<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Troubled Waters: India’s shipbuilding industry is facing a continuous fall in fresh orders
Those lured into an industry at its peak often have to face the ignominy of having to back down. This is amply demonstrated in the grand plans of Indian companies to join the shipping industry, when it was enjoying its biggest boom in a quarter of a century. Around the year 2006-07, India was touted as the next global destination for building of ships. It was supposed to be a natural progression of the shipbuilding industry’s migration from Europe to Asia, on a constant hunt for cheaper manufacturing destinations.
Everything seemed just right. An economic boom coupled with IMO (International Maritime Organization) rules that stipulate phasing out of ships older than 25 years as well as single-hull oil tankers by 2010 (see ‘Battling The Spill Effect’, BW, 18 May 2009) engendered a huge rush for new ships. Big global shipyards were saturated with orders — a 2008 KPMG report estimated that in the previous five years, average delivery was around 60 million DWT (deadweight tonnage, the amount of load a ship can safely carry), whereas orders placed for new ships were for 100 million DWT. This resulted in orders for smaller vessels, such as offshore supply vessels (OSVs) and bulk carriers moving to countries such as India and Vietnam.
Indian shipping’s cause was also helped by the government, which had introduced in 2002 a subsidy of 30 per cent on the sale price of ships. The move was designed to help them compete in the global marketplace. As a result, Indian shipping industry’s order book grew multi-fold, from 0.3 million DWT in the 9th Plan (1997-2002) to 1.3 million DWT in the 10th Plan (2002-07). That helped take India’s market share to 1.3 per cent of the global order book from a mere 0.1 per cent earlier. According to Planning Commission estimates, the industry can achieve a world order book share of 2.2 per cent worth Rs 37,000 crore by 2011-12.
Source: BW research
Enticed by the bulging order books of existing players and great returns, several Indian companies announced big investment plans for shipbuilding. Existing players, too, joined the fray, announcing ambitious expansion plans (see ‘Caught In No Man’s Land’). In all, 14 companies announced newer or expansion projects worth $5 billion. Once implemented, these investments were to take India’s shipbuilding capacity up to 5 million DWT by 2012, helping it gain a global market share of 2.2 per cent. Given that these were infrastructure investments, the government allotted them land in coastal areas for free, or at very cheap prices.
But before they put money on the ground, things changed. The global economy went into recession, and with it the shipping trade. The Baltic Dry Index, which tracks the freight rates for transporting dry bulk cargo through sea, plunged 80 per cent from 8,291 in April 2008 to 1,659 in April 2009. As trade declined, so did freight volumes and demand for new ships. World over, orders began to be postponed or cancelled, as many buyers could not pay for the ships they ordered. In India, fresh orders started declining from October 2008 onwards, and have come to naught by April 2009. The government, too, did not extend the subsidy, which expired in August 2007, and financing — a key element in an industry that manufactures only on order — became impossible to find.
Not surprisingly, the companies developed cold feet. Most of the big plans have been put on hold. Many companies have not even raised money for their projects, and initial public offerings (IPOs) of two companies — Cochin Shipyards and Goodearth Maritime — have been shelved. Everyone is waiting for the government to bring back the subsidy and rationalise a lopsided tax structure, and, most importantly, waiting for the economy to turn.
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Dropping Anchor
Companies have a variety of reasons to show for delaying their projects. RIL Chairman Mukesh Ambani’s Rs 8,000-crore plan to build a shipyard and a large-scale dredging company as part of the Maha special economic zone (SEZ) at Rewas, Maharashtra, stalled after the SEZ ran into land acquisition trouble. Engineering giant L&T, which operates a yard at Hazira in Gujarat, had announced plans to invest Rs 3,000 crore in a mega shipyard at Kattupalli in Tamil Nadu. A spokesman for the company says that the project is in a preliminary stage with land still to be acquired, and Rs 1,500 crore will be invested now. The balance will be put in when the global situation improves. According to brokerage firm IDFC-SSKI Securities, L&T will focus only on ship repair and defence demand.
Bharati Shipyards (BSL) Managing Director P.C. Kapoor says the company’s greenfield yards at Dabhol and Mangalore are on schedule. “Both these yards would enhance our shipbuilding capabilities,” he says. But analyst Pritesh Chheda of Emkay Global counters that Bharati did revise capex plans for both yards. “These are now spread over 2010-11,” says Chheda. “It has also kept the Rs 2,000-crore greenfield yard in West Bengal (with the Apeejay Group) on hold till demand revives.”
