Industry Report—Shipping and Ports

8/6/2019 Industry ReportShipping and Ports

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Industry ReportShipping and Ports

May 2006

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Analysis


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ICRA RESEARCH ANALYSIS

INDUSTRY REPORT SHIPPING AND PORTS

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Contacts:

Vineet Nigam Asst. General ManagerAmul Gogna Executive Director

Date May 2006


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TABLE OF CONTENTS

SHIPPING

INDUSTRY CHARACTERISTICS...............................................................................................................4

COMPETITIVEFORCES........................................................................................................................9

INDUSTRY FINANCIALS......................................................................................................................14

PORTS

INDUSTRYCHARACTERISTICS.............................................................................................................16

COMPETITIVEFORCES......................................................................................................................21

INDUSTRY FINANCIALS......................................................................................................................25


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INDUSTRY CHARACTERISTICS

Importance to Economy

Shipping plays an important role in the Indian economy. Approximately 95% of Indias international trade byvolume and 70% by value is seaborne. India has 12 major and 185 minor/intermediate ports along its coast-line of around 7,517 kms. Shipping has a multiplier effect on the economy & creates employment.

Although shipping plays a major role in facilitating the countrys international trade (sea borne trade ac-counts for 32% of the countrys foreign trade), the same cannot be said for the Indian shipping industry.Indian shipping companies collectively owned about 704 vessels with 8.3 million gross tonnage (GT) oraround 13.75 million deadweight tonnage. India ranks 15th in the world by flag of registry forming approxi-mately 1.5% of the total world tonnage with a favourable average age as compared to the world fleet. Contrib-uting approximately 0.3% to the countrys GDP, share of the Indian shipping industry in Indias sea bornetrade has declined from 40.7% in FY1988 to around 30-32% over the last few years. In terms of Indias

overseas trade, the share of Indian shipping industry is only around 14% (comprising 5.6% for general cargo,8% for dry bulk, 27% for POL and products). The low share of Indias shipping industry in Indias seabornetrade is largely on account of policies which have affected the industrys competitiveness vis--vis foreigncompanies. Thus, although shipping as a service is of tremendous importance, the Indian shipping industryhas only moderate importance in the country.

Cyclicality

As international trade tends to be cyclical, demand for shipping services is also cyclical. High cyclicality ofthe industry is reflected in volatile freight rates. The shipping industry is generally characterised by a continu-ous demand-supply imbalance. Demand depends on factors such as volume of trade, shifting global tradepatterns, regional disparities, oil price developments for tankers, and regulatory interventions. Supply invari-ably follows demand, with growing demand positively impacting freight rates and encouraging new shipbuild-

ing activity. The stock of vessels can be influenced by changes in scrapping of old vessels or changes in thestream of new builds. The delivery of new vessels can be one or several years after the order and as suchtime-lags in vessel deliveries influence market dynamics. In a scenario of depressed freight rates, lowerrevenues can lead to the elimination of marginal players as well as influence the scrapping of old ships.Owing to highly cyclical demand and capital intensive nature of the business (ships can cost anythingbetween US$20-200 million depending upon size and specification), shipping companies frequently buy andsell ships to adjust their asset and expense base in light of expected demand conditions. Typically, shipsare sold/scrapped when the companies stop recovering the variable costs. Prices of ships also tend to becyclical and timing of ship sale/purchase can be an important determinant of profitability. Therefore, if effec-tively managed, ship buying and selling can neutralise the demand cycles to some extent.

Sensitivity of Industry to Government Policies

Indias shipping industry is governed by the Ministry of Shipping, which encompasses within its fold shipping

and port sectors which include shipbuilding and shiprepair, major ports, national water-ways and inlandwater transport. Until recently, the Government had not responded to the industrys demands for rationalisationof the taxation structure. However, this has changed with introduction of tonnage tax scheme. Governmenthas rationalised the fiscal regime for the industry by introducing the Tonnage Tax system from FY2005, inorder to provide Indian shipping industry a level playing field vis--vis international shipping companies andalso facilitate the growth of Indian tonnage. This regime aligns the income tax incidence on shipping in-comes of Indian industry to levels applicable to most of the global shipping tonnage. However, permission toregister ships in Flag of Convenience (FOC) countries is still awaited. This raises the costs for Indian-shipping companies in relative terms and affects the industrys competitive position adversely, which isreflected in its declining market share. However, even so, the downside risk (arising out of adverse policydevelopments) on this front appears limited.

SHIPPING


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Growth Potential/Outlook

The growth potential of the shipping industry is directly dependent on growth in world output, world trade, and

world maritime trade. In 2005, world output increased 4.8%, as compared with a growth of 5.3% in 2004.World output is expected to increase 4.9% in 2006, and 4.7% in 2007; primarily driven by higher growth inemerging economies. While output growth in emerging/developing countries is expected to be 6.9% in 2006(7.2% in 2005), output growth in advanced economies is expected to be 3% in 2006 (2.7% in 2005). Over theperiod 1998-2007, world output is expected to expand 4.1% per annum.

During 2005, the volume of world trade increased 7.2%, as compared with a growth of 10.7% in 2004. Theincrease in trade was driven by high oil and metals trade.

Volume Growth in World Trade in Goods%

198897 19982007 2001 2002 2003 2004 2005 2006 2007

Volume 7.20 6.50 0.3 3.7 6.0 10.7 7.2 8.0 7.5

Exports

Advanced economies 7.2 5.2 1.3 2.3 3.4 8.5 5.1 6.6 6.1

Other emerging market

and developing countries 7.6 8.9 2.8 7.4 11.4 14.4 10.8 10.1 10

Fuel exporters 4.4 5 1.7 3.1 9.1 9.9 6 6.6 5.3

Nonfuel exporters 8.9 10.2 3.1 8.9 12.1 16 12.5 11.6 12

Imports

Advanced economies 7 5.9 1.5 2.9 4.7 9.4 5.9 6.3 5.5

Other emerging market

and developing countries 7.4 8.9 3.5 6.6 11.5 16.6 12.1 12.9 12.4

Fuel exporters 1.3 9 15.3 8.9 6.4 14.4 19.4 16.2 10.3

Nonfuel exporters 9.5 8.9 1.4 6.1 12.6 17.1 10.7 12.3 12.8

Source: International Monetary Fund

World seaborne trade increased 6.9% in 2004 to reach 27,635 billion ton-miles. Increased demand forhaulage of crude oil and oil products resulted in ton-mileage for these commodities increasing by 6.2% in2004, as compared with 6.9% in 2003. For all dry cargoes, the ton-mileage increased by 7.4% in 2004. In thetanker segment, total world shipments of tanker cargoes increased 4.2% in 2004 (the latest year for whichdata is available) to 2.32 billion tons, as compared with growth of 3.6% in 2003. . About 76.4% of the tankertrade was in crude oil, with the remainder in petroleum products. The share of tanker shipments in overallworld seaborne trade was 34.3% in 2004. In the dry bulk segment, overall dry cargo shipments increased

4.4% in 2004 to 4.44 billion tons, as compared with a growth of 6.9% in 2003. The ?ve dry-bulk trades ironore, coal, grains, bauxite/alumina and rock phosphaterecorded a growth of 7.6% to 1.59 billion tonnes.The remaining dry cargo trade increased at a slower rate of 2.7% to 2.86 billion tons. The share of dry cargoshipments in world seaborne trade was 65.7% of total goods loaded during 2004.


