Last year Indian ports and shipping industry has seen mixed bag of performance and failure. Some new policies and acts have been put together. One of the biggest and dream project of ministry of shipping – International Container Transshipment Terminal (ICTT) at Vallarpadam, has became operational. Strong growth in India’s trade reflected buoyancy in the overall GDP growth in the last decade. Fueled by increasing globalization and liberalization of trade policies, there has been a surge in India’s global trade, thus over the past ten years India’s trade has grown at 19% CAGR.
Since 1982, port traffic in India has grown at a multiple of 1.5 of India’s real GDP growth. Post-liberalization, traffic growth picked up from sub 7% levels to 9.7% levels in the last decade. Thus for India to achieve 8% GDP growth, it is imperative that port traffic has to grow at 11-12%. As per the data from MoS, Indian ports has registered a growth of 3.95% in cargo traffic in 2010-11 at 883.48 million tonnes, compared to 849.89 million tonnes in the year 2009-10. During the past five years, traffic grew at compounded annual growth rate of 7.98%. While cargo traffic at major ports grew at CAGR of 5.29%, traffic at all non major ports grew at CAGR of 13.93%. The state of Gujarat continues to remain leader in cargo traffic handling. Among major ports, Kandla port with 8.88 million tonnes, handled around 14% of total traffic, while non major ports in Gujarat accounted for 74% of total minor port traffic.
Says an official from MoS, “Major ports have been losing traffic to non major ports is a great matter of concern, though it shares the burden of the major ports.” He added, “Since major ports are overburdened with the incoming cargo around the world, non major ports are taking advantage of the current scenario, making it a healthy competition between major and non major ports.”
According Indian Ports Association, the main reason for losing traffic to non major ports is the lack of infrastructure in major ports, which comes under the authority of Government of India. Whereas non major ports are concerned, it’s been developed by private players where the decisions are much quicker than government. Infrastructure bottleneck such as capacity constraints, lower draught, higher pre-berthing time and turnaround delays. The share of non major ports in total traffic stood at 35% in 2010-11 compared to 27% in 2009-10. Industry pundits believe that the trend of non major ports will gain momentum in the near future as several Greenfield ports are on the verge of completion.
Natural barriers constrain port capacity and limit the threat of new port entrants. Issues like availability of natural deep water draft, favorable tidal conditions, and ecologically sensitive areas determine the viability of ports and restrict the potential competition. However, some of these barriers can sometimes be overcome. One can build terminals out into the sea to deal with draft/ tidal conditions issues but with attendant increased capital costs.
According to the NMDP and Committee on Infrastructure, capacity at major ports was to be hiked to 1002 mmt by FY12 implying 19% CAGR additions in capacity. But only 120 mmt have been added till FY10 implying a CAGR of 11%. This has led to a shift in the capacity addition targets. proposes to increase the capacity to 741 mtpa by FY12 (26% lower than original targets).
As per the NMDP and Committee on Infrastructure, container capacity was envisaged to be increased from 62 mtpa in FY06 to 223 mtpa by FY12, implying a 24% CAGR in additions. Execution has fallen short of the target, with capacity increasing to 121 mtpa by FY10 (18% CAGR). However, the Maritime Agenda retains the vision to grow container capacity faster than other categories, accounting for 30% of total capacity addition at major ports between FY10-20.
The challenges don’t stop here. As per a global survey, Indian ports are expensive compared to its global counterparts. The Indian ports trade at a premium to their Asian and other global peers, at an average price earning of 21 times in a calendar year 2012 and financial year 2013 vs Asian and other global ports at price earning of 13 times. Says Deepal Delivala, analyst, Citi Investment Research & Analysis, “We believe that this premium is justified given the strong earnings growth profile (earnings growth of 54-111% over the next two years vs. the Asian average of 10%, other ports’ average of 18%) and the superior ROE profile once they scale up (14%-30% in FY14E).
On a recovery note
The maritime sector seems to have recovered well from the global financial crunch. Gujarat Pipavav Port Ltd in August 2010 came out with its Initial Public Offer worth `5 billion. The year 2011 will also witness an IPO from Kraikal Private Port Ltd. The completion of some the key ports projects was also a good sign of recovery in the past one year, which includes – MoS dream project – ICTT at Vallarpadam completed in February 2011, 20 mtpa coal terminal at Dahej, 60 mtpa dry cargo terminal at Mundra by Mundra Port and Special Economic Zone Ltd, and 30 mt bulk terminal at Hazira, Surat by Essar Ports Ltd. In the previous fiscal 2010-11, around five public private partnership projects worth `40 billion were completed at the major ports. Further, eight PPP projects worth `32 billion were awarded.
