Overview of the shipping sector in India

Mr Anil Devli - CEO INSA Email: ceo@insa.org.in l

April 1, 2011

OVERVIEW OF SHIPPING IN INDIA

Indian tonnage currently stands at 10.11 million GT and Indian flagged vessels carry 8.4% of Indian trade cargo. The rest is carried by overseas shipping companies. Coastal shipping accounts for just 10% or a million GT of Indias total tonnage. In its National Maritime Agenda, the ministry of shipping has estimated that Indian seaborne trade could increase 3.56 time by 2020 resulting in shortage of tonnage. The Agenda has set a target for Indian shipping tonnage of 43 million GT by 2020. Indias exim cargo in terms of volumes was 611 million tonnes of which coastal cargo was ~133 tonnes in 2009-10. In 2009-10, major and minor ports in India carried a total cargo throughput of 849.89 million tonnes indicating a year-on-year increase of 14.27%. The Maritime Agenda, trafiic at major ports estimated to grow at a CAGR of 8.03% to 1214.82 million tonnes by 2020, whereas traffic at non-major ports is expected to grow 15.96% CAGR to 1269.59 million tonnes in the same time.

CURRENT CAPACITIES IN EXIM SHIPPING

OVERSEAS: Dry Cargo Liners

Category wise as on 01.03.2011 Type of Ships No 17 16 98 2 64 63 4 4 8 49 2 6 14 347 GRT 172569 186796 2711231 94955 3424980 2249357 19659 74817 208939 142141 17790 28933 15535 9347702 DWT 212597 235762 4754352 169257 6201390 3937987 10731 116639 240757 101120 18889 12641 13631 16025753

Cellular Container Vessels Dry Cargo Bulk Carriers Ore Oil Bulk Carriers Oil Tankers(Crude Oil Carriers) Oil Tankers(Product Carriers) Passenger-cum-Cargo Vessel Acid Carriers LPG Carriers Supply Vessel Ro-Ro Container Dredger Tugs Total (Overseas)

CURRENT CAPACITIES IN COASTAL SHIPPING

COASTAL Type of Ships Dry Cargo Vessels Tugs Dry Cargo Bulk Carriers Oil Tankers(Crude Oil Carriers) Oil Tankers(Product Carriers) Passenger-cum-Cargo Vessels Passenger Carriers Ethylene Gas Carrier Ro-Ro Vessel Dredgers Offshore Supply Vessels Specialized Vessels for Offshore Service Port Trusts & Maritime Boards Total Total (Overseas, Coastal & OSVs) 95 708 1055 45377 1015469 10363171 15702 1007830 17033583 No 72 242 12 2 13 32 54 3 1 28 110 44 GRT 125342 72862 237220 50080 40035 89435 16702 8727 956 121893 118444 88396 DWT 180636 23424 364928 82246 43226 27232 1964 6558 1386 76152 133896 50480

NATIONAL MARITIME AGENDA

The Maritime Agenda document states that it is an Agenda for consideration rather than an Agenda for action. At the same time, many of the listed activities are statements of obvious intentions and all concerned have to be working towards achieving these goals. The Agenda document has set the following as targets to be achieved by 2020. (a) To achieve a global market share of 5% by 2020. (b) To develop a strong ancillary base in India by 2020. (c) To generate additional employment for 2.5 million persons (0.5 million direct and 2.00 million indirect) by 2020 in the core shipbuilding, ancillary and supporting industry sectors. (d) To develop strong R&D facilities and design capabilities for the commercial shipbuilding. (e) To be self-sufficient in ship repair requirements of India and to emerge as a dominant ship repair centre replacing Colombo, Dubai, Singapore and Bahrain. (f) To achieve a share of 10% by 2020 in global ship repair.

NATIONAL MARITIME AGENDA (COASTAL SHIPPING)

The National Maritime Agenda has put forth a set of recommendations for coastal shipping which includes promotion of river sea vessels, manning relaxation without compromising on safety, providing financial incentives and upgrading existing infrastructural facilities. Improvement of minor ports: The Agenda has proposed that a port regulator should be set up for non-major ports to regulate service levels, and technical & performance standards. Major ports are under the control of the central government while the non major ports are under state control and therefore there is a need for uniform application of systems, rules and processes.

OVERVIEW OF GLOBAL SHIPPING

According to the World Trade Organization, global trade growth will increase 13.5% in 2011, the biggest year-on-year increase since 1950, following a faster-than-expected recovery in trade flows. Still, the development of the shipping industry will be restricted by excess freight capacity as newly built ships are delivered to owners. New deliveries and over-capacity are hurting recovery of shipping. The levels of scrapping are lagging far behind newbuilding deliveries. According to Clarksons data, some 957 vessels entered service in 2010, with just 115 scrapped, bringing the global dry bulk fleet to a total of 8,154 at the end of the year. This compared with 550 deliveries in 2009 versus 265 scrapped, which saw 2009 end with a fleet of 7,295. The world liner fleet has reached 15 million TEUs in March 2011, according to Paris based analyst Alphaliner. The growth of the world fleet has coincided with growth in containership sizes and as a result the dwt per slot has dropped from 15.7 dwt per TEU in July 2001 to 13.1 dwt per TEU in March 2011.

