ROLE OF INDIAN SHIPPING IN INDIA’S

INTERNATIONAL TRADE
INTRODUCTION
Shipping Industry is probably the most cyclic of all industries. Being a global industry, it is
affected by a whole gamut of factors which range from world economic condition, political
events, natural disasters to age of existing vessels, new vessel delivery schedules, availability of
ship building slots with ship yards, government regulations etc.
Besides being characterized by choppy revenue stream, the shipping industry is also highly
capital intensive. A single ship can cost anything between US $20 Mn to US $300 Mn.
Commoditized product coupled with the fact that globally there are a large number of players in
this segment; no single company has significant pricing power.
In 2005, the world shipping industry garnered a freight income amounting to US $380 Bn. The
total world shipping tonnage, as on 1st January 2006, stood at 642.67 Mn GT[Dry Bulk
(27.75%), Wet Bulk (27.15%), Containerships(14.98%), LNG/LPG (4.19%),
Others(25.94%)].The Indian shipping industry earned a freight income of US $2.2 Bn in FY
2006 and the Indian tonnage, as on 1st July 2006, stood at 8.57 Mn GT [Dry Bulk (30.60%), Wet
Bulk(55.70%), LPG carriers(3.30%), Containerships(1.10%), others(9.30%)].
The shipping industry is interestingly poised at the moment. After seeing dizzying high freight
rates in 2004 and a strong market in 2005 & 2006, ‘what lies ahead?’ is not an easy question to
answer. The prospects of the shipping industry will depend on the trade volumes growth in dry
bulk, wet bulk and container ship segments, in addition to tonnage addition/deletion balance in
these respective segments.
INDIAN SCENARIO
The Indian economy has shown fall in the growth from 6.8% in FY1998-99 to 5.9% in
FY1999-2000. The fall mainly reflects a slowdown in agricultural production after previous
year’s bumper harvest. However, activities in the industrial and services sector strengthened
during the year, buoyed by a revival of exports and the pick up in domestic demand. Thus, the
growth in GDP from the industrial sector accelerated to 6.9% from 4.0% in the previous year,
while services grew at last year’s level of 8.2%.

Both imports and exports measured in USD have grown by 8% in FY1999-2000. In

contrast, exports fell by 4% in 1998-99 while imports grew by less than 1%. This trend is
reflected in terms of volume of cargo handled by major ports, which grew by 8% in FY1999-
2000 against stagnation in the previous year.

The buoyancy is explained partly by the revival of world trade on the heels of the East
Asian recovery and a modest recovery in some global commodity prices. Low inflation in the
domestic economy may have also strengthened the competitiveness of India’s exports in global
markets.

Growth in imports is primarily due to rise in oil prices even though oil import volumes
have not increased. The non-POL imports have, however, remained sluggish in the current
financial year with a marginal increase of 1.1 percent in the nine months, as compared to an
increase of 15.8 percent in the corresponding period last year.
Indian share in world export
Year export import World export Indias share in
world export
1950 1.1 1.1 61 1.80
1960 1.3 2.3 130 1.00
1970 2 2.1 314 0.64
1980 8.6 14.9 1998 0.43
1990 18 23.6 3393 0.53
2000 33.6 41.9 5497 0.61

Indian exports increased at a compounded growth rate of 7.22 per cent and imports at a
compounded growth rate of 7.71 per cent during the period 1950-99. The world exports during
this period, however increased at a compounded growth rate of 9.62 per cent. The growth rates
were the maximum during the decade 1970-80. With the current ongoing liberalization of Indian
economy, India’s share in world export is expected to accelerate in the years to come.

INDIAN SHIPPING HISTORY

The history of the Indian shipping industry dates back to 1919, when the first Indian shipping
company, Scindia Steam Navigation Company, was established. The industry is seen as a symbol
of national pride and sovereignty, with the result that the Govt of India has often intervened to
promote shipbuilding and shipping activities. Nevertheless, the shipping industry is
fundamentally global in nature, given that it is mostly engaged in international trade as opposed
to coastal trade. Besides, historically, Indian tonnage has not grown in line with the country’s
trade requirements, a fact that explains the low market share of Indian liners. It is estimated that
Indian flagged vessels account for only around 14% of the India-based Exim seaborne trade.

