Amit Mitra

WITH the freight market booming, shipping companies have been on an overdrive. As freight rates touch their all-time highs, ship-owners are revving up their acquisition plans to derive optimum economic mileage from the market sentiments. Mercator Lines, India's third largest shipping company in the private sector with a clear focus on energy transportation, has also major acquisition plans. "Having entered into agreement for acquisition of a second-hand Suezmax tanker recently, which is due for delivery in February, our company's tonnage has crossed the one million DWT mark. Our desire is to touch 1.2 million DWT by the year end, but it will largely depend on prevailing market conditions," says Mr H. K. Mittal, Chairman and Managing Director, Mercator Lines. In an interview to Business Line, he dwelt at length on the freight market trends and his company's plans in the coming months.

Excerpts from the interview:

How do you read the present freight market trends? How long you think will the buoyancy in the market last?

The freight market is at an all-time high now, especially in the tanker segment, which is our core area. As for how long this will last, my understanding is that there could be a mild correction in the rates some time in February/March. But with the shipyards worldwide being full till 2008, availability of ships vis-à-vis the growth in demand will continue to remain tight. So, despite the correction, I am convinced that the market will remain firm till that time.

What has been the major driver for the freight market?

The major driver has undoubtedly been the Chinese market, especially in terms of its crude requirement. As per reports, I understand that China's crude oil imports rose 34 per cent in October, as domestic production failed to keep up with the surging demand.

China's crude oil imports rose to 9.27 million tonnes last month, while during the 10-month period it was about 100 million tonnes costing $ 26.47 billion, which is 65 per cent more than last year. Clearly, China's appetite for energy is still very strong. In fact, according to a Merrill Lynch report, demand for oil in Chine is likely to grow much quicker than the Government expects during the next five years. It is believed that China is understating its oil demand by 20-25 per cent and it is estimated that China will be consuming 10-11 million barrels per day by 2010. Two or three years ago, nobody thought there would be this kind of growth.

What about the winter demand?

the winter demand for fuel has already started. The freight rates are unprecedented today. The market is today between 350 and 400 World Scale (WS), which is an all time high. For example, a VLCC (Very Large Crude Carrier) earned an average of $1,79,600 per day towards October end on the spot market as against an average of $77,800 per day in 2003 and $34,271 in 1999. Similarly, the spot charter for a Capesize bulk carrier was $77,650 per day in October end as against $40,609 and $19,419 in 2003 and 1999 respectively. Today, the situation is that even for January the bookings have been high. The revised WS ratings for VLCCs indicate that for 2005 they would stand at 160, which indicates a very strong freight market.

How has Mercator Lines capitalised on the freight market buoyancy?

We have been judiciously using our tonnage. As of now, one-third of our tonnage is deployed in the spot market and two-third on time-charter and COA basis. In the time-charter segment, we have long-term contracts. For example, we are moving 6.2 million tonnes of crude for MRPL this year from Gulf to India, for which we have taken three Aframax tankers on charter also. We have a five-year contract with British Gas, which will give us enough returns to wipe out our entire debt up to March 2004. This give us that psychological cushion that through one ship we are able to wipe out our debt. For the spot market, we have one VLCC and one Aframax, which is roughly one-third of our tonnage, because the VLCC tonnage is big. The remaining vessels are either on time-charter or COA.

But the spot earnings are significantly more than time-charter...

Definitely yes. But we have to cover ourselves and for that we must have a balance between time charter and spot. At the moment, spot rates are three-four times that of time-charter rates.

What are your expansion plans?

We have major expansion plans, which, of course, will depend on prevailing market conditions. This year, so far, we have invested $135 million, with our tonnage crossing the one million DWT mark, if you take the vessel that is due for delivery in February. Our desire is to invest up to $200 million in the current fiscal so that the tonnage crosses 1.2 million DWT mark. We see quite a bullish market in the coming months and we want to en-cash it as much as possible. But, of course, like I said, it all depends on the prevailing market conditions.

Will you be looking for a second VLCC?

Again, it depends on the market. See, because of the rise in freight rates, the cost of second-hand vessels is also surging. For example, two 1989-built VLCCs were sold recently for $62 million each, while we bought our first VLCC some months ago for $44 million and that too it was a 1993-built vessel. As far as double-hull VLCCs are considered, these are not only very costly, but are also not available in the market.

How will you be funding this acquisition programme?

We are in the process of completing our second placement of shares. We are offering 6.5 lakh shares to a Mauritius-based FI, Lotus Global Investment Ltd, apart from another three lakh shares to the promoters. The price will be a minimum of Rs 560 per share. This is for part-financing our expansion programme.

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