Overview of the World Economy
Economies around the world have been seriously affected by the financial crisis andslump in activity. The advanced economies experienced an unprecedented 7 percent declinein real GDP during the fourth quarter of Calendar Year 2008, and output has fallen almostas fast during the first quarter of 2009.
Going forward, the stabilisation of the financial markets might take longer thanpreviously envisaged, even with strong efforts being made by policymakers. Monetary policyinterest rates are expected to be lowered to or remain near the zero bound in the majoradvanced economies, while central banks continue to explore ways to use both the size andcomposition of their balance sheets to ease credit conditions. Fiscal deficits areexpected to widen sharply in both advanced and emerging economies, as governments areassumed to implement fiscal stimulus plans in G20 countries amounting to 2 percent of GDPin 2009 and 1 percent of GDP in 2010.
Source: International Monetary Fund.
Overview of the Indian Economy
The Indian economy, which was on a robust growth path up to 2007-08, averaging at 8.9per cent during the period 2003-04 to 2007-08, witnessed moderation in 2008-09, with thedeceleration turning out to be somewhat sharper in the third quarter. The slowdown in theIndian economy during 2008-09 has been associated with a deceleration in investmentdemand, which had been an important driver of growth in recent years. The adverseconditions for access to external capital, and the depressing effects of the global crisison domestic business confidence contributed to the moderation in investment demand.
Based on recent production / sales data on cement, steel and automobiles there arevisible indications of a strong recovery in the industrial sector. The current recoveryseen in cement, steel, automobile and in the core industries index is expected to gatherfurther momentum as the two major problems that the industry faced in the October-Decemberquarter of the financial year 2008-09 are being addressed - inventory levels declining andliquidity easing. The industrial sector continues to repose faith in domestic demand asits investment intentions remain robust. Several new capacities whose commissioning wasdeferred during October-December 2008 are now being commissioned. New capacity expansionplans are being announced. Hence we are likely to see growth albeit at a slower rate thanthe one witnessed in last 5 years.
Source: Centre for Monitoring Indian Economy, Reserve Bank of India.
Your Company’s Business Performance, Opportunities and Outlook
The business model adopted by your Company is unique in nature with no peer groupcomparison. The business is based on the intrinsic demand for transportation services andlogistics & cargo handling infrastructure required by the steel, power generation andrefining industry. Your Company had reorganised its business with certain other businessesof the Essar Group to become a one-of-a-kind integrated logistics company. During thefinancial year, your Company has consolidated various businesses in the areas of dry bulkports, oil terminals and oilfields drilling services under its fold. With interests in drybulk ports and oil terminals, crude and dry bulk carriers, port to plant logistics andoilfield services, your Company now provides end-to-end logistics solutions to itscustomers.
a) Ports & Terminal Business:
Consolidated cargo throughput at major ports in India grew by 2.13 percent in thecurrent fiscal according to the latest data released by the Indian Ports Association. Thecountry’s 12 gateway ports, six each on the east and west coasts, handled 530.35million tons of cargo, compared to 519.31 million tons in the same period last year. YourCompany through its subsidiary Vadinar Oil Terminal Limited (VOTL) is operating a 10.5million metric tons per annum (mmtpa) terminal at Vadinar on the west coast of India. VOTLis currently expanding its capacity to support refinery capacity of upto 16 mmtpa from theexisting capacity of 10.5 mmtpa. The blue print for this expansion is being finalised. In2009, VOTL, was awarded Five Star Rating and the prestigious Sword of Honor by the BritishSafety Council. VOTL is one of only forty organisations worldwide to be awarded with thishonor, thereby recognising the high standards of Safety maintained by your Company. Inaddition to the same, VOTL has also obtained ISO 9001:2000 certification this year.
Your Company through its subsidiary Essar Bulk Terminal Limited (EBTL) is setting up anall weather deep draft dry bulk port at Hazira in Gujarat. The port will handle rawmaterials and finished products for the steel plant at Hazira. Your Company has achievedfinancial closure for the project and the terminal is expected to be operational in thecurrent financial year.
