27-07-2017

How long can SCI keep its container biz afloat?

SCI

State-run Shipping Corporation of India Ltd (SCI) is increasingly coming under pressure to take a call on the future of its container shipping business, as continuous losses become a drag on the Mumbai-based firm’s balance sheet.

In FY17, India’s biggest ocean carrier by fleet size incurred an operating loss of ₹95.54 crore from running five container ships.

The previous year, the loss stood at ₹134.95 crore.

In fact, over the past six years, SCI’s container division made an operating profit only once — of ₹15.71 crore in FY15.

It reported operating losses of ₹195.21 crore in FY14,₹31.57 crore in FY13 and ₹311.66 crore in FY12.

SCI came perilously close to losing its ‘Navratna’ status, a tag that allows state-owned firms greater freedom from government control. It posted three consecutive years of losses between 2011 and 2014 (manly due to poor rates from container and bulk ships), only to turn around in 2015 through some deft cost-cutting measures, including culling 12 new building orders to preserve cash in a difficult market and freeze ship purchases. The freeze has since been lifted.

The continuous losses have led experts to question the relevance of SCI running container ships, a segment battered globally by dull trade since the collapse of Lehman Brothers in 2008.

Global crisis

The world’s top container carriers have borne the brunt of the financial crisis, reporting huge losses, forcing the industry to consolidate through mergers, acquisitions and alliances to stay afloat.

The consolidation trend gained momentum with the 2016 collapse of South Korea’s Hanjin Shipping, once the world’s seventh biggest container shipping company.

SCI, India’s only main line container ship operator, is not part of any of the three global alliances that emerged in the wake of the crisis in the industry.

Since the beginning of this fiscal, SCI has sold two old container ships for scrap, which leaves it with only three. There are no plans to order more container ships, a government official said. “You can see the direction the container unit is taking,” he added.

With just three container ships, SCI does not have the clout to be a part of any global alliances.

It only has a vessel sharing arrangement with Mediterranean Shipping Company SA, the world’s second biggest container shipping firm by capacity, on the Europe sector. “Who will take SCI into alliances? Alliances are between equals; you cannot have unequal partners,” said an executive with a global shipping company.

Some experts want SCI to continue running container ships to act as a tempering influence on freight rates to and from India. This section argues that SCI should boost its container fleet to become a bigger player.

But others say that the firm should close down the loss-making unit, as it doesn’t serve any worthwhile purpose.

“It cannot sustain any longer,” said the government official. “This business is of volumes; we don’t have the volumes. If we want to remain in this segment, either we need to pump in money to buy bigger ships or consolidate in a big way to become a mega player.”

Economies of scale

“Owning big sized container ships is key for consolidation. Otherwise, we cannot reap the benefits of economies of scale — the box rates keep going up,” he added.

With the government weighing a potential privatisation of the national carrier, SCI needs to get out of the loss-making business to make it attractive to suitors, he said.

Still, some others say that SCI could consider spinning off its container business into a separate joint venture and induct a strategic partner to strengthen the business.

But the government official mentioned earlier said it is his considered view that “SCI should get out of the container shipping business”. “There is no reason for SCI to remain in this business. It has, in fact, become counter-productive,” he added.

Source: The Hindu Business Line 

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