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World Seaborne trade

Billions of ton miles

Oil Iron Ore Coal Grain Five Main Other TotalDry Bulks Dry

Crude Products Total

2000 8,180 2,085 10,265 2,545 2,509 1,244 6,638 6,790 23,693

2001 8,074 2,105 10,179 2,575 2,552 1,322 6,782 6,930 23,891

2002 7,848 2,050 9,898 2,731 2,549 1,241 6,879 7,395 24,172

2003 8,390 2,190 10,580 3,025 2,810 1,273 7,454 7,810 25,844

2004 8,910 2,325 11,235 3,415 2,965 1,325 8,065 8,335 27,635

The volume of world trade increased 7.2% in 2005, as compared with 10.7% in 2004, driven primarily by

growth in trade by developing economies. Data on world seaborne trade indicates that World seaborne trade(goods loaded) in 2004 recorded another consecutive annual increase, reaching a record high of 6.76 billiontons. The annual growth rate was 4.3% in 2004, as compared with 5.8% in 2003. Total maritime activitiesmeasured in ton-miles increased to 27,635 billion ton-miles in 2004, compared with 25,844 billion ton-milesin 2003.

Over the last few years, the shipping industry has performed well on account for strong demand for shippingand unusually low tonnage supply, both of which resulted in rise in freight rates making for a classicalupturn in the market. Demand for shipping is expected to continue to be strong as demand for key cargocontinues to be buoyant (see chart below).

Demand growth in Key Cargo


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During the post liberalisation period i.e., FY1992-2006, Indias trade has performed at a much better rate thanin the pre-reform period. Indias trade in goods has increased at a 5-year compound average growth rate(CAGR) of 20.4% to US$241 billion in FY2006. While exports have increased at a 5-year CAGR of 17.7%,

imports have increased at a 5-year CAGR of 22.6%.

The Ministry of Commerce has targeted doubling of export share in world trade between 2004-09. This wouldrequire exports also to at least double during next five years or a CAGR of at least 15%. In the past five years(FY2002-06), the growth rate has been 17.7%. The country will have to sustain its growth momentum in thenext three years if it wants to reach the target of a 1.7% share in world exports by 2008-09.

In volume terms, the data upto FY2004 indicates that Indias exports increased 6% in FY2004, and at a 5-year CAGR of 13.9% between FY2000-04. The growth was primarily because of significant increase inexports of mineral fuels, lubricants; chemicals; and manufactured goods (primarily metals and textiles).Indias imports in volume terms increased 20.9% in FY2004, and at a 5-year CAGR of 8.5% betweenFY2000-04. The growth was primarily because of significant increase in exports of crude oil, beverages, andmanufactured goods.

However, it needs to be mentioned that inspite of this expected upturn in world and Indian trade in goods,market share of Indian shipping industry is expected to continue to decline. As a result, long term growthpotential appears limited.

The future growth of the Indian shipping industry is expected to be driven by various factors. In the energysector, addition to the refining capacity is already underway and expected plans of further capacity expan-sion both in public and private sector could result in potential market for tankers for crude oil imports. Theuse of liquefied natural gas (LNG) is expected to progressively increase, with plans to step up the countrysconsumption of natural gas from its current level of about 8% to 25% in the overall energy basket. The importof LNG is therefore projected to be a critical area for growth. In the dry bulk sector, India is a leading iron oreexporter, with domestic production slated to increase by 41% during 2002-07. Indias iron ore exports involume terms have increased by 17.2% over FY2000-04. Along with the increased requirement of import ofcoking coal to cater to steel industrys demand, the dry bulk sector is expected to benefit from increase in

iron ore exports and import of coal.

Indias Trade in Goods

%

2000 2001 2002 2003 2004 2005 2006

Value-US$ million 86,493 95,097 95,240 114,132 141,992 187,303 240,845

Exports 36,822 44,560 43,827 52,719 63,843 80,672 100,607

Imports 49,671 50,537 51,413 61,412 78,149 106,631 140,238

Growth 14.4% 9.9% 0.2% 19.8% 24.4% 31.9% 28.6%

Exports 10.8% 21.0% -1.6% 20.3% 21.1% 26.4% 24.7%

Imports 17.2% 1.7% 1.7% 19.4% 27.3% 36.4% 31.5%


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Volume Growth in India s Trade in Goods

%

2000 2001 2002 2003 2004 5-year CAGR

Exports 15.5% 23.9% 3.9% 21.8% 6.0% 13.9%

Food & food articles -17.1% 10.1% 15.1% 28.9% -0.4% 6.2%

Beverages & tobacco 57.6% -15.4% -9.7% 20.1% -5.8% 6.4%

Crude materials, inedible, expect fuels 6.9% 33.9% 3.1% 31.8% -19.0% 9.5%

Mineral fuels, lubricants, etc. -38.1% 1689.5% 32.6% 32.6% 1.4% 81.6%

Animal & vegetable oil, fats & waxes 32.2% 0.7% -1.4% -23.6% 13.3% 2.6%

Chemicals & related products 24.6% 30.2% 12.5% 29.4% 6.7% 20.3%

Manufactured goods 16.4% 54.6% 4.1% 14.1% 5.9% 17.8%

Machinery & transport equipment 15.3% 46.8% 1.0% 13.6% 17.4% 17.9%Miscellaneous manufactured articles 38.8% -17.9% -17.5% 35.0% 1.5% 5.2%

Imports 9.5% -1.0% 5.0% 9.4% 20.9% 8.5%

Food & food articles -13.5% -56.0% 92.4% 11.4% 2.0% -3.6%

Beverages & tobacco -17.5% 36.5% 4.6% 58.9% 32.8% 20.0%

Crude materials, inedible, expect fuels 34.5% -8.2% 35.5% -5.8% 17.6% 13.2%

Mineral fuels, lubricants, etc. 1.5% -4.7% 8.8% 4.8% 9.5% 3.8%

Animal & vegetable oil, fats & waxes -15.1% 93.2% -43.5% -4.2% 120.1% 14.3%

Chemicals & related products 12.7% -26.2% 7.0% -1.5% 67.9% 8.0%

Manufactured goods 24.8% -21.0% 14.8% 27.4% 11.6% 10.0%

Machinery & transport equipment 7.9% 3.6% 17.2% 31.2% 17.9% 15.2%

Miscellaneous manufactured articles 37.6% 35.1% -26.2% -24.4% -21.6% -4.0%


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Growth in Indias Shipping Fleet

At end- 1999 2000 2001 2002 2003 2004

Total Ships 510 549 557 617 625 669

Of which dry cargo bulk 116 117 119 90 87 91

Oil tanker 106 107 108 105 115 126

Dry Cargo Liner 165 198 201 279 277 299

Others 123 127 129 143 146 153

GRT (thousands) 7,053 6,953 6,968 6,207 6,623 7,701

Of which dry cargo bulk 2,648 2,703 2,820 2,212 2,053 2,068

Oil tanker 3,348 3,218 3,220 3,172 3,794 4,844

Dry Cargo Liner 652 591 488 467 418 427

Others 405 441 440 356 358 362

DWT-thousands 11,495 11,356 11,462 10,115 10,870 12,716

Of which dry cargo bulk 4,452 4,548 4,779 3,711 3,426 3,443

Oil tanker 5,750 5,548 5,587 5,539 6,644 8,483

Dry Cargo Liner 793 709 547 499 435 422

Others 500 551 549 366 365 368

COMPETITIVE FORCES

Extent of Competition

Indias shipping fleet has expanded at a significant rate over the last few years, as detailed below:

The Indian shipping industrys tonnage position at the beginning of the 10th Five Year Plan (2002) was 6.97million GT. The tonnage position improved to 7.70 million GT (or 12.72 million dwt) with 669 vessels at end-2004.

