Sailing Against the Tide

The shipping industry comes to grips with global trade reality but a tangible game plan can help it race against the waves.

by Radhika Rani G

The news trickle of a hijacked ship rescued by US and British Special Forces within a day of capture, added to the cheer of an international shipping summit gala dinner in Mumbai October last. Spyros Polemis, as the chairman of the International Chamber of Shipping representing more than 80 per cent of the world merchant fleet, raised a toast to the fraternity gathered that evening.

The Greek god of shipping with family roots in the business running over two centuries, he had earlier in the day stressed the need for navies to act robustly against piracy, especially complying with the best management practices.

That the 23 crew members, including 10 Indians – all sealed in an armoured area on the Italian bulk carrier plying in the Indian Ocean – were finally freed, lent hope to his point. The arrest of the 11 pirates, led by a message-laden bottle tossed by hostages from a porthole, thus brought a happy ending to the high drama on the mid sea.

Surprises unfold

But more dramatic events seem to follow into 2012. The shipping industry, on a rough voyage of falling fortunes in the midst of a dip in demand for its services and a string of austerity measures in the Eurozone, looked prepared to face the unexpected. But it did not anticipate events that would unsettle international rules, regimes and protocols for clear answers on incidents concerning safety of life at sea.

“What we had not foreseen,” says Spyros, “was that the year would begin with the tragedy of the Costa Concordia and that the safety record of the industry would be put under the spotlight in the most dramatic way imaginable.”

Closer home, the killing of two Indian fishermen on ‘mistaken identity’ as pirates off the Kollam coast in Kerala by Italian Navy marines is snowballing into a diplomatic row. The incident occurring 14 nautical miles off Alappuzha, within India’s contiguous zone and not a danger band by territorial standards, begs for answers on safety and accountability of shipping, its crew and the littoral governments at large.

Add to this the ripple effect on ocean transport – price war, rate volatility, burgeoning tonnage and tight lending – caused by a near 10-per cent decline in global trade. And now, the impact of Iran trade sanctions on insurance coverage for Indian shipping firms. Sailing against the uncertain trade winds and delivering the result has since been the agenda of many a walk-the-talk sessions the world over.

Glut stays put

The world fleet today stands at 50,000 merchant ships, registered in over 150 nations and manned by over a million seafarers of virtually every nationality. It will, as per a Deutsch Bank report, see a 12 per cent growth in 2012.

This oversupply of vessels with far too few cargoes to carry is now a contentious issue for shipowners and charterers. Analysts have been crying loud that dry bulk freight rates are suffering as a glut outpaces commodity demand.

As per the latest update, the Baltic Exchange's sea freight index – that tracks rates for shipping dry commodities – fell for a fifth straight day as rates for both Capesize and Panamax vessels went down. A temporary lull in iron ore imports into China, which is already saddled with a huge inventory, partly explains the anomaly.

"The rates continue to bounce around near the bottom as vessel availability outweighs demand," Deutsche Bank’s Justin Yagerman reiterates in the report.

Dry bulk order book for 2012 is more than 30 per cent of the existing capacity as against 7.5 per cent growth projection and tankers’ is 20 per cent as against 2.5-3 per cent growth. Only in container lines, is the demand-supply ration proportional at 9 per cent.

The situation in the dry bulk is extremely bad, says Sabyasachi Hajara, CMD of Shipping Corporation of India, the premier shipping line holding one-third of Indian tonnage. The country’s largest energy transporter with a fleet of 17 bulk carriers and 43 tankers, SCI faces a precarious situation as a Capesize vessel, a Panamax bulker and a Supramax, all attract a similar rate, of less than $10,000.

So, do we seriously need a moratorium on new orders, especially on dry bulk carriers, until the crisis is over? But industry reports point out that only a fewer new orders are being placed and those delivered currently are the older ones signed during the trade boom. On the other hand, the demand for product tankers, according to Drewry, is likely to grow in Asia and Middle East regions with upcoming refinery capacity additions.

Since shipping has always seen a cyclical pattern with periodic crests and troughs, the current distorted demand-supply equilibrium is seen as just another phase.

“This too (overcapacity) shall pass,” says Shipping Secretary K Mohandas. “The glut in the shipping industry will end in two years,” he predicts. “There are delivery cancellations already happening.”

Good deals

But global giants with deep pockets are seeing good opportunity in the chaos – cashing in on low shipbuilding prices and therefore economical vessels. For instance, shipping tycoon John Fredriksen of Norway is investing hundreds of millions of dollars in new ships. He has recently placed a $610-million order – six oil tankers from STX offshore & Shipbuilding Co for $210 million and two LNG vessels from Hyundai Samho Heavy Industries Co for $400 million.

