Shippers Prefer Coastal Routes

With international shipping facing a steep downturn, major shipping companies have begun competing for coastal contracts. At least 14 shipping companies have bid for Indian Oil Corporation's tender for transport of petroleum products on coastal routes.

The bidders include Shipping Corporation of India and Varun Shipping. The companies include those with their own tanker fleets as well as bareboat charter operators.

The industry estimates that IOC requires at least 24 tankers for shipping kerosene, petrol and high-speed diesel as an alternative to rail and road transportation.

This is a rare occasion when competition is being witnessed on coastal routes. Shipping companies till early this year avoided coastal routes in favour of the more lucrative international ones.

However, in view of the international downturn, the number of vessels on offer for the IOC tender is close to 30.

The cost of chartering a large crude carrier is $28,000 per day, as against $45,000 last year.

Accordingly, shipping companies have begun lobbying with the ministry of surface transport to restrict the bidding process to domestic vessels.

Their efforts include attempts to keep companies with bareboat charter vessels out of the bidding process and classifying them as foreign vessels. During the lease period, bareboat charter vessels fly the flag of the lessors, usually foreign ship financing companies and international banks.

If bareboat charter operators are kept out of the bidding, the number of vessels will fall to 24, the number IOC needs. However, the restriction on bareboat charters could seriously jeopardise acquisition plans of shipping companies. Ships funded through bareboat charters are transferred to the shipping company at the end of the lease period.

If restrictions are imposed on their operation, defaults could take place, forcing lessors to repossess the ships.

Shipping companies have complained that bareboat charter operators are in a position to offer lower rates, since their cost of acquisition is lower.

Indian shipping companies are at a disadvantage after the downgrading by Moody's that has pushed up spreads to 350-400 basis points over the London Inter-Bank Offer Rate. Bareboat charter operators, on the other hand, have been able to secure funds at lower spreads since the vessel are still owned by the lessor.