Essar Shipping to scale up third-party cargo

The Ruia-owned Essar Shipping is planning to increase volumes via third-party cargo, even as it services debt in a not so friendly freight market.

“Current tanker freight levels are not as good as two years ago. But, by 2019, we expect freight rates to pick up in this segment as older tonnage is scrapped,” explained Ranjit Singh, executive director and chief executive officer, Essar Shipping. 

The scenario in the dry bulk segment is quite the opposite. “At the current level of the Baltic Dry Index, we are able to service debt, cover operational cost and also have an earnings kitty,” Singh said.

The Index, a measure of freight traffic, has moved up from its all-time low of 290 in February 2015 to over 1,700 in December. The Baltic Dirty Tanker Index has tumbled to 800 from 1,070 in June 2015 and the Baltic Clean Tanker Index to 690 from 848 in July 2015.

Baltic indices are global benchmarks and a leading indicator of economic growth.

According to the 2016-17 annual report of Essar Shipping, its total debt at the end of March was Rs 4,282 crore. The company has 14 vessels and is expected to handle 22 million tonnes of cargo in 2017-18, up from 17 million tonnes the previous year. The incremental volume is expected from the dry bulk segment. 

Essar Shipping plans to increase the third-party cargo contribution in the dry bulk segment. This will reduce dependence on captive cargo.

“We aim to double our third-party cargo volume to eight million tonnes in the dry bulk segment by 2020. We are meeting parties,” Singh said.

At present, about 70 per cent of Essar Shipping’s cargo is captive and 30 per cent is third-party.

The company is also eyeing new vessels and doing away with older ones. “Any addition to our fleet is subject to long-term cargo supply. Any vessel we add will boost debt servicing; it will not be a burden on the balance sheet,” Singh added. 

The company has a fleet with an average age of 12 years. Forty per cent of India’s cargo ships are over 20 years old and 12 per cent are older than 15 years. 

“We have an ageing Capesize vessel that we plan to scrap and to use the proceeds for second-hand tonnage. With this, we will continue to have a young fleet,” Singh said.

Great Eastern Shipping, Shipping Corporation of India and Seven Islands are among the other big Indian shipping companies along with Essar Shipping. Volatile freight rates have been affecting all domestic shipping companies and each one has devised its own strategy to combat them.

“Companies need to keep their interest costs low, since overall chartering rates are also low. Unless a company is cash rich or has significantly low debt, addition to its fleet is not recommended,” explained Hitesh Avchat, senior manager at CARE Ratings.

ESSAR’S ROUTE OF CAUTION

·         To double third-party cargo to 8 million tonne by 2020
·         Baltic Dry freight rates helping manage debt comfortably
·         Company to keep thrust on having young-age fleet
·         To add vessels subject to long-term cargo supply
·         Analysts caution debt-laden shipping firms from buying new vessels