His new venture Frontline 2012 is reportedly placing its first order for 10 new medium-range tankers for oil products. Though Fredriksen seems to be making a big gamble with the restructured company, analysts say Frontline 2012 will reap big benefits once the slump is likely to end in 2013.

Similarly, the Swiss firm MSC Mediterranean Shipping Company has been quietly building a fleet of giant container ships, and with its 43-strong armada today, it has dwarfed Maersk’s current fleet of 21 ships above 11,500 teu.

According to Alphaliner, the gap is likely to widen as MSC plans to boost its 11,500-14,000 teu fleet to 56 during the course of 2012. In contrast, Maersk will not receive any new ships of this size.

As per latest reports, the Danish major which had last year ordered 10 Triple-E ships of 18,000 teu capacity from South Korea’s Daewoo Shipbuilding and Marine Engineering, will drop the option to order 10 more ships considering the overcapacity prevailing on the Asia-Europe trade.

To restore its profitability in the prevailing glut, the container giant has indeed cut down its capacity on the Asia-Europe trade lanes by 9 per cent. This adjustment, according to Maersk Line CEO Soren Skou, will help the firm improve vessel utilisation without giving up any market share gained over the past two years.

The largest container ship in the world is also considering additional opportunities such as redelivery of time charter tonnage, use of lay-ups and slow-steaming.

Meanwhile, CMA CGM is reshuffling its services on the Asia-West Mediterranean trade in partnership with Maersk Line. The reorganization, according to the French container company, is part of its “commitment to keep providing its customers with the best quality of service on the Asia-West Med trade.”

In the Far East, Kawasaki Kisen Kaisha (K-Line), the Japanese shipping major, is scrapping and redelivering some vessels to downsize the fleet and concurrently operating more flexible fleet by increasing its own tonnage and short-term charter portion. It is deploying five large container carriers between Asia and Europe this year as part of efforts to improve sales and enhance efficiency.

OOCL has announced a new China-Bangkok Service (CBS) to extend its service network between China, Thailand and Vietnam. The new service will be jointly operated by OOCL and Regional Container Lines (RCL) with three 1,200-1,300 teu containerships covering strategic ports in China, Thailand, and Vietnam.

MSC and Zim have announced a new cooperation venture on the South America East Coast-USA trade comprising of 2 main loops – US Gulf-South America East Coast Service and US East Coast-South America East Coast - to meet customers’ needs. The new joint service, according to the shipping lines, will offer comprehensive ports’ coverage to partners’ hubs and wider scope of direct links connecting South America East Coast and the US.

Back in India, the Ruias-led Essar Shipping is pulling back its two very large crude carriers (VLCCs) from the spot market to long-term contract in the wake of the freight market slump. With this, the company's fleet of 25 vessels of 1.8 million dwt, will work in the long-term charter.

Bailing out

In the midst of a crisis-hit financial system, the Shipping Secretary feels there is need for bailing out Indian shipping companies by offering them sops, such as giving cargo support. “We are examining how to provide the support,” Mohandas says. Foreign direct investment can flow into the sector and ships can come for flagging here.

In a survey, entitled ‘The Way Ahead’ done by international legal practice Norton Rose Group, the shipping sector is looking to new sources of finance in place of bank funding. While 43 per cent of respondents said they expect their primary source will continue to come from bank debt over the next two years, 31 per cent said they expect this would come from private equity and 18 per cent from export credit agencies. Another 42 per cent of respondents believe that a lack of available funding poses the greatest threat to the stability of their business and 40 per cent say the cost of borrowing is their primary concern.

“Repossessions and enforcements will increase into 2012 and insolvencies are likely to follow. However, the position in South-East Asia remains relatively positive and we believe that this region will experience the quickest recovery in the shipping sector following this extended (and still deepening) crisis,” the survey notes.

All this should bode well in the short term for an industry getting ‘bolts from the blue’. Calling upon the World Shipping Congress to be realistic and grounded, Spyros counsels, “The worse thing we need is fear about the future.” Can’t agree more!

Published in the March issue of Maritime Gateway (www.maritimegateway.com)

Energising SEZs

Special economic zones as a concept have caught the attention of countries around the globe. Deemed as separate ecosystems for industrial and economic growth, many of them, especially in Asia, have been fighting against odds to make even the high expectations placed on them. As port activity gears up in India, several SEZs are emerging on the coastline. Here’s a quick look at the sizzling facts ’n figures and what makes them hot.

by Radhika Rani G.

Ever since aggressive Asian economies have been making headlines, a rapt international audience has been watching in awe the energy and ferocity of the emerging tiger, dragon and bull! As the charged up nations take centrestage, the world reckons with reason that time has turned around for new competitors on the block. If England ruled the world economy from 1820-1890 and America from 1890-2000, analysts say China and India are set to dominate the world scene in the 21^st century.