Shipping Corporation of India (SCI) is waiting for the right partner before executing its project. “We have been talking to interested parties, but have set no timeline for execution,” says Sabyasachi Hajara, chairman and managing director of SCI. He adds that creating huge capacities amid a crisis does not make sense.
Mercator Lines Chairman H.K. Mittal’s “personal” venture to build two shipyards for cargo-carrying ships in Gujarat and Maharashtra for Rs 2,300 crore is yet to cross the preliminary stage. Mittal blames the delay on the crisis engulfing the shipbuilding industry: “Ships meant for exports are getting cancelled or delayed as buyers are not able to manage finance.”
The fate of the proposed Rs 3,200-crore shipyard in Cuddalore in Tamil Nadu by Chennai-based Goodearth Maritime is unknown. The company managed to raise Rs 260 crore from IDFC Private Equity in 2007-08, but its IPO, which was to bring in a bulk of the money, did not take off. Managing Director S. Madhan could not be reached for comment.
Mumbai-based Dolphin Offshore’s Rs 400-crore plan for a yard to make smaller vessels has also been held up. “We are awaiting clearances from the Gujarat government on our shipbuilding proposal,” says Satpal Singh, managing director of Dolphin Offshore, which is one of the few companies to have acquired land for its project. Tuticorin Port Trust’s Rs 1,400-crore yard proposal is also awaiting clearance from the Ministry of Shipping. “The management is in talks with the government over certain policy issues,” say sources in the Port Trust. The project is behind schedule by at least two years.
Chennai-based Tebma Shipyards has put off its plans to build two yards for Rs 1,000 crore. “We are in the process of acquiring land, as there is no hurry in terms of demand,” says P.K. Balan, chairman of Tebma Shipyards. “We hope demand will recover by 2011, by which time we will expedite the process.” The company has an order book for 16 vessels, which it hopes will take it through the current fiscal.
Among the very few projects that are actually underway is Mumbai-based Pipavav Shipyard’s (PSL) Rs 2,900-crore project to create an offshore fabrication yard by end-2009. PSL is, at present, constructing a number of Panamax bulk carriers (large ships of at least 60,000 DWT in size that can pass through Panama Canal) of 74,500 DWT each, among the largest ships being built in India today. PSL has also received ONGC’s contract for the construction of 12 OSVs. “PSL’s current order-book extends up to 2012,” says a company spokesman. “By that time, economic conditions would have improved following the recovery measures being taken by governments worldwide.”
Also on schedule is ABG’s Rs 1,650-crore project in Dahej. “We have now started building rigs for the oil and gas industry,” says Dhanajay Datar, CFO of ABG. “ABG has completed 40 per cent of the work on the two rig orders it has received from Essar.” However, it has not received any money from Essar for the orders, which is stretching its working capital limits, according to analyst Kejal Mehta of Prabhudas Liladhar.
Struggling: Of the 15 projects announced
by Indian companies, only three have
got underway
Looking Ahead
Analysts say the crisis is the result of investment decisions taken by only looking at the order books of existing players, and neglecting future viabilities. In fact, many companies are unsure of the long-term strategy for the sector in the larger scheme of their core businesses. Further, clarity on government support is getting vague. Last December, former Shipping Minister T.R. Baalu had told Parliament that the reinstitution of the subsidy was under consideration. But it is yet to take place. SCI’s Hajara, though, says he is confident that the subsidy will return. Analysts say it may be limited to 20 per cent at the insistence of the finance ministry.
What might be needed to put the ambitious investments back on track? A lot, actually; including the return of the subsidy, easier finance, a more rational tax structure (the industry is subject to 12 different direct and indirect taxes), faster replacement of old and single-hull ships. It will also require “favourable investment policies that would encourage shipbuilding”, says M. Jitendran, managing director of India’s biggest shipbuilder, the state-owned Cochin Shipyards. He adds that one way to beat the downturn is to invest and build capacities that would fetch better business when the tide turns.
That is something companies, who had announced big shipbuilding plans, are not doing. They are just waiting for the economic tide to turn. As Jitendran says, “A pick-up in trade volumes is necessary to inspire freight rates, which will put confidence back in investors.” Yes, but given that many of them were given government land for free, can they afford to wait?
Meanwhile, with only three of the 15 ambitious projects announced having got underway, India’s quest to be the next big shipbuilding destination will also have to wait.
sreevalsan dot menon at abp dot in
(Businessworld Issue Dated 11-17 Aug 2009)