Your Company through another subsidiary Essar Bulk Terminal (Salaya) Limited is settingup a dry bulk port facility at Salaya in Gujarat. The port will handle import of coal andexport of pet coke. The operations of the port are expected to begin during the financialyear 2011-12.
In view of the tremendous long term opportunities provided by the Government of Indiato privatise ports, especially container terminals, your Company is actively pursuingdevelopment of Ports & Terminal projects through a competitive bidding route orthrough Joint Ventures and Strategic Alliances.
b) Sea Transportation Business:
In the dry bulk segment a marginal increase in seaborne trade of dry bulk commoditieswas witnessed. Sailing distances were shorter and port congestion fell, while technicaloff-hire and Chinese Coastal trade saw an increase. During the year under considerationthe dry bulk fleet expanded by 6.5 percent. In view of the uncertain global economicscenario resulting in restrained investment in housing and capital equipment and reducedspending on capital goods there is likely to be a fall in the seaborne transport of ironore, coking coal and steel products during the next two financial years.
In the energy transportation segment, global oil consumption declined by 2 to 3 percentduring the year. An interesting phenomenon of traders employing Very Large Crude Carriers(VLCC’s) for the purpose of storage to take advantage of the reverse arbitrage thatexisted in the futures market was witnessed during the year but after the latest round ofsupply cuts by OPEC, the oil futures market have witnessed a narrowing of the arbitrageopportunity thereby resulting in a decreased demand for VLCC’s. Based on themacroeconomic view and oil market forecasts there is likely to be a significant decline inthe utilisation rate of tankers and thus a decrease in freight rates for all segments ofthe tanker market.
During the year under review, your Company has added two Supramax Dry Bulk Carriers inits fleet while having sold one Capesize vessel, one Suezmax tanker and one Producttanker. The ships were acquired, despite growing uncertainty in the markets as they werebacked by long term charters with globally reputed steel majors. The philosophy ofacquiring new vessels only on the basis of committed cargo from reputed companies hasprovided steady cashflows and is instrumental in weathering the downfall in the freightrates. Your Company was awarded the Most Quality Conscious Indian ShippingCompany by the Director General of Shipping for the fourth time, which recognisesthe Company’s ever increasing endeavor to provide good quality services to itsclients.
c) Oilfields Services Business:
In Asia-Pacific, the Indian Ocean market has been the most active recently, with quitea few tenders being processed in all categories – jackups, standard and deepwaterfloaters. Mexico remains the bright light in an otherwise quiet global jackup market,where Pemex Exploration and Production has outstanding tenders requesting the provision ofsix additional jackups, with more expected to follow. In South America, Petrobras ismaintaining its ambitious newbuild floater plans, with the operator expected to tender forthe provision of seven more ultra-deepwater newbuilds later in 2009.
In 2009, your Company reaped the benefit of the reorganisation that was undertaken in2008 with Essar Oilfields Services Limited (EOSL) becoming a subsidiary of your Company.EOSL has a fleet of 14 rigs which includes one semi submersible offshore rig and thirteenonshore rigs. The Company has successfully deployed its semi submersible rig, EssarWildcat on a long term charter in the Krishna Godavari basin on the East Coast ofIndia during the year. Of the thirteen onshore rigs, ten are currently contracted withglobal energy majors. During the year, your Company has also entered into an agreement toconstruct two New Building Jack Up Rigs which are expected to be delivered in 2011.Essar Wildcat, has received excellent recommendations for a Health Safety andEnvironment (HSE) audit carried out by International Risk Control Asia (IRCA). This auditis one of the best tools available to maintain and verify the condition of rigs.
d) Logistics Business:
Your Company through its subsidiary Essar Logistics Limited (ELL) providestransshipment, lighterage and trucking services to steel mills and oil refineries. ELL isnow carrying out logistics handling for large project cargoes and is making investments inacquiring assets for project cargo movement. During the year under review, ELL handled18.5 million tonnes of cargo.