Shippers To Buy Old Crude Carriers

The abolition of the cost plus formula for shipping crude, as a part of the phase out of the administered price mechanism, will lead to the shipping industry acquiring second hand crude carriers.

This is primarily because under the new market determined freight rate, mechanism shipowners will not get an assured rate of return on the cost of acquisition of the ship.

Under the cost plus formula which is being dismantled from April 1, 1998, shipowners were assured of freight rates which would guarantee a 12 per cent rate of return on equity and cover the interest costs of the acquisition of a ship. This was for freshly acquired ships.

 

The guaranteed rate of return would stay in place for 16 years with it decreasing as time passed.

This meant shipowners received guaranteed freight rates irrespective of market conditions. However, from April, it is the market that will determine the freight rates. There will also be a new role for the state owned Shipping Corporation of India (SCI).

Under the old arrangement, SCI had the first right of refusal for the carriage of crude. Other shipping lines could enter only after paying a brokerage to SCI.

Under an informal understanding reached between the centre, the Indian National Shipowners Association (INSA) and the Oil Coordination Committee, SCI will still play the role of a nodal agency as far as transport of crude is concerned. All ships will be chartered through SCI.

This time, SCI will enter into time charter agreements with other shipping companies. It will actually charter in these ships and in turn they will charter it to OCC," said B L Mehta, president, INSA. The association is the apex body of Indian shipowners.

Mehta says that the OCC, the body which imports crude has agreed to pay a fixed rate per tonne of crude transported to SCI.

The precise rate and formula to be used for computing this has not been agreed upon so far, according to Mehta. "However, since the rates will be essentially market driven and the ships employed by OCC at the most for five years, it is not viable to go in for new ship acquisitions. Indian shipowners will be primarily importing second hand ships in such a scenario," he added.

However, he contends that second hand ships will not lead to compromises on safety as this would be strictly adhered to at the time of acquisition. Sources in the National Union of Seafarers of India (NUSI) which represents the seamen too says that old ships need not necessarily mean unsafe ships.

Apart from age, other factors like maintenance of the ships too affect safety they added.