and Home before they can participate in port infrastructure projects.

Shipping pundits say that the propensity of the powers that be to bar private players on security grounds- Adani had been stopped earlier before from investing in JNPT Mumbai and Vizhinjam in Kerala- is likely to put a dampener on investment into the shipping sector. Recent developments at the Cochin Shipyard seem to underscore their point: a “major expansion” mooted through gradual disinvestment saw howls of protest from many, including some members of the parliamentary consultative committee on shipping, who see it as back door privatisation of a performing asset.

Even as Commodore K. Subramaniam, CMD of the shipyard, was encouraging fresh investment, saying it was needed to boost capacity and sustain growth of ship repair and shipbuilding, A. Sampath MP, a member of the consultative committee, issued a press release lambasting the plan.

“Privatising Cochin port is like killing the goose that lays golden eggs, as the port has been profitable even when the global shipping industry is facing a major crisis", he said. He also pointed out that Bibhu Prasad Tarai (CPI-Odisha) and Fransisco Sardinha (Congress-Goa), both members of the committee, had "given their dissent note on the move".

Industry players are watching the developments connected to Mormugao and Tuticorin carefully. Adani, who has been denied security clearance four times earlier, has responded guardedly. "We are not aware that the ministry of home affairs has denied national security clearance to APSEZ to participate in the terminal development projects in Mormugao and Tuticorin Ports. APSEZ was not shortlisted since a coal terminal project has been awarded to the company in Mormugao and so the question of security clearance does not arise. We would think the company should get national security clearance in normal course, which even foreign companies operating in India are allowed," Rajeeva Sinha, Director, Adani Ports, told the Economic Times.

India's 12th Five Year Plan envisages an investment of a staggering Rs 73,700 crore in the port sector as part of the 12th Five-Year Plan. The national maritime agenda sets ambitious targets- port traffic to be more than trebled in its 13 major ports and 187 minor ports in the next eight years (2,500 million tonnes from 800 million tonnes today).  To keep pace, capacity at all ports should rise more than threefold as well; some experts wonder how that will happen in the present scenario.

"Security standards at various ports have been a cause of concern. But the denial of security clearance to certain companies is likely to affect some port projects, especially when the government is trying to improve efficiency and award more projects at various ports," said Manish Saigal, partner at KPMG to the Economic Times.

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As race hots up for top ship breaking spot, MoEF clarifies Supreme Court ruling

It remains uncertain who will win the top spot in global ship breaking this year, experts say, pointing out that continuing legislation and court judgements in South Asia will have a major impact on demolition profitability. Meanwhile, in an attempt to assuage fears in Alang and to help Indian ship breaking yards compete better against a resurgent Bangladesh, the Ministry of Environment and Forests (MoEF) has clarified the recent Supreme Court ruling in the country- a judgement that had thrown the business into some disarray.

India will face stiff competition from Bangladesh and Pakistan, analysts warn; the falling Rupee has already hit profitability hard, even though Alang remains the leading ship-recycling yard in the world catering to nearly 90% of Indian demolition activity. The Indian industry has an estimated annual turnover of about Rs 10,000 crore and directly or indirectly affects the livelihoods of 300,000 people.  However, it has lost almost a thousand crores this year because of cash deals- the prevalent custom- in a depreciating Rupee scenario.

Meanwhile, Bangladeshi ship breaking activity- that was almost shut down last year- has accelerated. Reports the well-known demolition newsletter, the GMS weekly, "Bangladesh has indeed been the busiest market of the year so far, opening fully again at the start of the year." 

GMS is still bullish on India. "Having been relatively quiet in the preceding few months due to a struggling currency (which saw some end buyers lose about 20% of the value of their previous purchases), India is now enjoying its moment in the spotlight as deals continue to be tucked away at vastly improved numbers", it says.  

The July 30 Indian Supreme Court judgement apparently upholding the Basel Convention- a treaty on the international movement of hazardous wastes, including ship recycling- had caused some panic in Alang. The ruling said, “... in all future cases of a similar nature, the concerned authorities shall strictly comply with the norms laid down in the Basel Convention ... before permitting entry of any vessel suspected to be carrying toxic and hazardous material into Indian territorial waters.” 

Some buyers had stopped buying ships for scrapping after this ruling, fearing huge losses if the ships were not allowed into India. They also feared that dead vessels would have to be towed from other countries under the SC ruling.  

They should breathe easier now that the MoEF has stepped in to clarify the SC; it has said that the SC's orders issued earlier- in 2007- still apply; these have already been implemented in Alang and elsewhere and should pose no problems. 

Some ship breakers are circumspect about the future, though. "We will have to wait and see. Only after 3-4 months one can say whether India will be able to keep the top title this year as well," said an Alang-based ship-breaker to the Indian Express newspaper before the MoEF clarification.

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