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The deep waters of ship acquisition

Santanu Sanyal

REPORTS HAVE it that India Steamship Company (ISS), an ailing shipping company of the K. K. Birla group, is planning tonnage acquisition. Thanks to the one time settlement of its dues to the government and banks, the company will soon have a clean balanc e-sheet, a prerequisite for raising resources to fund the acquisition.

Two second-hand handymax vessels are proposed to be acquired at an estimated total cost of $25 millions, to be funded largely by way of international commercial loans.

It is important that the vessels are acquired at the earliest. The ship prices, both for new-built and second-hand, are low now despite BFI ruling at more than 1,500 points. This situation may not continue for long.

According to indications available, ISS will most probably acquire the vessels early next fiscal. One hopes the ship prices will persist at present levels till then. Otherwise, the company would have missed the tide.

The extent of the drop in ship prices can be assessed from some of the examples. Poompuhar Shipping has floated tender for a 75,000-DWT self-unloading bulk carrier, that is, a vessel fitted with gears as well as conveyors. The ship is to be deployed for carrying coal for the Tamil Nadu Electricity Board and will be attached to the Ennore port, coming up near Chennai.

Poompuhar had inquired about a similar vessel, though of a lower capacity, about 65,000 DWT, a few years ago. At that time, a Korean shipyard had quoted a price of $59 millions. Today, the same yard is asking for $39 millions for a bigger capacity (that is, 75,000 DWT) vessel with much improved engine and other facilities.

A couple of years ago, a major industrial house, having interests in steel, had acquired four second-hand handymax vessels at a little more than $100 millions. At that time, it was considered a good buy. Right now, a newly-built handymax is available at about $23 millions. The second-hand market too is believed to be fairly attractive. A 1994-built 45,000 DWT handymax is now reportedly available at $15/16 millions.

In fact, a shipowner today is faced with a problem of choice: Should he go for a new built ship available at a reasonable rate with delivery maturing in one or two years from now? Or, go for a second-hand vessel which can start earning right today.

One has to take a decision judiciously after weighing the pros and cons of the alternatives. Not all second-hand vessels are worth buying. Also, ships less than five years old may not be available at a reasonable rate. Their owners would not have recover ed the cost, the freight market being the dumps in the past few years.

There is a third alternative. A section of Indian shipowners favours targeting ships available for resale, that is, new ships almost ready for delivery but the shipowner who had ordered it would like to sell it. The resale market is believed to have firm ed up a little as some owners who ordered earlier are prepared to cash in as they feel that the new building prices are set for an upswing in the near term.

Ship-acquisition is tricky business. A shipowner should get rid of the old tonnage and acquire new one at the right time, which may not necessarily be when ship prices are at the lowest. A leading Indian ship company is realising it the hard way. The com pany now has a fleet of a large number of 20-year-old ships as it did not replace in time. True, the ship prices are low now. But even at current prices no shipowner can even dream of replacing all the old ships at one go. At the same time, the operation of old ships only adds to costs.

While the demand-supply imbalance has a lot to do with the condition in the ship market, the critical position of the economies of the two major Asian ship-building nations -- Korea and Japan -- too have been partly responsible for the state of affa irs.

In their desperate bid to keep their yards working, the two countries are offering attractive terms. The South Korean Government has made it clear that it has no immediate plans to raise the ship prices beyond what is dictated by the free interplay of ma rket forces. Since the beginning of this year, there has been a modest increase in prices but that does not guarantee that the prices will continue moving up.

Seoul's views became available in the wake of findings of the European Union that the Koreans are building and selling ships below cost. ``Our shipyards are supplying quality vessels at reasonable price and we have no control over our yards as Korea is f ree economy,'' is how the Korean Government reacted to the criticism of the EU. The disclosure of the cost structure of the yards, as suggested by the EU, too has been ruled out on the ground that commercial information is protected by confidentiality an d intellectual property rights.

It may be noted that some time ago the Korean Government signed a ship-building agreement with the EU, and recently the European side wanted the shipbuilding prices increased.

Meanwhile, Germany is slowly trying to emerge as a viable new building alternative to Far Eastern builders as weak currency and attractive financing schemes may make the German-built ships price competitive.

Coming back to India Steamship Company, how is it going to deploy the handymax carriers it proposes to acquire by the end of this/early next fiscal? According to a section of shipowners, the company will do well if it engages the vessels in coastal movem ent, particularly for carrying coal for TNEB. The earning from the coastal movement of coal, though not high, is steady and reasonable. More important, the cost of coastal operation is nearly half that operation in international waters.