According to the statistics of Indian National Ship-owners Association (INSA), the size of the
Indian fleet is around 14 million dead weight tons (DWT), which is a minuscule 2% of the global
fleet (721 million DWT). Around 80% of the Indian fleet is owned by just five companies: The
Shipping Corporation of India Limited (SCI), The Great Eastern Shipping Company Limited (G
E Shipping), Mercator Lines Limited (MLL), Essar Shipping Ports and Logistics Limited
(Essar), and Varun Shipping Limited (Varun). Among the various classes of ships, Indian
shipping companies have largely focused on bulk carriers, carrying both liquid cargo (petroleum,
oil and lubricants, or POL) and dry cargo (coal, iron ore, grains, etc).

Of late, domestic shipping companies have sharpened their focus on the offshore logistics
segment, although their presence remains limited with regard to container ships, liquefied natural
gas (LNG) transporting ships, car carriers, and cruise liners. The shipping business is marked by
high capital intensity, volatile freight rates, commoditized product offerings, and a high level of
fragmentation. The credit risk profile of the shipping sector is also affected by the generally high
leverage adopted by ship owners to fund acquisition of new/second-hand ships.

Offsetting the financial risk partly is the fact that ships are good security: seizing and auctioning
ships is relatively easy, as compared with assets of manufacturing companies. Nevertheless,
some shipping companies have adopted several mitigates to offset the risks facing the sector.

LINKAGES BETWEEN ECONOMY, TRADE AND SHIPPING

A strong interdependence exists between economic growth and trade. International trade
economists have long established that a liberal and outward-oriented trade regime increases
welfare and income through the following channels. The first channel for the impact of trade on
growth is “investment”. Openness can affect both the level and the efficiency of investment and
growth in several ways. First an open trade regime can increase market size and hence lead to
investment in industries with increasing returns that would not have been viable in a closed
smaller market. Openness further leads to increased investment by allowing domestic players
access to capital goods that were unavailable previously or were available at too high a cost.
The second channel is “productivity channel”. To the extent that open trade regimes lead to
greater exposure to world stock of productivity enhancing knowledge, thus openness leads to
greater growth. A third channel for the impact of trade on growth is the government policy. If
and to the extent that trade openness creates incentives to policy makers to pursue virtuous
macroeconomic and regulatory policies, then it can lead to higher growth.Economic growth
determines the level of competition and investment in an economy. Rising income of people and
investments by firms, lead to a greater demand for goods and services. As industries relocate
according to competitive advantage (for example shipbreaking – a relatively unskilled labor
intensive activity shifted from developed countries to developing countries where unskilled labor
are abundantly present), such rising consumption levels would lead to greater flow of
goods to meet such demand.
The Asian countries provide an example of such linkages between economic growth and trade.
Structural imbalances caused a meltdown in the economy leading to lower investments in
infrastructure and industries. This in turn led to lower imports of raw materials and other goods.
In the recovery phase, increased competitiveness of the currencies (as a result of depreciation)
promoted exports, leading to accumulation of foreign exchange reserves and build up of
investor’s confidence. This led to renewed investments and hence economic growth.

WORLD ECONOMIC
GROWTH
 GLOBAL TRADE

GLOBAL SHIPPING
TONNAGE

The relation between the economy, trade and shipping demand is strong but it is very difficult to
fit them in simple and direct models. The growth in the economy of the world may hide different
aspects of the requirement of shipping. As different economies move from one phase of
development to other, the consumption pattern changes. An economy with rapid industrialization
will be having more manufactured and value added goods as its exports and thus an increased
need for liner and container vessels for its exports. One of the major changes that have taken
place in the world trade is the reducing share of coal and crude oil. As the energy requirement is
increasingly met by new sources like natural gas, solar and nuclear energy, the need for coal and
crude oil has been increasing at a much lower pace. This shift in the world trade has affected the
shipping demand for coal and crude oil. These structural changes need to be studied in
determining the shipping demand. Trends like these take shape over a long period of time but
have a strong influence on the shipping demand.
The world trade in goods determines the extent to which transportation is required, which in turn
determines the demand for shipping services. The demand for the shipping services is mainly
dependent upon how much trade takes place between the various nations in the world. The
demand is not only on the quantity of the service, i.e. total tonnage required in moving the cargo
but also the distance that the cargo needs to be moved. The nature of the cargo, its value and the
distance that it needs to be moved influence the size and the kind of vessel required. The world
fleet development has a remarkable phase lag in comparison to the world trade. This is typical of
the shipping industry whose prospects keep on changing dramatically. When the demand is high
the freight rates start to zoom up. With the expectations of high returns, huge orders are placed to
build up tonnage and the laid up tonnage is put into use. The demand for new tonnage cannot be
met overnight. The time for building a new ship varies from one to two years. This again
depends on the existing order book of the shipyards worldwide and their capacities. The tonnage
build up leads to an oversupply of tonnage in the market thereby leading to a crash in the freight
rates. Given that the standing costs are high ship owners generally keep their ships in operation
even if the freight rates are low. The ships are kept in operation till the variable costs are
recovered. Decreasing returns lead to removal of the excess tonnage through ship scrapping.

