No respite for shipping cos despite 100% capacity utlisation, low bunker rates

Lower freight rates mean companies unlikely to see any benefits in margins

A near 100% fleet capacity utilisation and declining bunker fuel rates are also not helping shipping companies make money. This scenario otherwise would have been a sure shot at margin improvement. But the reason it is not working is significantly lower freight rates. 

Companies are saying they are living "hand to mouth after running fleet at full capacity and saving in fuel cost." 

Normally, shipping companies run fleet on 75% average capacities.

Given the low freight rates in segments like bulk and decisions taken previously, shipping companies may not see any major benefit in the present situation. 

Tanker segment may be a savior for the time being. Due to high volatility, India route freights have seen some improvement. On many routes India route freights are not reflected in benchmark Baltic indices as they not part of them. Indices have been falling with some bounces whenever they hit new lows.

Moving in tandem with crude oil, rates of bunker oil have almost halved in the last few months. “Price of bunker fuel has tumbled nearly 50% to about $300 per tonne, in turn lowering input costs of shipping companies lending some support to their operating profits,” shipping agent Rajesh Kumar Shahi of Glory Shipmanagement said.

Bunker oil, which is mainly used to fuel ships, accounts for 40% of the total cost of shipping companies.

But leading domestic shipping companies such as Shipping Corporation of India, Mercator and Essar Shipping are enjoying close to 100% fleet capacity utilisation despite slowing economic situation in China, which has thawed the global trade and oversupply of vessels in waters.

“The freight rates in the bulk segment are so low that despite deploying nearly 95% of the bulk fleet and bunker prices falling, we have no margins in this segment and are absolutely in a hand-to-mouth situation at present,” a senior official from bulk division of Shipping Corporation of India told Business Standard. The company currently has a well diversified fleet of 69 vessels that includes 17 bulk carriers.

Mercator, another leading shipping company, whose standalone business is largely pure shipping, has missed the bus for a totally different reason.

“With us the issue is that, Mercator is already into a 2-year contract for tankers, and the rate locked in are marginally lower the prevailing market rate, so we are missing out on the opportunity. Our contracts will come for renewal only in October, so we will have to wait,” a senior official from Mercator said. The company has seven tankers, one VLCC and 13 bulk vessels. Mercator's bulk business is handled by its Singapore subsidiary Mercator Lines (Singapore).

“When we moved into long term contracts for tankers, the market was very volatile and to protect our margin, we moved into 2-year contracts, but now we are missing out on the opportunity,” said the Mercator official.

“The extent of fall in freight rates is much higher than that in bunker (fuel) prices and so the input cost coming down will not help,” said a senior official with Essar Shipping, which has already hedged itself on bunker and remains insulated from any fluctuations that take place in the fuel prices.

However, experts were of the view, that a right mix of tanker and bulk fleet could perhaps lower the damage for these companies as the tanker segment remains buoyant.