Distribution of Indian Shipping Tonnage at end-2004

Name of the Company No. of ships GT % of GT

Shipping Corpn. of India Ltd. (SCI) 84 2,578,140 33.5

Great Eastern Shipping 71 1,757,106 22.1

Essar Shipping Co. Ltd. 39 886,596 11.5

Surendra Overseas Ltd 6 178,722 2.3

Mercator Lines Limited 11 483,848 6.3

Varun Shipping Co. Ltd. 10 180,473 2.4

Sanmar Shipping 4 104,932 1.4

Radiant Shipping 5 106,126 1.4

West Asia Maritime Ltd. 4 116,400 1.5

Chowgule Steamship 6 66,824 0.9

Others 429 1,289,630 16.8

Total 669 7,692,472 100.0


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As discussed, the share of the Indian shipping industry in Indias trade is low. The share of Indian Shippingin the carriage of General cargo is about 5.19%, Dry Bulk Cargo 7.1%, Liquid Bulk Cargo 30.1%. However,the overall share of Indian Ships in the total overseas trade was around 16.1%. During 2004, the Indianshipping industry carried 13.83 million tonnes of cargo for exports, and 40.89 million tonnes of cargo forimports. The following figures provides details of Indias foreign trade tonnage and share of Indian vessels ona monthly basis for FY2003-05.

As discussed, the share of the Indian shipping industry in Indias trade is low. The share of Indian Shippingin the carriage of General cargo is about 5.19%, Dry Bulk Cargo 7.1%, Liquid Bulk Cargo 30.1%. However,the overall share of Indian Ships in the total overseas trade was around 16.1%. During 2004, the Indianshipping industry carried 13.83 million tonnes of cargo for exports, and 40.89 million tonnes of cargo forimports. The following figures provides details of Indias foreign trade tonnage and share of Indian vessels ona monthly basis for FY2003-05.

The Indian shipping industry is characterised by chronic over-capacity for most period except for brief peri-ods when the economy peaks and demand for trade increases. Owing to this, players compete fiercely forbusiness, which results in price competition. Given the fragmented and commoditised character of mostshipping segments, absolute size does not translate into market or pricing power. However, size can provideeconomies of scale, and allow a company to offer more frequent and reliable services. A larger fleet alsoincreases flexibility to react to shifts in geographical trade and transportation patterns.

Barriers to Entry

The risk is low risk on this account as highly complex and capital intensive nature of the business pose assignificant entry barriers. Global over-supply position and sharp fluctuations in demand also serves as adissuading factor to aspirants. The prices of all main types and sizes of ships have increased signficantly

over the last years. During 2004, price increases were more pronounced for tankers and bulk carriers andre?ected the high demand for these modes of transport. New shipbuilding prices for Panamax dry bulkcarriers and VLCC tankers fared particularly well, with a 40% increase in 2004, while prices for Suezmaxtankers and Handymax bulk carriers increased by 36.6% and 36.4%, respectively. In general, the upwardtrend of shipbuilding prices re?ects increased ship ordering in the wake of optimistic forecasts for interna-tional trade.

Average second-hand prices have also recorded significant increases. During 2004, average second-handprices for tankers and bulk carriers recorded substantial increases. Dry bulk carriers recorded gains ofaround 40%, with the largest one being for Panamax vessels. In the tanker sector, double-digit price in-creases were recorded during 2004, with Suezmax tonnage recording 54.2% increase.

Monthly Tonnage of Foreign Trade and Share of Indian Vessels


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Trends in New shipbuilding prices

US$ million

Type of Vessel 1990 1995 2000 2002 2003 2004

30-50,000 dwt bulk carrier 24 25 20 15 22 30

32-45,000 dwt tanker 29 34 29 26 30 38

70-74,000 dwt bulk carrier 32 29 23 20 25 35

80-105,000 dwt tanker 42 43 41 35 41 56

170,000 dwt bulk carrier 45 40 40 31 47 61

250-280,000 dwt tanker 90 85 76 67 75 105

125-138,000 m 3 LNG 225 245 165 164 155 190

75,000 m 3 LPG 78 68 60 60 59 77

15,000 dwt general cargo 24 21 19 16 16 20

Trends in Second-hand Ship prices

US$ million

Type of Vessel 1999 2000 2001 2002 2003 2004

40,000 dwt tanker 20 27 26 24 28 40

80-95,000 dwt tanker 26 39 33 30 38 57

130-150,000 dwt tanker 36 50 43 42 48 74

250-280,000 dwt tanker 50 71 60 53 75 107

45,000 dwt dry bulk carrier 16 15 12 15 21 30



Threat of imports/substitutes/unorganised sector

The risk is very high. The threat is primarily in the form of foreign shipping companies, which enjoy structural,and costs advantages vis--vis Indian companies and have aggressively captured market share from theirIndian counterparts.

The average age of Indias shipping fleet is also higher than the world average. For example, the world fleetaverage age was 12.3 years in 2004, with almost 27.3% of the ?eet 20 or more years old. General cargovessels had the highest average age (17.5 years) and container vessels the lowest (9.4 years). By comparison,

the average age of Indian fleet was 16.9 years in October 2005, with around 38% of the fleet with average ageof over 20 years. In terms of DWT, around 33% of SCIs tanker tonnage is more than 19 years old. About77% of SCIs dry bulk fleet is more than 15 years old of which about 70% belong to handymax size. Themarketability of these handymax vessels comes down with age as most of the reputed charterers prefer totake vessels of 15 years or younger. The age of a fleet also impacts on the fleet efficiency, notably speed,fuel consumption, automation and staff requirements; and other costs such as insurance costs and thecost and frequency of dry-docking. A younger fleet can also provide additional funding flexibility for managementas its collateral value tends to be both higher and more transparent. However, the average age of shippingfleet of private players is lower. For example, the current average age of tanker fleet of Great EasternShipping is 12.8 years. Its dry-bulk fleet has an average age of 16.3 years.


