 Budget 2006-07: Shipping
Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. A higher level of industrial activity would generally lead to higher demand for industrial raw materials. This in turn would boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be highly volatile. Freight rates and earnings of shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth (growth in world trade) and trade patterns, the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage. Read more
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Under NELP VI, 55 blocks and area of 355,000 sq kms offered. |
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Investment of Rs 220 bn expected in the refinery sector in the next few years. |
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National Maritime Development Programme (NMDP) approved. Work is in progress in 101 projects covering inland waterways, shipping and ports including deepening of channels in Kandla, JNPT and Paradip. |
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Plan allocation for Department of Shipping increased by 37% to Rs 7.4 bn |
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Ship management services brought under the service tax net |
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Investments under NELP VI shall provide a great boost to companies operating in the offshore segment of the shipping industry. |
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Plan allocation for Department of Shipping shall foster greater development in shipping, port and related services. |
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After a strong 2005, which saw oil demand grow at its fastest pace in almost a quarter century, 2006 till date has been pretty volatile for the shipping companies, especially those operating in the tanker segment. For 2006, while the International Energy Agency (IEA) has projected oil demand to grow by 2%, tanker supply is expected to outstrip the same, thus leading to a continuance in pressure on rates. |
Indian National Shipowners' Association (INSA) Wish List |
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Exempt all services provided to the shipping industry from the purview of service tax whether availed domestically or internationally. |
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Provide tax exemption to all shipboard personnel on their income earned during their articled period of employment on Indian ships so as to provide impetus to seafaring career. |
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Restoration of Sec. 10(15)(iv)(C) of the Income Tax Act, which grants exemption from withholding tax on remittances of interest on external commercial borrowing (ECB) taken on or after June 1 2001. This shall foster greater ship acquisition as 80% of the funding is through foreign resources. |
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Exemption for the industry from the purview of fringe benefit tax (FBT), in line with the tax practices followed by other major maritime nations. |
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Modification to the tonnage tax regime. |
| Budget 2003-04 |
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Budget 2004-05 |
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Budget 2005-06 |
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The government has allocated Rs 110 bn towards renovation/modernisation of airports and ports.
Dividend tax removed at the hand of the shareholders.
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Concessional regime under Section 33AC to be withdrawn and companies to be granted option to pay tonnage tax or normal corporate tax on profits.
Setting up of an International Container Trans-shipment project at Kochi.
Service tax has been raised from 8% to 10%. Further, a surcharge of 2% on account of education cess will be imposed on this tax.
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Approved the revised proposal for time-bound implementation of International Transshipment Terminal (ITT) at Kochi port
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| [Read more on Budget 2003-04] |
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[Read more on Budget 2004-05] |
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[Read more on Budget 2005-06] |
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| Key Positives |
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| Rising global trade: Strong global economic growth led by China and the US is expected to result in above average growth in global oil consumption during FY06 as well. This will have direct benefits for the Indian shipping industry. It is estimated that the 2.0% increase in oil demand forecast by the IEA for 2006 should typically lead to around 4.0% to 5.0% increase in tanker demand.
| Shipping regulations: As per IMO regulations, approximately 87 mdwt, or 27%, of the world tanker fleet is likely to be excluded from the majority of oil tanker trades by 2010. This is a positive for the Indian shipping sector, as over the long term, regulations like these will enable shipping companies to maintain strict quality and safety controls.
| Government's thrust on oil exploration: Deregulation and divestment of companies from the energy sector has aided Indian offshore companies' growth in the past few years. This has been a consequent effect of the government's radical change in its approach to E&P (exploration and production) activities in the country. This is vindicated by the aggressiveness shown by the government of India in concluding NELP-V in 4 months instead of 6 as was in case of NELP IV and this gave a clear indication about the seriousness of ensuring oil security for the country. Under NELP V, 6 blocks in deepwater, 2 shallow water and 12 on land blocks, involving an investment of US$ 1 bn have been offered and this is positive for the offshore business of shipping players.
| Privatisation of ports: Another key focus area of the government is the privatization of ports. Though this is a long-term process, the move is a step in the right direction.
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| Key Negatives |
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| Uncertainty regarding sustainability of global economic growth: While growth in global trade has helped Indian shipping companies to improve their financial performance, sustainability is still an issue. Especially with the Japanese and Southeast Asian economies still vulnerable to a downturn, and that the Chinese economy is on its way for a slowdown, demand for tonnage could fall. Also, any 'shock' in form of the US economy slowdown might have a negative impact on the shipping industry's performance in the future This in turn would hurt freight rates and earnings for shipping companies.
| Supply could outstrip demand for tonnage: While FY04 and FY05 were strong years for shipping companies, growth in FY06 and FY07 is likely to be relatively slower on account of a huge influx of tonnage and the consequent pressure on tariffs. The current order book size of global shipping tonnage is around 28% of the current capacity of 334 mdwt. As such, around 90 mdwt is likely to be added over the next 2.5 years. The International Energy Agency (IEA) estimates global oil demand at 2.0% in 2006 respectively. However, we believe that, at the current rate of tonnage supply, the higher oil demand is unlikely to absorb the incremental tanker capacity. Therefore, freight rates are likely to experience pressure over the medium term.
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