It is Champagne time for shipping industry. With strong sentiments sweeping the freight market, all Indian lines have reported handsome after tax profit in the just ended quarter. Captains of the industry predict the boom to last at least for another two-three years.

In an interview with Business Line, Mr Sanjay Mehta, CEO and Managing Director, Essar Shipping, dwells at length on the emerging trends in the global freight market and the company's growth plans. The company registered a 46.4 per cent increase in its net profit during the second quarter of this fiscal to touch Rs 30.89 crore.

Excerpts from the interview :

How do you see the freight market?

Growth in India's sea freight is amazing. Just to give you an idea, this fiscal up to now India imported 90 million tonnes of crude oil and our expectation is that by the end of the year we will be importing 625 million barrels. What is significant is that on one hand we have a supply crunch as far as ships are concerned and on the other the demand is increasing worldwide.

How long do you think this trend will continue?

Let us look at the macro-economic side. Huge raw material consuming countries such as the US, Japan and China are having a healthy GDP growth - so there is a tremendous pressure on raw material movement, both crude oil as well as steel and iron ore.

As we see it, this macro-economic growth will be sustained for the next two years. And, as I said, on the supply side, there is no new supply of ships until 2007-08. So the freight market boom will continue till 2007-08. After that, I predict a 15 per cent fall in the freight market, based on the tonne-mile demand and supply projections.

Will the rising crude prices have an impact on the freight market?

Because of the rising crude prices, I fear the demand might get subdued. I think if the market crosses $60 per barrel mark, there will be a real impact on consumption of crude worldwide.

There is also the inflation fear, especially in countries such as India and China. Once inflation starts rising, interest rates go up and consumption goes down. That is when we may see a downside in the freight market.

Coming to Indian shipping industry, how will the new Tonnage Tax impact the sector?

Tonnage tax was the best thing to happen for the Indian shipping industry. There will be more competition. You will see foreign companies coming and setting up shop in India, especially in the container segment.

What are your acquisition plans?

We have a different approach. Our approach is more logistic-oriented. We look at acquisition of ships not from the point of view of buying ships at the lower end of the asset value market and selling them to make profit. We will buy ships that we can operate for 25-30 years minimum. If you look, we are the only company in India that has all its crude oil tankers double-hull. We do not do speculative buying of ships - our policy is to acquire assets behind business.

What is your business strategy?

Our strategy is to go beyond shipping and become a provider of complete sea-logistic and supply-chain solutions. In the first six months of this fiscal we have moved 150 million barrels of crude for different oil companies world over, which is the highest amount of crude moved by any Indian shipping company. And this is primarily because we are able to control the full logistic chain, as is being now sought by oil companies. The supply-chain solutions include shipping, terminal activities, storage, lighterage, ultimate delivery of oil to refineries and taking the products out of the refineries for onward transportation.

We envisage that in one year from now, oil companies will no longer work with just traditional shipping companies, but with companies that can provide full logistic solutions.

Do these involve long-term contracts?

Yes, we have firmed up long-term contracts involving provision of such supply chain solutions to global oil majors like Exxon Mobil, Chevron and BP. While we handle shipping and related activities like lighterage and storage, other operations like terminal activities are outsourced. For example, Exxon Mobil operates seven refineries in the US.

Logistic experts from our New York office visit the refineries and study the refinery configuration at the start of the year then there give us a forecast of where the crude will come and crude mix - that is from where the crude will be shipped for the whole year. And then we prepare a supply chain proposal, which we totally execute. We have saved Exxon about 15 cents a barrel in transportation costs during the last two years, which is quite significant.

But ESL does not provide such services to Indian oil companies...

We have not been able to book such long-term contracts with Indian oil companies, as they cannot hand over transportation of their crude to third party logistic service providers. The Indian oil companies have to book their ships through Transchart. Moreover, there are no large storage facilities on the coast. But I think over the years the domestic oil industry would also look for supply chain solutions.

You seem to focus little on the spot market... .

We focus on consecutive voyages, because we provide total logistic solutions. We take contract for moving say 20 million barrels, 30 million barrels. We agree to do 10 voyages from West Africa to US, or five voyages from Arabian Gulf to China.

Spot is very little and that too to cover some time lags. For example, after we have consecutive voyages to US, we do not bring back our ship to West Africa or Arabian Gulf. Instead we take the ships to Venezuela, which is only three days from US. And from there we pick up a cargo to China, Singapore or South Korea and then from there we come to Arabian Gulf to pick up another cargo. So the voyage between Venezuela to China or Singapore is spot market driven. By this our utilisation of assets is in the region of 95 per cent while other companies have 65 per cent or 70 per cent.

What are your growth plans?

We have a committed capital expenditure plans to invest in modern tankers and bulk carriers over the next two years. Our intention is to have the largest carrying capacity in India in the capsize bulk carrier segment. Our focus will continue on energy transportation and management services, which will be 70 per cent of our revenue.

What will be the impact of Tonnage Tax on ESL?

We are going for the Tonnage Tax regime. Our tax liability this fiscal on account of Tonnage Tax will be Rs 1.5 crore - last fiscal it was Rs 4.7 crore.