WORLD BANK OUTLOOK FOR GLOBAL GROWTH AND TRADE

THE World Bank in January 2011 outlook expects global economic growth to slow down to 3.3% this year, from 3.9% in 2010, before edging up to 3.6% in 2012 indicating continued moderate recovery. Trade growth is expected to moderate from the strong bounceback in 2010 to steady, if unspectactular, trade growth of about 8-9% and associated demand growth for shipping capacity is expected in the next two years. Emerging economies, including China and India, have regained pre-crisis levels and are expected to continue setting the pace with their growth forecast at 6%. It put Chinas growth this year at 8.7% and Indias 8.5%. The global economy will continue to face challenges with significant downside risks, in particular rising food prices, commodity prices and oil prices that could dampen growth prospects. Large trade imbalances and interest rate differentials could generate further tensions over currency exchange rates and affect trade.

The India story

WHAT INDIAN SHIPPING NEEDS

Cargo support: The need for a strong cargo support policy backed by an equally strong coastal cabotage policy and cargo assurance policy for exim trade. This would attract investment and ensure that there is not only capacity building in this sector but also efficiencies due to competition and larger supply. This would also lead to accelerated development of transport infrastructure. Taxation: Policies should be framed keeping in mind that Indian shipping companies directly compete with international players and therefore taxation and technical issues should give Indian companies a level playing field, if not an edge, vis--vis international players. Upgradation fund: Need for cheaper funds made available through an upgradation fund with interest subvention for building tonnage. Infrastructure status: This would empower the sector to raise long term and low cost funds, and avail tax holidays on direct taxes and concessions on indirect taxes.

INSAS ESTIMATES FOR GROWTH IN TONNAGE

Growth of Indian overseas trade and the cargo carried by Indian ships
Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2014-15** *million tonnes
** Projected

Major ports* 344.80 383.75 383.63 463.78 519.16 530.53

Total (Major & Minor)* 345.65 400.58 447.14 497.81 576.35 598.70 1194.45

Y-O-Y growth % 15.9 11.62 11.33 15.78 3.88

Cargo carried by Indian ships 47.59 54.86 61.12 60.86 54.65 50.43 100.33

% share 13.8 13.7 13.7 12.2 9.5 8.4 8.4

Growth of Indias overseas trade and fleet size

Indias overseas trade (million tonnes) Percentage of growth of overseas trade (yoy) Overseas fleet as on 31-3-2009 (million GT) Overseas fleet as on 31-08-2010 (million GT) Share of Indian shipping in Indias overseas trade (million tonnes) Percentage share of Indian shipping Projected addition to the fleet (million GT)

Actual (2008-09) 598.70 12.20 8.32 8.72 50.43 8.40

Projected (2014-15) 1194.45 12.20 16.55 100.33 8.40 10.05

WAYS & MEANS TO ENHANCE CAPACITIES

Maritime Strategy for India: India needs a long term maritime strategy with financial commitments

and targets from the government.

Infrastructure status: The shipping industry should be granted infrastructure status and given access

to cost-effective finance with an interest subvention scheme.

Controlled FDI: There is a need for controlled FDI in coastal trade. Absolute cabotage for Indian flag: The latter should be a pre-requisite for trade from India. Continued cargo support: In the form of long term contractual arrangements between the Industry

and Indian shipping companies for cargoes such as oil, cotton, cement, steel, coal and fertilizers. This cargo assurance will lead to higher investments and aid financing in the shipping sector.
Funding support: Need for cheaper funds made available through an upgradation fund with

interest subvention for building tonnage. This fund could be like the ones set up for automobile, textiles, IT and telecom industries.

WHAT WOULD EXPANDING CAPACITIES MEAN TO INDIA?

Development of coastal shipping will have a positive impact on the environment in terms of energy conservation and reduction in GHG from carbon emissions. Promotion of coastal shipping would reduce the carbon footprint of Indias transportation sector as it shifts the burden of cargo traffic from road and rail traffic. In its report Measures to promote growth of Indian shipping 2009, SBI Capital Markets Ltd said that development of the shipping industry creates a favorable impact on Indian overseas trade by effectively lowering freight costs. The table below by UNCTAD, 2007, illustrates this point.
Country group Estimate of total freight costs of imports (mill) 632.4 341.1 24.1 Value of imports (c.i.f.) Freight costs as % of import value

World Total Developed countries Economies in transition Developing countries

10712.2 7035.7 317.5

5.9 4.8 7.6

259.9

3359

7.7

Development of the shipping industry will help in meeting the countrys strategic defense and oil requirements. A national fleet also acts as a source of ships and seafarers for defense in times of need.