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Age of Indias Shipping Fleet

% of total

At end- 1999 2000 2001 2002 2003 2004

Number of Ships

0-5 years 9.4 10.4 10.8 13.6 11.8 11.5

6-10 years 14.5 15.3 14.4 13.6 13.6 13.3

11-15 years 21.0 13.1 10.6 14.3 15.0 15.2

16-20 years 28.8 33.0 35.0 28.2 25.9 20.2

>20 years 26.3 28.2 29.3 30.3 33.6 39.8

GRT

0-5 years 9.2 6.1 6.6 7.8 10.8 10.8

6-10 years 19.3 21.2 17.4 12.3 11.0 10.5

11-15 years 19.6 13.4 13.1 17.4 16.9 23.2

16-20 years 26.4 33.9 36.1 32.6 30.5 24.8

>20 years 25.6 25.4 26.8 29.9 30.9 30.7

Fluctuations in Demand-Supply Gap

World trade has increased at a steady pace and the trend is expected to continue and probably gathersteam as economies open-up to trade further under the aegis of WTO and other trade agreements. Althoughthis bodes well for the industry in long term, cyclicality of demand for shipping results in frequent demandsupply fluctuations. A summary of the balance of global tonnage supply and demand for 2000-04 indicatesa significant reduction in the supply surplus. For example, surplus tonnage declined from 10.3 million dwt in2003 to 6.2 million dwt in 2004. This was largely attributable to the high level of vessel scrapping over the last

few years and to increased employment of ships.

Trends in Oversupply in the World Shipping Fleet

Million dwt

Type of Vessel 1999 2000 2002 2003 2004

World merchant fleet 799.0 808.4 844.2 857.0 895.8

Surplus 23.7 18.4 21.7 10.3 6.2

Active Fleet 775.3 790.0 822.5. 846.7 889.6

Surplus tonnage percentage 3.0 2.3 2.6 1.2 0.7

The surplus has declined for all kinds of fleets. Tonnage supply in the oil tanker sector increased by 12.3million dwt in 2004 to 298.3 million dwt as newbuildings delivered outweighed tonnage scrapped, laid up orlost. This, combined with increased shipments and extended haulage, brought down overcapacity from 6million dwt in 2003 to 3.1 million dwt or 1.1% surplus. In 2004, the total dry bulk ?eet supply increased by27.6 million dwt to 325.1 million dwt. Overtonnage for this type of vessel declined from 3.6 million dwt in 2003to 2.1 million dwt in 2004, or 0.6% surplus. For the conventional general cargo ?eet, overcapacity stood atthe same level in 2004 as in 2003, with supply exceeding demand by only 0.7 million dwt or 1.6% surplus.


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Tonnage Surplus by Main type of ships

Overall, the shrinkage in surplus and increased demand resulted in freight rates increasing in 2004. During

2005, the trend of declining freight rates that was witnessed in H1FY2006 continued during Q3FY2006 as isevident from the figure below. The fall in freight rates were primarily due to increased fleet growth. After asharp increase at the end of calendar 2004, the Baltic Dry index declined since mid-April 2005.

Although the cyclicality translates into enhanced business risk for the shipping industry per se, expecta-

tions of continuance of strong demand in 2006 make for a cautiously positive outlook.

For the tanker segment, earnings and profitability have improved during FY2005 and FY2006 because ofincreased oil demand. On the supply side, until 2001, the development of the tanker fleet was rather steady,but since then, the world fleet has increased by almost 50 million dwt and could increase by another 45million dwt to 420 million dwt by end-2008. Because most large tankers above 25 years old have beenremoved from the market, sales for decommissioning will remain low over the next few years until 2009.Overall market demand-supply developments during 2004-06 have resulted in higher tanker utilisation rates,and therefore higher spot earnings. The prospects for tanker segment is positive for 2006 with an expectedgrowth in oil freight. However, it will also to a great extent depend on whether the oil market will be smooth,with no disruption due to hostilities, weather or other events. However, the downside could be from anexpected fleet increase of 6%.

Baltic Dry Index


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In recent years, the dry bulk market has been driven almost by the burgeoning Chinese demand for com-modities, especially iron-ore. The overall increase in tonne-mile demand for bulkers in 2004-05 is estimatedat about 10%. Against this, the supply of dry-bulk carriers went up by only about 5%, resulting in substantialtightening in utilisation levels. The improved balance between supply and demand has resulted in higherrates for both time and trip charters.

INDUSTRY FINANCIALS

ROCE and Operating Margins

The financial performance of the 13 leading Indian shipping companies indicates a significant improvement in

performance during FY2004 and FY2005. Operating Income (OI) increased 28% during FY2005 to Rs. 75.63billion, as compared with a growth of 31% during FY2004, mainly because of significant improvement infreight rates. Considering OPM as the sole comparative indicator of industry financial performance can bemisleading in the case of shipping industry as OPMs tend be relatively high to absorb the interest outgo onship purchase related debt. OPMs for the Indian shipping industry have been relatively stable (ranging in the29%-36% bracket between FY1999 and FY2003). With strong demand and rising freight rates, operatingmargins have improved significantly in FY2004 and FY2005. Interest and depreciation remain at around15-16% during FY2004 and FY2005, as compared with 19% in FY2003. The improvement in operatingmargins, and lower interest and depreciation costs resulted in a significant improvement in net profits andmargins. While operating profits increased 48.2% during FY2005 to Rs. 32.17 billion, net profits increased109% to Rs. 28.86 billion. ROCE reflects the trend in Operating Margin.

Margins and Returns

FY 2003 2004 2005

Operating Margins 25.9% 36.6% 42.5%

Net Margins 14.4% 22.9% 38.2%

ROCE 10.9% 20.7% 25.0%

As evident from the table below, the shipping companies reported a modest growth in revenues duringQ3FY2006. Sluggishness in global freight rates (bulk dry) restrained industrys revenue growth. Companieshaving significant exposure to dry cargo vessels were effected the most. Increasing capacity outpaceddemand resulting in a slide in bulk and tanker freight rates. Soft freight rates also resulted in pressure onmargins of shipping companies.

Global Tanker Fleet Development


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Financial Performance of Indian Shipping Companies during 9MF2Y006

Rs. million

9 months ended December 2005 2004 Change2005 2004

Net Sales/OI 58,227 54,909 6.0 100.0 100.0

Cost of Sales 34,675 31,898 8.7 59.6 58.1

OPBDIT 23,553 23,011 2.4 40.4 41.9

Interest 1,645 2,084 -21.1 2.8 3.8

Depreciation 6,722 5,879 14.3 11.5 10.7

OPBT 15,186 15,048 0.9 26.1 27.4

Other Income 4,329 3,433 26.1 7.4 6.3

PBT 19,515 18,481 5.6 33.5 33.7

Tax 885 659 34.3 1.5 1.2PAT 18,630 17,822 4.5 32.0 32.5

% of OI

Earnings Stability

Owing to the cyclical nature of the industrys demand, earnings tend to be unstable. Operating profits havedeclined from Rs. 9.16 billion in January-March 2005 to Rs. 7.93 billion in October-December 2005.

Trends in Gross Sales and Operating Profit for Indian Shipping Industry

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INDUSTRY CHARACTERISTICS

Importance to Economy

Ports plays an important role in the Indian economy. Approximately 95% of Indias international trade byvolume and 70% by value is seaborne. India has 12 major and 187 minor/intermediate ports along itscoastline of around 7,517 kms. The 12 major ports carry about 75% of the total traffic, with Vishakapatnamas the top traffic handler in each of the last five years. The total income of the 12 major ports was around Rs.54 billion during FY2005.

Ports provide an interface between the ocean transport and land-based transport. In the initial years, thetraffic was being handled mostly at major ports. However, over the years, non-major (minor) ports have alsowitnessed growth in traffic. The growth in the cargo handled at Indian ports has increased from a level of19.38 million tonnes or mt (major ports) in 1950-51 to around 518 mt (major and minor ports) by FY2005.The share of traffic at major and minor ports stood around 383.7 mt and 134.7 mt, respectively duringFY2005.

