Freight rates in the oil tanker segment should start looking up: A R Ramakrishnan

Interview with Managing Director, Essar Shipping

Even as shipping rates have been volatile in the past few years, Essar Shipping is holding ground due to advantages such as, support from the group or its growing oil-fields business. A R Ramakrishnan, managing director, Essar Shipping, talks to Shubhashish and Katya B Naidu about the company’s business, and the behaviour of international shipping industry and its effects. Edited excerpts:

There has been a slowdown in the dry bulk shipping rates. Is this yet another sign of slowdown?
If you look at the global scenario, shipping rates have been under pressure. In the past few months, the rates in the dry bulk market have fallen drastically. That being said, in my opinion, new deliveries will keep happening in capsize vessels this year. But if you look at 2013, the new deliveries will taper off. Therefore, the pressure that is coming because of addition of fleet would should start reducing.

 

Do you see any uptick in tanker rates?
Dry bulk freight rates are under pressure, but rates on the crude oil side have improved in the past months. Tanker rates, for example, in the spot market, are hovering around $30,000 per day. Newer refineries like Reliance and Essar are sourcing oil from Latin American countries as these refineries are capable of cracking low-grade crude. There is this margin available to them in terms of the lower crude price from the Latin American market, compared to the Middle East. So, you will see a lot of crude coming in from countries like Mexico and Venezuela. That is a long-haul trade and more very large crude carriers or VLCCs would be required. I think that would add to the positive side of the freight rates going up.

Do you think higher tanker rates will sustain?
I think they should be, unless there is something dramatically going wrong in Europe. China is doing alright and there are no serious concerns about its intake of crude oil or iron ore. India would also continue to buy crude at a fairly reasonable rate. I think, overall, freight rates in the tanker segment should start looking up because it has been down for too long.

Isn’t the over supply of vessels still a concern?
The growth of vessels in the tanker segment is far less than those in the dry bulk side. The rate of fleet addition is in the range of 10-15 per cent on the dry bulk side, and 5-6 per cent on the tanker side. In the meantime, the older VLCCs are getting out of the way as demolition of ships have picked up. It is higher this year than the past year.

We are in a slightly better position as compared to our peers. A distinct advantage we have is our group cargo, which is also part of our business. There is a steady revenue stream that we have with the group companies in the form of long-term contracts.

What percentage of your cargo comes from group companies?
At present, it is around 60 per cent. My intention is to maintain 55-45 per cent balance between group cargo and cargo from others.

We must have a strong visibility of revenues through long-term contracts and at the same time have good mix of third-party cargo because that helps in leveraging a lot, whether in terms of operations or for the stakeholders.

What are the macro drivers for growth in shipping rates?
India and China targeting over seven per cent growth is a healthy sign. I feel there would be good opportunities going forward, as there is expansion happening in India, in the power, refining and steel sectors. There are tremendous amount of commodities that will be needed to be moved, whether it is coal, iron ore, or crude oil.

What are the growth areas?
Essar Shipping has three businesses under it. Apart from shipping, we have two subsidiaries. One of them does the drilling business, and the other has logistics business. The drilling business is the one that is really turning a lot in favour of Essar Shipping. We own assets such as a rig that could operate in conditions like 500 metres into water. We have a dozen of land-rigs ranging from 250 to 2,000 HP and a couple of jack-up rigs under construction.

This is going to bring in much more revenue than it did in the previous year, because the contracts that we have now secured are far higher earnings than the earlier ones. Top line is growing substantially in the oil-fields business. More importantly, Ebitda is increasing as these are high Ebitda businesses.

Are you planning to build scale into oil-fields business?
That is what we are trying to build it abroad. We are looking at how we can grow the drilling business and bring a bigger value to the business. With the contracts that we had secured in the past few months, our presence in the oil-fields business is far better and much higher.

How is your logistics business growing?
We are a fairly large logistics company. We are clocking in revenue of Rs 1,200 crore, and this is a substantial revenue for any logistics company.