THE DETERRENTS TO CAPACITY EXPANSION IN INDIA (TAXATION)

The taxation issue has vexed Indian ship-owners consistently over the years. Policies should be framed keeping in mind that Indian shipping companies directly compete with international players and therefore taxation should give Indian companies a level playing field, if not an edge, vis--vis international players. Differential taxation for seafarers a burden on Indian companies: The Indian seafarers on Indian ships have to pay income tax while Indians on foreign flagged ships are exempted from paying income tax. In the UK, a March 2011 government-appointed review of tax allowances has concluded that seafarers income tax concessions and the tonnage tax scheme were crucial for the future of the UK Merchant Navy. The 2011 finance bill and Customs and Excise notifications issued have proposed to introduce a levy of 1% Excise duty (5% on imports) accompanied by a special additional custom duty (SACD) on ships (used for transportation) and other vessels. Historically, ships purchased in a foreign country are exempted from all customs duty and this is a practice internationally. Such a levy would create inconsistencies between Indian and international regulations and cripple the competitive ability of Indian tonnage. Service tax: A service tax abatement of 25% was given for transport of coastal goods and goods transported through national waterways or inland water in the 2011 budget. But with this, the CENVAT credit on inputs was taken away. The shipping industry believes that this concession takes away the benefit accruing through 25% service tax abatement. Withholding tax: The deduction of tax at source by Indian companies hiring foreign vessels for coastal cargo movement adversely affects the profitability of Indian companies. Bunkers used for coastal trade are also levied 33% custom duty which is not so in exim trade.

DETERRENTS TO CAPACITY GROWTH

Rational tax structure: To provide Indian shipping companies a level playing field vis--vis foreign players. The table below highlights the differential tax treatment meted out to Indian shipping companies which makes it difficult for them to compete with foreign ship owners.
Financial Year 2009-10 India (Rs. In mn.) Singapore (In Rs mn)

TAXES PAID/PAYABLE
On tonnage income Profit on sale of ships (A) Other income/treasury operations (B) Taxes paid/payable on non-tonnage income TOTAL TAXES PAYABLE % of taxes on profit before tax % of taxes on gross revenue 33.6 294.45 94.44 388.89 Nil Nil 94.47 94.47

388.89 9.73% 1.87%

94.47 2.19% 0.42%

MANAGING THE ENVIRONMENT

India has tried to ensure that UNFCCC which backs the principle of common but differentiated responsibility (CBDR) continues to be the central body with respect to greenhouse gas (GHG) reduction norms and has tried to prevent IMO which backs the principle of common responsibility for all from getting full control of this issue. The Cancun Agreements reached on December 11, 2010 digress from the previous Bali Action Plan which had agreed on the principle of CBDR for greenhouse gas (GHG) emissions. The Cancun Agreements instead established a regime of measurement, report and verification (MRV) based on common commitments/actions which is not favourable to developing countries. On a positive note, these Agreements are currently silent on the responsibility of the shipping industry.

MANAGING THE ENVIRONMENT

But the Energy Efficiency Design Index (EEDI) for new ships and Ship Energy Efficiency Managements Plans (SEEMP) for all ships proposed by Marine Environment Protection Committee (MEPC) are not so benign. Though these protocols will be voted on in July 2011, they are likely to be implemented as IMO is heavily influenced by developed countries who are backing these measures. An other adverse outcome of these deliberations for developing countries could be the implementation of market based measures (MBMs) by IMO, in case technical and operational measures are found inadequate to reduce GHG commitments.

ABOUT INDIAN NATIONAL SHIPOWNERS ASSOCIATION (INSA)

Indias premiere national association representing shipowners Founded in 1929 Member companies own ~90% of Indian tonnage Works towards integrating Indian shipping industry with the world economy and endeavors for a competitive positioning in the global market. Promotes development of national shipping for fullest participation in the carriage of cargo and passengers in inland, coastal and overseas trade and for cross trades outside India. Securing adequate representation for the association, national shipping and allied industries on public, government and non-government platforms. Collecting, collating and disseminating statistical and other information in India and abroad regarding shipping and allied industries.

PROFILE OF INSA MEMBERS TOP 10

Top 10 INSA member companies as on 01.02.2011
S.No Name of the Company No.of ships GT % of INSA % of Indian Shipping

1 2 3 4 5 6 7 8 9 10

Shipping Corpn. of India Ltd. Great Eastern Shipping Co Ltd. Mercator Lines Limited Essar Shipping ports & Logistics Ltd. India Steamship Varun Shipping Co. Ltd. Pratibha Shipping Limited Tolani Shipping Ltd. Sanmar Shipping Five Star Bulk Carriers Pvt. Ltd. Total of top ten companies Other INSA members Total INSA members Total Non INSA members Total Indian Shipping

96 37 18 22 6 12 9 7 6 6 219 245 464 586 1050

3781301 1446038 566873 483451 342002 314215 281543 249493 190122 176811 7831849 1246537 9078386 1302283 10380669

41.65 15.93 6.24 5.33 3.77 3.46 3.10 2.75 2.09 1.95 86.27 13.73 100.00

36.43 13.93 5.46 4.66 3.29 3.03 2.71 2.40 1.83 1.70 75.45 12.01 87.45 12.55 100.00

(Source : DGS tonnage statement)

QUESTIONS?

Mr. Anil Devli- CEO INSA Email: ceo@insa.org.in

10