Cyclicality

The significant increase in Indias international trade during the recent years has resulted in traffic handledat Indian ports increasing at a 5-year compound average growth rate (CAGR) of 9.1% to around 518.4 mt inFY2005.

Demand for port facilities depends on factors such as volume of trade, shifting global trade patterns, regionaldisparities, oil price developments for tankers, and regulatory interventions. Supply invariably follows demand,with growing demand positively impacting freight rates and encouraging new shipbuilding activity.

Sensitivity of Industry to Government Policies

In India, the Ministry of Shipping (MOS) is the nodal Ministry responsible for the shipping and port sectorswhich include shipbuilding and shiprepair, major ports, national water-ways and inland water transport. The12 major ports, placed under the Union list of the Indian Constitution, are statutory bodies (trusts) administeredby the Government of India (GoI) under the Indian Ports Act, 1908 and the Major Port Trust Act, 1963. TheIndian Ports Act lays down rules regarding safety of shipping and conservation of ports for the entire port

Growth in Port Traffic for Major Ports

Thousand tonnes

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Monthly Trends in Ports Traffic

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sector and regulates matters pertaining to the administration of port duties, pilotage and other charges. TheMajor Port Trust Act lays down the institutional framework for the major ports in India. Accordingly, eachmajor port is governed by a Board of Trustees appointed by the GoI. The trustees exercise limited power andare bound by directions on policy matters and orders from the GoI.

Worldwide, investments in ports and their management, have been made by the State, mainly because ofthe large volume of resources required, long gestation periods, uncertain returns and various externalities,both positive and negative, associated with this infrastructure. However, privatisation of port facilities and

services has now gathered momentum and India is also following the trend. The burgeoning resourcerequirements and the concern for managerial efficiency and consumer responsiveness have led to the activeinvolvement of the private sector in infrastructure services in recent times.

To encourage private participation, the Government of India (GoI) has laid down comprehensive policy guidelinesfor the private sector participation in the ports sector. In introducing private sector participation, the GoIdecided to adopt the landlord port model propagated by the World Bank. This particular model distinguishesbetween the port owner and the port operator. Application of the model implies that the government (majorport trusts) progressively relinquishes the responsibility of providing operational port services and theirmanagement to private developers through various contractual agreements. In Indias port sector, theseagreements have been in the form of Build-Operate-Transfer (BOT) schemes, chosen from tenders collectedthrough open bidding processes, where the private sector takes over the development and management ofport facilities (e.g. berth and cargo terminals) for a specified period. The government, however, retains theright of ownership over port land. In 2001, Indias first corporate port was set up at Ennore near Chennai. Thegovernment has decided to progressively corporatise all the existing major ports for ensuring their functioningon commercial principles. In this regard, it has introduced the Major Port Trust Act Amendment Bill, 2001 inthe Parliament. However, the process of corporatisation is yet to begin due to the delay in the passage of thelegislation introduced in the Parliament.

At present, depending on the nature of facility/ service, private operators can enter into a service contract, amanagement contract, a concession agreement or a divestiture to operate port services. In June 2004, theGoI sought to allow a private operator to develop and run a maximum of two container terminals in a majorport, provided a third terminal was tendered out.


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Growth Potential/Outlook

The growth potential of the ports is directly dependent on growth in world output, world trade, and maritimetrade. In 2005, world output increased 4.8%, as compared with a growth of 5.3% in 2004. World output is

expected to increase 4.9% in 2006, and 4.7% in 2007; primarily driven by higher growth in emerging economies.Over the period 1998-2007, world output is expected to expand 4.1% per annum. During 2005, the volume ofworld trade increased 7.2%, as compared with a growth of 10.7% in 2004. The increase in trade was drivenby high oil and metals trade.

World seaborne trade increased 6.9% in 2004 to reach 27,635 billion ton-miles. Increased demand forhaulage of crude oil and oil products resulted in ton-mileage for these commodities increasing by 6.2% in2004, as compared with 6.9% in 2003. For all dry cargoes, the ton-mileage increased by 7.4% in 2004. Inthe tanker segment, total world shipments of tanker cargoes increased 4.2% in 2004 (the latest year forwhich data is available) to 2.32 billion tons, as compared with growth of 3.6% in 2003. . About 76.4% of thetanker trade was in crude oil, with the remainder in petroleum products. The share of tanker shipments inoverall world seaborne trade was 34.3% in 2004. In the dry bulk segment, overall dry cargo shipmentsincreased 4.4% in 2004 to 4.44 billion tons, as compared with a growth of 6.9% in 2003. The ?ve dry-bulktrades iron ore, coal, grains, bauxite/alumina and rock phosphaterecorded a growth of 7.6% to 1.59billion tonnes. The remaining dry cargo trade increased at a slower rate of 2.7% to 2.86 billion tons. Theshare of dry cargo shipments in world seaborne trade was 65.7% of total goods loaded during 2004.

World Seaborne trade

Billions of ton miles

Oil Iron Ore Coal Grain Five Main Other Total

Dry Bulks Dry

Crude Products Total

2000 8,180 2,085 10,265 2,545 2,509 1,244 6,638 6,790 23,693

2001 8,074 2,105 10,179 2,575 2,552 1,322 6,782 6,930 23,891

2002 7,848 2,050 9,898 2,731 2,549 1,241 6,879 7,395 24,172

2003 8,390 2,190 10,580 3,025 2,810 1,273 7,454 7,810 25,844

2004 8,910 2,325 11,235 3,415 2,965 1,325 8,065 8,335 27,635

The volume of world trade increased 7.2% in 2005, as compared with 10.7% in 2004, driven primarily bygrowth in trade by developing economies. Data on world seaborne trade indicates that World seaborne trade(goods loaded) in 2004 recorded another consecutive annual increase, reaching a record high of 6.76 billiontons. The annual growth rate was 4.3% in 2004, as compared with 5.8% in 2003. Total maritime activitiesmeasured in ton-miles increased to 27,635 billion ton-miles in 2004, compared with 25,844 billion ton-milesin 2003.

Globally, container port traffic increased 9.6% during 2003 to 303.11 million twenty-foot equivalent units(TEUs), driven by growth in developing countries. The growth rate for developing countries and territories was11.9%, with throughput of 122.4 million TEUs (MTEU), which accounted for 40.4% of world total throughput.Preliminary figures for 2004 for worlds leading 20 ports handling containers indicates a 15.4% growth to166.6 MTEU. These top 20 ports accounted for 47.6% of world container port traffic for 2003 (44% in 2002).The largest container port in the world in 2004, Hong Kong, processed 21.93 MTEU. By comparison, JawaharlalNehru Port (JNPT), Indias largest container port, handled roughly 2.67 MTEU in 2005-06. With a throughputof 3.92 MTEU in 2003, India accounts for around 1.2% of worlds port throughput.For Indias 12 major ports,


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Top 10 Ports and their throughput

Million TEUs

2004 2003 2002Hong Kong (China) 21.93 20.82 19.14

Singapore 20.60 18.41 16.94

Shanghai 14.57 11.37 8.81

Shenzhen 13.65 10.70 7.61

Busan 11.43 10.37 9.45

Kaoshiung 9.71 8.81 8.49

Rotterdam 8.30 7.10 6.52

Los Angeles 7.32 6.61 6.11

Hamburg 7.03 6.14 5.37

Dubai 6.43 5.15 4.19

Antwerp 6.06 5.44 4.78

For Indias 12 major ports,For Indias 12 major ports,total traffic increased 10.3% during FY2006 to 423.41million tonnes (mt). Total traffic has increased at a 3-year CAGR of 10.5% and a 5-year CAGR of 8%. Interms of TEUs, total traffic increased 9% during FY2006 to 4.61 MTEU.