As trade liberalisation has opened unprecedented business opportunities, maritime nations, especially in Asia, are creating value-added facilities along their coastline to reap economic benefits through their ports and network of shipping services. In line with the strategy to pep up growth drivers, special economic zones are being conceptualised and implemented. 

Interestingly, China has set up all its SEZs along the coast, with reason and thought though.

Having realised the role of exports in the country’s development, China opened its territories for foreign investment in the name of SEZs. “It now has in principle 6 major SEZs and more than 120 FTZs. They attract foreign investment worth $ 60 billion that is more than 10-15 times of India’s FDI,” notes Dr Arunachalam, an expert on SEZ. “China attracted more FDIs possibly only because of SEZs in China,” he opines.

The SEZs, variously named as free trade zones (FTZ), duty free areas (DFA), high technology zones (HTZ) and export processing zones (EPZ) are the designated land areas of a country where tariff and quota restrictions are eliminated, bureaucratic stranglehold is minimised and various economic incentives are offered to potential entrepreneurs, observes S K Modak, an eminent researcher.  

Indian scenario 

With the hub port concept intensifying in India, port-based SEZs have started taking shape to provide value-added services. They are being perceived as viable ventures not just for the government but also investors like infrastructure companies, construction conglomerates and investment banks. The concept thrives on stakeholders’ money-returns many!

While the key factors for a port-based SEZ are infrastructure, environment, regulations, labour and weather conditions, a clear-cut policy framework with due attention to objectivity is the key.

“What characterise SEZs, particularly in the context of a developing country like India, are a focused attention on investment, especially foreign and private investment, and the promotion of exports,” notes Sriram Ananthanarayanan in his article ‘New Mechanisms of Imperialism in India: The Special Economic Zones’. All this, according to the government, is done with the stated purpose of increasing economic growth, which in turn increases employment.
 

Objectives of the SEZ Act 2005:

• Generation of additional economic activity
• Promotion of exports of goods and services
• Promotion of investment from domestic and foreign sources
• Creation of employment opportunities
• Development of infrastructure facilities
• Maintenance of sovereignty and integrity of India, security of the state and friendly relations with foreign states

While Kandla SEZ is Asia’s first export processing zone to have been started near Kandla Port in Gujarat in the early sixties, several such self-sustaining entities have come up in later years. The Central Government followed up the Kandla Free Trade Zone experiment by setting up EPZs and FTZs at Mumbai, Chennai, Surat, Noida, Cochin, Falta and Visakhapatnam. Of the 147 valid in-principle approvals out of 579 formal approvals as on date, a third of them comprise of port-based SEZs, thanks to port activity picking up pace in the country. 

The government, admit industrialists, has been proactive in the development of SEZs ever since passing the Special Economic Zone Act in 2005. It has formulated policies and has ensured that developers get proper facilities to start their units in liberal trade zones. In line with it, Cochin Port has commenced a large-scale port-based SEZ project initiative in Vallarpadam and Puthuvypeen.

Already, port-based projects like the international container transshipment terminal (ICTT), LNG re-gasification terminal, crude oil handling facilities for BPCL-Kochi Refinery, are underway. Other projects like a bunkering terminal, distribution park including free trade warehousing and process industries have also been proposed. The port is currently establishing infrastructure and amenities for the zone at a cost of Rs 7500 crore and is likely to commission the project by 2012.   

Among the private ones, Mundra Port & SEZ is the first port-based multiproduct SEZ to come up in more than 100 sq km. of area to offer world-class infrastructure for establishment of business units since 2001. Also, Gujarat is the first state to create SEZ Policy and has the largest area under SEZs.

Taking pride in his state’s best infrastructure and conducive environment for business, chief minister Narendra Modi feels the idea a is not just to create wealth. “The development should be by all and for all to ensure inclusive growth.” Gujarat, he says, believes in development through PPP mode and accordingly, the state manages 24-hour uninterrupted power supply in villages and is all set to ensure broadband connectivity in all the villages going forward.

Newer options 

In the wake of the petrochemical industry offering a wide scope of economic growth, the Central government has decided to attract major investment, both domestic and foreign into this sector. Accordingly, it has given the go-by to integrated Petroleum, Chemicals & Petrochemical Investment Regions (PCPIRs) to make the country a hub for both international and domestic markets to boost manufacturing, augmentation of exports and generation of employment.

As part of the initiative, the West Bengal government has recently signed an MOU to develop a PCPIR at Haldia. The coal ministry hopes that at least 10 lakh people are likely to get jobs at the proposed PCPIR units, including four lakh direct employment. 