Capital expenditure for new port facilities
Building a port is highly capital intensive, which acts as a barrier to new competitors. Large up-front expenditures are often required for dredging, quay construction, access roads and port structures, which need strong balance sheets and hence limit competition. In the current scenario of rising interest rates, companies could potentially look at raising equity to fund their expansion plans.
Exports surpass FY11 target of $200 billion
Latest full-year FY11 trade data from the Ministry of Commerce have received much attention, with exports touching $245.9 billion for FY11 – significantly higher than the government target of $200 billion. This is up 37.6% year-on-year; albeit off a negative base (exports posted a 3.6% contraction in FY10 due to the global crisis). With this, India’s share in world exports has doubled to 1.3% of GDP from 0.3% in 1993.
India’s strong export performance in FY11 has led the government to aim still of 26.7% y-o-y. The overall strategy is based on building strength in industries where there exists a strong domestic manufacturing base, such as engineering (which includes machinery and equipment) and chemicals (which include pharmaceuticals); boosting growth in light manufactured products such as textiles, leather products that generate employment; focusing on exports on gems and jewellery, which contributes to a high volume of exports and is labor-intensive; revitalizing natural resource-based exports, e.g., processed foods, agriculture products, iron ore, etc.
Over the last decade, the composition of exports has seen a marked shift, with capital-intensive engineering goods and petroleum products gaining shares over more traditional primary products and light manufactured goods, such as textiles and leather products. Today, engineering and petroleum products comprise 42% of India’s exports from 14% in FY20.
Says Venkatesh Balasubramaniam, analyst, Citi Investment Research & Analysis, “With the commissioning of refineries by Reliance Industries and Essar Oil, India’s petroleum product exports have seen a significant rise, averaging over 15% y-o-y growth over FY05-10 vs. 4.7% y-o-y previously.”
Latest data by the Ministry peg exports in FY11 at $42.5 billion. Looking ahead, petroleum product exports are set to increase further, as capacity additions come on-stream. The Ministry’s targets thus factor in petro product exports at $80 billion or 16% of the total export basket, by 2014.
Greenfield ports more challenging
However, one must remember that the concessions won at major ports have pricing that is determined by the tariff authority of major ports (TAMP). Hence, the pricing power is better at new Greenfield (minor) ports as compared to major ports. Many of these terminals are being won based on high revenue share to the Port Trust/ Government. For example:
• Mundra Ports offered a revenue share of 20% for the coal terminal at Mormugao port.
• Essar Ports offered a revenue share of 31% for the Paradip Coal terminal.
• Gammon Infrastructure led consortium offered a revenue share of 36.8% for the iron-ore terminal at Paradip Port.
• Vedanta, along with Leighton Contractors India, quoted a revenue share of 38.1% to win coal handling terminal at Vizag port in Andhra Pradesh.
As per MoS estimates, Indian ports are likely to handle about 1,032 mt and 2,495 mt of cargo by 2011-12 and 2019-20, respectively. The share of major ports is likely to decline, while that of non-major ports is expected to rise in the next 10 years.
In order to meet the increasing traffic demands, Indian ports are likely to achieve about 1,340 mt and 3,130 mt of capacity by 2011-12 and 2019-20 respectively. By 2020, capacity of major ports will surpass traffic by 20% against the ideal norm of 30%. The major ports will therefore continue to identify capacity expansion projects during the next decade.
However, considering the current pace of addition, these ambitious targets may prove difficult to achieve. Already, the Planning Commission in its mid-term review of the Eleventh Five Year Plan has almost halved the investment projections for the port sector due to a delay in the award of projects as well as inadequate capacity addition at the major ports. During the first four years of plan period, the capacity addition of major ports was about 140 mtpa, which is about 27% of the Eleventh Plan target of capacity addition of 511.8 mt. Going forward, efforts should continue to increase capacity and improve operational efficiency. Major and non-major ports should initiate and update various information and communication technology measures and integrate themselves with stakeholders to transform into world class ports. Modern cargo handling techniques need to be introduced to improve port performance, particularly in dry bulk cargo, where the majority of cargo is still handled at conventional berths. Improvement in multimodal connectivity and development of coastal and inland waterways will further augment growth prospects.
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