Indias Port Traffic

Thousand tonnes

FY 2000 2001 2002 2003 2004 2005 2006 5-year

CAGR

Chennai 37,443 41,220 36,115 33,686 36,710 43,806 47,248 5.5%

Cochin 12,797 13,117 12,057 13,001 13,572 14,095 13,938 2.9%

Ennore 3,401 8,485 9,277 9,480 9,168 21.9%

Haldia 20,713 22,842 25,029 28,603 32,567 36,262 42,216 11.0%

Jawaharlal Nehru 14,976 18,575 22,521 26,844 31,190 32,808 37,752 10.9%

Kandla 46,303 36,741 37,728 40,633 41,523 41,551 45,907 4.0%

Kolkata 10,313 7,158 5,374 7,201 8,693 9,945 10,806 15.0%

Mormugao 18,226 19,628 22,928 23,649 27,874 30,659 31,688 6.7%

Mumbai 30,412 27,063 26,433 26,796 29,995 35,187 44,190 10.8%

New Mangalore 17,601 17,891 17,501 21,430 26,673 33,891 34,451 14.5%

Paradip 13,636 19,901 21,131 23,901 25,311 30,104 33,109 9.4%

Tuticorin 9,993 12,284 13,017 13,294 13,678 15,811 17,139 5.7%

Vishakapatnam 39,510 44,685 44,344 46,006 47,736 50,147 55,801 4.7%

Total Major 271,923 281,105 287,579 313,529 344,799 383,746 423,413 8.0%

Minor 63,380 87,370 95,520 108,060 118,860 134,650


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About 80% of total volume of ports traffic handled is in the form of dry and liquid bulk, with the residualconsisting of general cargo, including containerised cargo. Oil traffic is the major form of liquid bulk traffic,accounting for around 33% of total major ports traffic. Other major traffic comprises iron ore (17%), and coal(4.5%). Container traffic of various items constitutes around 15% of traffic handled at major ports.

Commodity Wise Traffic Handled at Indian Ports

Thousand tonnes

FY 2001 2002 2003 2004 2005 2006 5-year

CAGR

Major Ports 281.10 246.37 313.55 344.80 383.75 423.41 8.5%

Oil 108.35 103.26 109.63 122.16 126.44 142.17 5.6%

Iron Ore 40.46 4.52 50.56 58.81 76.20 78.99 14.3%

Fertilisers 9.14 9.57 8.56 7.53 9.68 12.20 5.9%

Coal 48.10 45.89 48.19 48.80 52.79 59.25 4.3%

Container 32.22 37.23 43.67 51.00 54.76 61.83 13.9%

Others 42.83 45.90 52.95 56.49 63.88 68.98 10.0%

Minor Ports 87.37 95.52 108.06 118.86 134.65 16.3%

Oil 46.39 52.54 55.87 60.10 67.85 19.5%

Iron Ore 8.52 7.66 11.54 16.81 19.53 17.4%

Fertilisers 2.99 3.06 2.95 3.17 3.84 0.5%

Coal 9.59 8.90 10.79 9.83 13.82 15.9%

Container

Others 19.88 23.36 26.91 28.95 29.61 12.4%

The port traffic has increased at a 5-year CAGR of 8.5% for major ports and 16.3% for minor ports driven byan increase in trade in oil, iron ore, and other merchandise exports.

Trends in Indias Foreign Trade

US$ million

FY 2001 2002 2003 2004 2005 2006

Exports 44,560 43,827 52,719 63,843 80,541 100,660

Oil 1,870 2,119 2,577 3,568 6,798

Non-Oil 42,691 41,708 50,143 60,274 73,743

Growth 21.0% -1.6% 20.3% 21.1% 26.2% 25.0%

Imports 50,537 51,413 61,412 78,149 106,451 140,226

Oil 15,650 14,000 17,640 20,569 29,844 43,856

Non-Oil 34,886 37,413 43,773 57,580 76,607 96,370

Growth 1.7% 1.7% 19.4% 27.3% 36.2% 31.7%

The Government continues its endeavour to build additional capacities in major ports. By the end of the 10thFive Year Plan period in 2006-07, aggregate capacity in major ports is anticipated to reach 470.60 mtpa asagainst projected traffic of 415 mt.


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Indias port traffic is expected to increase at around 12-15% per annum during the next 2-3 years. Growth isexpected to be driven by high growth in exports (driven by a buoyant world economy), and higher oil imports.World output is expected to increase 4.9% in 2006, and 4.7% in 2007; primarily driven by higher growth inemerging economies. Over the period 1998-2007, world output is expected to expand 4.1% per annum.Industrial countries are projected to record a higher growth at 3% in 2006 (as compared with 2.7% in 2005)accompanied by recovery in activity in the Euro area and a more or less sustained growth in the US. Growthin most of the emerging and developing economies is projected upwards with China and India registeringhigh growth driven by strong domestic demand and exports. World merchandise trade is also expected toincrease by 8% in volume terms, as compared with 7.2% in 2005. Emerging and developing economies areprojected to witness higher export growth than industrial countries.

COMPETITIVE FORCES

Extent of Competition

At present, there are 12 Major Ports in the country viz. Kolkata (including Haldia), Paradip, Visakhapatnam,Chennai, Ennore and Tuticorin on the East Coast; and Cochin, New Mangalore, Mormugao, Jawaharlal

Nehru, Mumbai and Kandla on the West Coast. All the major Ports are administered by Port Trusts whichare autonomous bodies except for the newly constructed Ennore Port which is run by a company namedEnnore Port Limited.

Vishakapatnam is the largest port with traffic of 55.80 mt during FY2006, followed by Chennai (47.25 mt),and Kandla (45.91 mt). The ports have differing traffic patterns. Although oil constitutes the major item oftraffic handled at major ports, there is very little oil traffic at Paradip, Ennore, Tuticorin, Mormugao, and JNPT.By contrast, container traffic accounts for nearly 90% of traffic at JNPT. Similarly, nearly 80% of Mormugaostraffic is iron ore.