An investment of Rs 93,180 crore is proposed for high-class infrastructure and conducive environment for setting up businesses in an area of nearly 250 sq km. The major processing activities are being taken up by IOCL, Haldia Petrochemicals, MCCPTA India Corp Pvt Ltd, Tata Chemicals Ltd, Exide Industries Ltd and Shaw Wallace and Co. Ltd. 

“All existing labour laws of the country would be applicable in the PCPIR. And SEZs in the region, if any, would be governed by special laws, as approved by the Government of India,” the coal ministry explains.

Similarly, the government of Andhra Pradesh and the Department of Chemicals and Petrochemicals of the Central Government signed an MOU for setting up a PCPIR in the Vishakhapatnam-Kakinada region of the state. The total industrial investment is estimated at Rs 343,000 crore, including committed investment of Rs 1,63,890 crore. As the future of the petrochemical industry looks bright, the PCPIR is likely to provide 5.25 lakh direct and 6.73 lakh indirect employment. 

If conventionally, thermal power stations were established near coal mines to reduce logistics cost, they are now being developed in port-based SEZs owing to the import of coal with high calorie value. 

According to Vinay Pandey, general manager of AP Trade Promotion Corporation Ltd., the shift in fact ensures economical, uninterrupted and stable power that can be made available to industrial, commercial & residential units within the SEZ. “Similarly, projects that rely on imported ores are also suitable for development in port-based SEZs,” Pandey adds.

In view of the environmental concerns being voiced against such large-scale projects, experts advise developers to ensure comprehensive water management system including water desalination, distribution drainage and collecting domestic waste water. 

Further treatment and recycling of water can be done to sustain water levels, they say. Also, chemical and other hazardous industries can be established in SEZs by setting up common effluent treatment plants. To protect nature, environmentally demanding industrial units can also be set up in port-based SEZs. And most importantly, business units can rely on the available ample sea water for their heavy water demands.

As a range of SEZs are coming up across the country, experts caution the government to watch the implications for food security, political stability and the functioning of democratic institutions since the SEZ Act has a provision for ‘not’ having any democratically elected bodies of local governance. The special economic zones, though touted as separate ecosystems, are hoped not to remain aloof and above nature and law.

The Giant called JNPT

Jawaharlal Nehru Port has made a name as the container destination in maritime India. But delays in capacity addition and quality of service besides other pressing bottlenecks need to be plugged to navigate the destiny of this mighty Maratha harbour.

by Radhika Rani G.

The Jawaharlal Nehru Port has indeed taken India into the league of Asia’s leading container ports. Ranked as the 24^th largest port in the world and the topmost container port in India handling 56.5 per cent market share, the port today grapples with issues of space, expansion, capacity, connectivity, quality and perhaps bureaucracy. Endless reams have been written on these issues from time to time. However, the promise of a potential revenue generator can prompt the powers that be to endow the Arabian waterfront to make waves and not let JNPT turn a giant pity! 

The somber signs are already showing in exim trade as Nhava Sheva is literally bursting at the seams operating at nearly 107 per cent of the combined capacity of its three terminals – the JNPCT, NSICT and GTI – with insufficient infrastructure. “Service optimisation is nil,” says Capt Deepak Tewari of The Container Shipping Lines Association. “I cannot bring an ideal size of 8,000-TEU ship here because of draft constraints,” he rues.

The root for such disquiet, the maritime fraternity admits, lies at the policy making level where decision makers have paid little attention to infrastructure building and capacity expansion initiatives despite the signs of a growing economy driven by exports and imports. 

However, the Port Trust Chairman L Radhakrishnan hopes to turnaround the port, in two and a half years. With a 14-metre draft in the first phase and an ambitious 16.5-metre draft in the second, he says JNP can take in 8,000-12,000 TEU vessels. Sounds wishful thinking as the long-delayed dredging programme was mired in tentacles of red tape and resistance. But the special purpose vehicle formed with JNPT holding 87.5 per cent stake and MbPT the rest, at a cost of Rs 1,400 crore, will fast-track the deepening of the shipping channel.

The genuine issues, as the Port Trust Chairman L Radhakrishnan narrates in the following interview, can be weeded out by undoing what has been done – by working on the restrictive policies and regulations. The policies such as TAMP are more monopolistic than money-generating and need to be relooked. To add to this are land acquisition hurdles and fears of corporatisation among workers.

For now, things are easier said than done. Because the chairman and his group of officers, despite working relentlessly to take the port to new heights, yes to the Navaratna status, are forced to put up with delays beyond their control. But sheer optimism is the name of the game and the team is all game to make the port the Big Giant that it has set out to be.