WORLD ECONOMY AND INDIAN SHIPPING:

Indian shipping companies have been impacted significantly by the current downturn in the
global shipping market, as the sharp fall in their profitability and the weakening of their credit
metrics show. However, unlike some of the global shipping companies, fleet utilization of Indian
companies remains high because of the policy of “right of first refusal” of the Government of
India (Govt of India) for Indian charterers. As in the global market, in the Indian market too, the
near-term outlook for profitability remains weak for the sector participants. However, the extent
to which individual companies are impacted will depend on their segmental diversification, fleet
quality, chartering philosophy, phasing of induction of new builds, financial policies, and
financial flexibility.

The share of Indian shipping companies in India’s export-import (exim) seaborne trade is low at
14%. With the anticipated pickup in trade growth following gradual recovery of global
economies, the need for Indian tonnage should only go up. However, the industry may have to
phase out its older vessels, which constitute a large chunk of its fleet now, given that the demand
for older vessels has waned considerably. Thus, even to maintain its share of India’s exim trade,
the industry may have to invest a sizeable amount in the medium term. In this context, ICRA
expects small to medium shipping companies to face significant funding constraints, given the
reduced appetite of lenders for this sector. High cost of borrowings and a not-so-friendly tax
regime could also impact their competiveness vis-à-vis global players. However, with regard to
the larger and well-capitalized companies that have good financial flexibility, the downturn
presents an opportunity to augment their fleet by purchasing modern second-hand assets, which
are now trading at a significant discount to the new build.

Demand Supply cycles:

Patterns in recent shipping cycles Demand-supply factors largely set the tone for the shipping
cycles. For example, during 1973-88, the downturn in the industry was caused by sluggish
demand growth and overcapacity in the shipbuilding industry. Overcapacity kept the charter
rates low between 1988 and 1997. From 1998 to 2008, demand for ships grew rapidly and
shipyard capacity became tight, setting the tone for a period of great prosperity for the ship
owners. Within the latter period, 2004-08 happened to be one of the best phases for ship owners
with earnings reaching an all-time high.

The key factors that contributed to this prosperity include the prolonged boom in the world
economy, and sustained growth in China, which led to a significant demand for dry bulk and
container trades. On the supply front too, the market was in a favorable position with all the
excess supply of ships from the previous decade being absorbed by the boom in Exim trade.

However the factors which affected Indian Shipping Industry were as follows:

• Commodity price crash: The period saw significant correction in the prices of
commodities, including metals, petroleum products, and agri-products. Anticipating
further price correction, many importers postponed or went slow on their purchases.

• Decline in exim trade: The global slowdown translated into lower demand for
commodities and containerized products, which in turn reduced the demand for ships.
Cutback in production of crude oil by the Organization of Petroleum Exporting Countries
(OPEC) and lower demand for petroleum products would also fall in this category, as the
lower demand for crude oil and product tankers left many ships idle. The credit squeeze
also affected exim trade as banks were reluctant to open letters of credit (LCs) for
importers.
• Supply of new vessels: As in the previous up cycles, during 2004-08 too, ship owners had
placed orders for new ships, which started getting employed in the market at a time when
exim trade had begun to shrink, thereby impacting the spot and time charter rates. Also,
the extent of orders placed with ship building yards was one of the highest in 2004-08 as
compared with the previous years. But the new builds had just begun to hit the market,
and the impact was therefore limited.