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| Michael Pinto: Shipping in times of crisis | | When the last crisis struck, China used the opportunity to expand capacity, and its fleet is now many times India's |
| Michael Pinto / Jan 14, 2010, 00:02 IST |
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Replying to a question in Parliament recently, Shipping Minister GK Vasan detailed the steps taken to increase Indian tonnage. Apart from the introduction of tonnage tax which took place many years ago, the other steps outlined were only a snapshot of Shipping Corporation of India’s (SCI’s) expansion plans. But if Indian shipping is to become a force to reckon with in the world maritime fraternity, the fleet will have to be more than the sum of the vessels the state-owned behemoth plans to acquire in the next few years.
The cyclical nature of shipping is well known but, even then, the ferocity of the recent slowdown was unexpected. It is estimated that by the end of March 2009, as much as 9 per cent of world’s dry bulk tonnage was forced into idleness and orders for nearly 500 new dry bulk vessels were cancelled. The liquid bulk sector was able to avoid a large-scale lay-up of tonnage because crude oil and POL (or petroleum, oil and lubricant) products still had to be transported around the world but freight rates fell by almost eight times. The container sector fared no better. Freight rates dropped dramatically wherever possible orders for new vessels were put on hold and, in the face of falling demand, ships were routinely withdrawn from service.
Recent past has been a bit brighter and small “green shoots” are being seen. But it would be a rash prophet who would predict the end of the crisis in shipping. Indeed, so harshly has the industry been hit by the recession that AP Moller Maersk, the blue chip of all shipping blue chips, is expected to lose about $1 billion this year. Its container business itself showed losses of over $1.5 billion, and other shipping activities could not compensate for so much bleeding. Indeed, these activities are down to less than a quarter of what they were one year ago. Other large concerns have similar stories to tell.
The industry is no stranger to cyclical downturns. The two most vicious recessions in recent memory took place in 1973 and then again in 1979. Both were the result of the oil crisis and the consequent crippling of the world economy. The recent downturn the world over has had exactly the same effect on world shipping.
What should be the policy response in times of depression? The classical reaction has been to tighten the belt, lay up ships and cancel orders for new vessels until the market improves. But do we have to go into hibernation every time there is a downturn? A declining market in international shipping represents a huge opportunity which we would be unwise to ignore. Consider the example of more daring players. In 1970, when shipping was at its peak, China had only a third of India’s tonnage. When the twin crises of 1973 and 1979 struck, Indian shipping went into its shell. The Chinese, on the other hand, used it as an opportunity to expand in a market where bargains could be had. By 1975, China had two-thirds of India’s fleet, and by 1980, it was marginally ahead of India. By 1985, China’s fleet was more than double that of India and the difference has since grown many times over.
China’s example is true of a number of other countries like South Korea, Hong Kong and Taiwan which used a downturn in shipping to acquire vessels cheaply and held them against the day when the market would improve. And in each of these countries, it was generous governmental assistance that led the growth. In 1959, India established the Shipping Development Fund (SDF), charged with providing low-cost finance to shipping companies to acquire vessels. Until 1987, when it was abolished as no longer being necessary, it had advanced loans worth nearly Rs 1,500 crore and guarantees worth nearly Rs 57 crore to the shipping industry.
At a time when bailouts and generous government packages are the norm, perhaps policy-makers in India should look to re-invent the SDF. The Fund suffered from a common malaise of the time: Over-bureaucratisation. A beneficiary under the SDF had to let the government decide which ships he should acquire and when. The ponderous governmental decision-making process meant that several excellent bargains were lost through delay. The government’s socialistic approach led to preference for small one-ship companies which folded up at the first challenge. These mistakes must be avoided. But an innovative government orchestrated package for the shipping industry is a must. When companies like Hapag-Lloyd can receive a bailout of about ¤1.2 billion from the German government, and the French are considering a similar package for shipping giant CMA CGM, expansion of the Indian flag cannot be confined to SCI’s expansion plans alone. Timely governmental assistance to viable shipping companies to buy when prices are low will yield huge dividends when freight rates rise as they must when “green shoots” flower into large branches.
The author is a former secretary in the shipping ministry
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