GE Shipping, SCI on asset-buying spree

Dry bulk carrier prices at 30-year low in prolonged shipping downturn

Great Eastern Shipping and Shipping Corporation of India (SCI) are increasing their fleets during a longer-than-expected downturn that has depressed prices of ships.

SCI, the country’s largest shipping company, has bought an offshore vessel and is negotiating for a tanker. “If we buy vessels at current prices, we are never going to make losses,” said B B Sinha, chairman and managing director, SCI.

The state-owned company has a capital expenditure plan of Rs 900 crore in 2016-17. “We will also look at dry bulk vessel purchases,” Sinha added.

SCI has 69 vessels in its fleet with tankers dominating, followed by dry bulk carriers, whose prices have crashed nearly 40 per cent since last year.

“Offshore vessel prices are 50 per cent lower than 2008 because of oversupply. The tonnage available is twice what is needed,” said Anil Devli, chief executive officer at the Indian National Shipowners’ Association. “Prices are really attractive,” he added.

In the quarter ended June, Great Eastern Shipping bought three dry bulk vessels, a tanker and a very large gas carrier. The company also sold a crude carrier and cancelled the construction contract for a dry bulk vessel.

“We want to use our cash and our borrowing capability to invest when prices are low. We have made quite a bit of capital expenditure commitment since April,” G Shivakumar, executive director and chief financial officer of Great Eastern Shipping, said at the latest earnings conference call. “We will make more investments at the right price,” he added.

“It is easy to buy vessels at this juncture but no one knows the length of the downcycle. Once a ship is bought, the company should be able to hold it through this low phase,” said Captain Kiran Kamat, founder of Link Shipping & Management System, a transportation company.

Dry bulk carrier prices have dropped to a 30-year inflation-adjusted low. “Companies buying dry bulk carriers want to sell them in the next three years. Chartering is not the reason for purchase,” said an analyst with a local brokerage.

The price of Capesize dry bulk vessels has moved up to $24 million from $20 million in February, indicating reviving demand. China is expected to continue imports of iron and coal, and demand for dry bulk vessels is likely to sustain.

“We will gradually invest through the bottom of the cycle. We will reach a point where we do not want more leverage. We will stop there and wait for the recovery,” Shivakumar said.

“It makes sense to buy offshore vessels only if there is a charter contract ready,” an analyst said. Energy exploration and production spending had dropped 22 per cent after last year’s 25 per cent, Shivkumar said.

“Utilisation is estimated at below 60 per cent for drilling rigs and 50 per cent for supply vessels,” he added

The average cost of debt for Great Eastern Shipping is 4 per cent, among the lowest for a shipping company of its size. The company has increased operating profits over the last three years and kept its debt-equity ratio low.

“It makes sense to buy offshore vessels only if there is a charter contract ready,” an analyst said. Energy exploration and production spending had dropped 22 per cent after last year’s 25 per cent, Shivkumar said. "Utilisation is estimated at below 60 per cent for drilling rigs and 50 per cent for supply vessels," he added.