Industry Analysis – Shipping Industry

Bankruptcy of Hanjin Shipping line, among the top ten shippers globally, about a month back reflects the continued stress in the shipping industry. However, Indian shipping companies appears to have turned the corner aided by continued domestic demand and an assured domestic market.

Shipping industry, among the oldest industries in the world, remains under stress since the collapse of global market about eight years back. The sector is reeling under the onslaught of falling freight rates, increasing supply of vessels and declining trade especially decline in China’s imports. The industry can be broadly segmented into Dry Cargo which transports raw material such as iron ore, coal etc, Container ships which transports manufactured goods and Oil, Oil products & LNG segment. The industry is high capital intensive which makes it more vulnerable to industry cyclicality. Other than that, the gestation period for building and delivery of a ship is considerably high leading to potential for reversal in the industry conditions. The current phase of the industry is a reflection of this since there was huge investment commitment in purchase of new vessels during the boom period.

The industry is also highly segmented as a container ship cannot be used for dry cargo or even crude oil tanker cannot be used for petroleum products. This breaks the linkage between different segments reflected in the varying performance of each segment. Of the three broad groups, Dry Cargo and Container traffic are going through tough times. Baltic Dry Index (BDI) – basis for determining spot freight rates in the dry cargo market – which had hit a record high of close to 12,000 before the subprime crisis, has collapsed by almost 97% to a level of less than 1,000 now. However, Oil segment continues to do well with sharp drop in crude oil price providing strength to demand and trade. In fact, the vast difference in different segments condition has prompted some of the owners of dry cargo ships to convert their ships into oil containers.

Indian Shipping industry is quite small with only three listed companies recording annual revenue of over Rs 1,000 crores. Among the major companies in the sector are government owned Shipping Corporation, GE shipping and Essar shipping. The industry, like the global industry, was in doldrums and went through tough times recording three consecutive year of aggregate losses between FY12-14. Even though the demand hasn’t improved much but sharp drop in oil prices has brought down its operating cost substantially. Other than that, drop in oil prices also provided a respite as oil cargo account for nearly 30% of total shipping volume. The sector managed a respectable profit margin of about 11% in FY16.

(Image courtesy of Shipping Corporation of India Website)

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