Cement, power cos buy ships to cut costs

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Mumbai, March 25: Indian cement and power firms are buying bulk carriers to combat rising freight costs and long queues for ships, while eyeing a new revenue stream by putting these vessels in the market when idle.

A steep rise in freight rates last year prompted some Indian firms, which depend a lot on imported raw material, to buy vessels or expand their fleet, while others entered into long-term contracts.

The Baltic Exchange's chief sea freight index for global raw material trade, which monitors 40 major export routes, soared nearly 150 percent between January and November 2007.

"In the dry-bulk segment, freight rates are going through the roof and we also find it difficult at times to find ships," V.M. Mohan, vice-president (corporate finance) of India Cements, said. "We don't want to take chances."

The company, which imports 800,000-900,000 tonnes of coal annually from Indonesia, bought two dry bulk vessels earlier this year.

It has paid as much as $45-50 per tonne as freight charges, while the vessel operating cost was $12-15 per tonne, Mohan said. "(Now), we don't need to depend on the market for ships."

However, while owning vessels reduces delays, it is capital intensive and calls for complex operations, said Sanjay Mehta, managing Director, Essar Shipping.

While Ambuja Cements is expanding its fleet, power firms such as Tata Power Co are also looking at having their own fleet to lower cost of power generation.

"We are looking at entering shipping and logistics to bring coal to India, discussions are going on," Managing Director Prasad Menon of Tata Power told Reuters earlier this month.

Last year, Tata Power bought 30 percent stakes each in two Indonesian coal mines owned by PT Bumi Resources Tbk for $1.3 billion.

"As long as non-shipping Companies use it for captive cargo and not get into trading in the market, it's a viable option," said Managing Director Atul Agarwal of Mercator Lines Ltd, which has a fleet of 12 bulk carriers.

"Being a specialised field, you can burn your fingers very badly and history has proved it," he said.

DOUBLE BENEFIT

However, the Companies buying the ships are also looking at another benefit.

The new ships can double as cash generators when idle and Companies are looking at options of putting out unused tonnage on the market, Atul Kulkarni, senior manager of consulting at Deloitte Touche Tohmatsu India Pvt Ltd, said.