Commodity-wise Patterns of Major Ports Traffic during FY2006

Millions

Million tonnes Container

Oil Iron Ore Fertilisers Coal Container Others Total MTEUs

Chennai 13.21 9.46 1.07 3.17 11.76 8.58 47.25 0.73

Cochin 9.64 0.00 0.68 0.20 2.54 0.88 13.94 0.20

Ennore 0.24 0.54 0.00 8.39 0.00 0.00 9.17 0.00

Haldia 17.73 7.96 0.83 8.79 1.71 5.20 42.22 0.11

Jawaharlal Nehru 2.50 0.00 0.00 0.00 33.78 1.48 37.75 2.67

Kandla 24.29 0.00 1.93 0.43 2.31 16.94 45.91 0.15

Kolkata 4.93 0.15 0.00 0.00 3.23 2.49 10.81 0.20

Mormugao 0.83 25.31 0.23 3.27 0.11 1.94 31.69 0.01

Mumbai 27.78 0.00 0.59 1.83 2.15 11.84 44.19 0.16

New Mangalore 22.39 9.31 0.66 0.51 0.15 1.43 34.45 0.01

Paradip 0.91 10.27 1.57 16.29 0.05 4.03 33.11 0.00

Tuticorin 0.77 0.00 1.44 6.15 3.43 5.35 17.14 0.32

Vishakapatnam 16.94 15.99 3.19 10.22 0.63 8.84 55.80 0.05

Total 142.17 78.99 12.20 59.25 61.83 68.98 423.41 4.61


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For minor ports, Gujarat has the maximum traffic of 95.8 mt in FY2005, accounting for 71% of traffic at minorports. Other minor ports are in Andhra Pradesh (10.7%), Maharashtra (9%), and Goa (6.2%).

Efforts for attracting private sector participation in major ports have continued. At end-2005, thirteen private

or captive projects with a capacity addition of about 47.6 mtpa and an investment of about Rs. 26.62 billionhave been completed/operationalised, while 24 others with a capacity addition of around 100.68 mtpa and aninvestment of Rs. 79.10 billion are at various stages of evaluation and implementation.

Bargaining Power of Suppliers

The ports in India are critically dependent on adequate availability of both equipment and manpower. At theMajor Ports of Mumbai, Kolkata, Visakhapatnam, Cochin, Chennai, Mormugao and Kandla, Dock LabourBoards (DLBs) were set up under the Dock Workers (Regulation of Employment) Act, 1948. The function ofthe DLBs is to provide regular employment to dock labour. The labour provided by the DLBs perform work onboard the vessels. On the other hand, the labour to be deployed on the shore are provided by Port Trust. Ithas been felt that to ensure optimum utilization of labour, there should be complete interchangeability ofDock Workers and Port workers. The question of merger of dock labour with the Port labour had been under

consideration of GoI and the DLB was superseded in 1994. Under the Dock Workers (Regulation ofEmployment) (Inapplicability to Major Port Trusts) Act, 1997 the DLBs at Cochin, Mormugao and Chennaihave been merged with their respective Port Trusts. Supersession of Dock Labour Board at Mumbai hasbeen extended from time to time and is still under supersession. The question of merger of DLBs atVisakhapatnam, Kandla, and Kolkata is being examined in consultation with the respective Port Managements.

Indian ports have traditionally suffered from overstaffing and low productivity of port labour. Salaries andwages constitute around 39% of operating expenditure. The provisions of the Dock Workers Act made italmost impossible to downsize port employment in India to a more optimal level and achieve higher labourproductivity in the port sector. Overstaffing also resulted in escalation of costs, making Indian ports highlyuncompetitive. The costs of such inefficiencies have been borne by the users in terms of overpriced importsand uncompetitive exports.

Recognising the high degree of overstaffing at Indian ports, the GoI introduced a Special VRS Scheme for

Officers, employees and workers of Port Trusts/DLBs in 1991. The Scheme was intended to attract thesurplus persons to opt for voluntary retirement as it was considered that such a situation existed in thePorts. This Scheme was continued till 2000. The VRS was reopened in August 2003, with relaxation ofcertain conditions. As a result, around 2,200 employees/workers opted for VRS. Overall, manpower at majorports has declined from 69,464 at end-FY2004 to 65,962 at end-FY2005.

Barriers to Entry

Worldwide, investments in ports and their management, have been made by the State, mainly because ofthe large volume of resources required, long gestation periods, uncertain returns and various externalities,both positive and negative, associated with this infrastructure. However, privatisation of port facilities andservices has now gathered momentum and India is also following the trend. The burgeoning resourcerequirements and the concern for managerial efficiency and consumer responsiveness have led to the activeinvolvement of the private sector in infrastructure services in recent times.

The private participation in ports requires high capital investments. This is evident from the costs of approvedprivate sector/captive port projects in major ports.


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Approved private sector/captive port projects in major ports

As of end-2005

Project Type Port Capacity Cost

(mt) (Rs. billion)

Container Terminal Jawaharlal Nehru 7.2 9.65

Liquid Cargo Berth Jawaharlal Nehru 5.5 2.00

Fifth Oil Jetty (Iffco Jetty). Kandla 2.0 0.22

Oil Jetty awarded to M/s. IOCL. Kandla 2.0 0.21

Container Terminal Tuticorin 3.6 1.00

Captive Berth to Oswal Fertilisers Ltd. Paradip 2.5 1.00

Container Terminal at Chennai Stage I (600 mtrs.) Chennai 5.6 4.70

Container Terminal at Chennai Stage-II (285 mtrs) Chennai 2.4 -

Container Terminal at Multipurpose Berth outer

harbour. Visakhapatnam 4.8 1.00

Mulitpurpose Berth No.4 A at Haldia Haldia Dock Complex

(HDC) 1.5 1.50

Development of Container Freight Station Kandla 3.0 0.41

Allotment of Multipurpose berth No.12 Haldia Dock Complex

(HDC) 0.5 0.30

Multipurpose General Cargo Berths 5A and 6A Mormugao 5.0 2.24

Multipurpose Berths at Visakhapatnam Port

EQ8 & EQ 9 Vizag 2.0 2.40

Redevelopment of existing Bulk Terminal into

Container Terminal Jawaharlal Nehru 15.6 9.00

Oil Jetty and related facilities at Vadinars (ESSAR) Vadinar (Kandla) 10.0 25.00

Development of International Container Cochin 5.0 (to be 6.00

Transshipment Terminal at Vallarpadam. raised to 40 (total

in phases) 21.18)

Construction of Jetty for POL Products/Chemicals Ennore 3.0 2.00

Total 81.2 68.63

Threat of imports/substitutes/unorganised sector

Ports plays an important role in the Indian economy. Approximately 95% of Indias international trade byvolume and 70% by value is seaborne. In terms of handling merchandise cargo, the ports are likely to facelittle competition. However, in terms of passenger traffic, the major modes of transport for internationalarrivals are air, land, and sea. Airlines dominate international arrivals into India, with an estimated share of83% in FY2004, and 84% during April-October 2004 (the latest period for which data is available). Internationalarrivals in India by land constituted around 16.2% of arrivals during FY2004. The share of sea has beendeclining from 0.8% in FY2004 to 0.3% during April-October 2004.

Fluctuations in Demand-Supply Gap

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Outdated layout of berths, outmoded cargo handling equipment, insufficient maintenance and inadequateoperational dredges rendered Indian ports operationally unsuitable for modern cargo handling. Attachmentsfor handling specialised cargo as well as the number of technicians trained to handle modern equipmentwere in short supply. Moreover, in the logistic chain, land transport capacity was insufficient. Railwayslacked the necessary equipment and structure to ensure steady flow of container traffic and concentrated onmainly bulk transport instead. Poor road linkages with ports also impeded the flow of cargo. Apart fromserious obstacles posed by inadequate capacity, the major ports of India were also characterised by problemsof underutilization of existing facility. Several berths for traditional cargo, whose significance had diminishedover time, remained unutilised. Underutilization of port capacity also occurred due to multiple managementcontrol and inadequate communication between port staff, customs authorities, stevedoring companies,transport authorities etc. This was further compounded by lack of synchronisation of interdepartmentalworking times within the port trust itself and absence of pre-arrival planning and work scheduling.

The consequence of the above constraints and inadequacies was poor operational efficiency of Indian ports.In terms of most performance indicators, Indian ports lag behind their foreign counterparts. Earlier, averageship turn around time (ASTA) in India used to be exceptionally high (11.9 days in FY1985), and despitehaving progressively declined, stood at around 3.5 days in FY2005, which is amongst the highest among

Asian ports. Hong Kong has an average turnaround time for container vessels is about 13 hours, as comparedwith the lowest comparable figure for IndiaTuticorin, which has an average turnaround time of 1.12 days.

Average Ship Turnaround Time for major Ports

days

1995 2000 2001 2002 2003 2004 2005

Chennai 7.97 6.40 5.80 5.30 3.70 4.60 3.80

Cochin 4.05 3.23 3.10 2.37 2.19 2.22 2.33

Haldia 7.18 5.21 3.96 4.01 3.02 2.87 3.00

Jawaharlal Nehru 5.20 1.72 2.48 2.34 2.28 2.04 1.84

Kandla 9.74 6.15 4.72 6.55 5.94 5.06 4.62Kolkata 9.53 6.59 5.50 4.71 4.47 4.29 4.17

Mormugao 6.88 4.30 4.25 2.04 3.86 4.47 4.35

Mumbai 9.35 5.60 5.20 5.47 5.06 4.10 4.21

New Mangalore 5.75 3.80 2.89 2.73 1.90 2.35 2.96

Paradip 5.62 3.89 4.16 3.99 3.37 3.42 3.41

Tuticorin 5.42 6.39 4.10 4.11 3.59 2.59 2.66

Vishakapatnam 5.73 4.75 3.71 3.51 3.72 3.33 3.20

The share of idle time at berth to total time for major Indian ports was actually on the rise since the decadeof the 1980s, reaching a high of 42.8% in 1993-94, before declining to around 24% at present.

Indicators of Operating Efficiencies of Major Ports

FY 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Avge. Turnaround time-days 7.83 6.24 6.03 5.23 4.84 4.16 3.95 3.47 3.45 3.41

Avge pre-berthing time-days 3.02 2.52 2.09 1.64 1.58 1.16 1.28 1.06 1.10 0.98

Avge. Ship berth output-tonnes

per day 4,763 5,223 5,453 5,904 6,321 7,406 7,713 8,750 9,079 9,298

Idle time at berth to total time% 40.10 38.75 34.53 32.92 31.19 29.64 28.74 27.12


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Inefficiency of Indian ports resulted in higher through-port and sea transport costs, making cargo shippedfrom Indian ports cost-inefficient and non-competitive in international markets. Coupled with this, the longwaiting time discouraged large cost efficient vessels and ship liners from touching the Indian ports.Consequently, Indian container cargo had to be transshipped in Colombo, Dubai or Singapore, resulting inadditional costs and transit times.

However, the major ports have witnessed a significant improvement in performance during the last few years.The major ports continued the trend of excess capacity as compared to the traffic handled which began in2001. The aggregate capacity of the major ports was around 385 mt during FY2005, as compared with trafficof 384 mt during FY2005. The major performance indicators for the ports have improved during 2004, as theaverage turn around time has improved from 3.48 days during 2003 to 3.38 days during 2004. Similarly,average output per ship berth day for all Major Ports taken together has improved from 8,590 tonnes in 2003to 8838 tonnes in 2004.

Aggregate Capacity and Traffic at Major Ports

Million tonnes

FY 1999 2000 2001 2002 2003 2004 2005

Aggregate capacity 232 247 281 333 351 377 385

Traffic 252 272 281 288 314 345 384

The aggregate capacities of major ports by the end of the Tenth Plan (2007) is expected to reach 471 mtpa,as compared with projected traffic of 415 mt.

With infusion of new technology and capacity building, the congestion at Indian Ports in the 1990s haswitnessed reduction in most places and operational efficiency has also improved leading to capacities beingmarginally ahead of demand. As a result of the comfort level achieved in capacities vis--vis traffic and thesignificant levels of traffic share achieved by minor ports over the last few years, congestion in major portshas reduced. Increasingly, berths in major ports wait for ships in contrast to the situation a few years backwhen ships used to wait for berths. However, with the projected growth of traffic and growing containerization,there is need to expand the capacities in the sector through investment from both public and private sectors.

INDUSTRY FINANCIALS

ROCE and Operating Margins

The detailed financial performance of major ports is not available. However, all major ports have shownoperating surplus during the last few years. The combined financial performance of major ports indicated asignificant increase in operating surplus from Rs. 11.71 billion in FY1999 to Rs. 18.52 billion in FY2005.


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Operating Income, Operating Expenditure and Operating Surplus of Major Ports

Rs. billion

FY OI OE OS

2002 2003 2004 2005 2002 2003 2004 2005 2002 2003 2004 2005

Chennai 3.40 3.35 3.69 4.04 2.81 2.70 2.61 2.86 0.59 0.65 1.07 1.17

Cochin 1.87 2.01 2.01 2.07 1.56 1.47 1.42 1.46 0.31 0.53 0.60 0.61

J L Nehru 3.87 4.60 5.80 6.30 2.23 2.13 2.34 2.72 1.64 2.47 3.46 3.58

Kandla 1.80 2.12 2.11 2.36 1.05 1.42 1.66 1.73 0.75 0.70 0.45 0.63

Mormugao 1.88 1.88 2.08 2.16 1.33 1.28 1.35 1.39 0.55 0.59 0.73 0.76

Mumbai 5.01 5.13 5.11 6.29 5.17 5.09 5.04 5.42 -0.15 0.04 0.08 0.87

New Mangalore 1.94 2.02 2.24 2.68 1.08 0.96 1.08 1.08 0.86 1.06 1.16 1.60

Paradip 2.97 3.81 4.13 4.71 2.01 2.12 2.13 2.39 0.96 1.69 2.00 2.32

Tuticorin 1.17 1.25 1.25 1.38 0.59 0.61 0.65 0.64 0.58 0.64 0.60 0.73

Vizag 3.95 4.28 4.54 5.02 2.27 2.21 2.25 2.27 1.68 2.06 2.30 2.76

Kolkata 9.73 8.68 9.57 10.07 6.97 6.41 6.75 6.59 2.75 2.27 2.82 3.48

Total 37.58 39.12 42.52 47.08 27.07 26.41 27.27 28.57 10.52 12.71 15.25 18.52

Because of a decline in per tonne handling at major ports from Rs. 94.1 in FY2002 to Rs. 74.4 in FY2005,operating surplus ratio has increased from 28% in FY2002 to 35.9% in FY2004, and 39.3% in FY2005.

Earnings Stability

Earnings of the major ports are likely to increase because of an expected increase in seaborne trade andtheir monopoly position in handling traffic.


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Documents

Industry Report—Shipping and Ports