Saturday July 21, 2012
MISC sails past stormy seas
By SHARIDAN M. ALI and JOHN LOH
WITH a renewed focus on energy transportation and related energy businesses, MISC Bhd is determined to keep its head above the choppy waters of the shipping industry going forward.
This is after the shipping giant, renowned as one of the world's leading owner-operator of liquefied natural gas (LNG) carriers, made a tough decision to cease its liner operations late last year due to competitive and saturated operating conditions.
This resulted in MISC having to make a hefty provision of RM1.67bil together with higher impairment charges on its vessels due to deterioration in the shipping market,
Its bottomline was a sea of red ink for two consecutive quarters ended Dec 31, 2011 and March 31, 2012.
But the sacrifice, according to MISC, will benefit the company in the long run where it is now free of the ailing liner operations and more nimble to focus on its energy shipping and related businesses.
“We have made enough provisions for the liner exit and we hope to put this chapter behind us. I think from now on, it will be positive in terms of our profitability.
“If we do not exit the liner business, it will negatively impact MISC as a whole and we are not prepared to allow that to happen,” MISC president and chief executive officer Datuk Nasarudin Md Idris tells StarBizWeek recently.
The exit of the liner business will allow MISC to pay more attention on energy-based shipping, allowing the shipping giant to focus its capabilities on the transportation of such cargo in its tanker fleet.
“This will also help us to focus on our customer relations strategy, given the common customer profile across the LNG, petroleum and chemical trades.
“The tank terminal business is also an integral part of the logistics supply chain for the transportation of energy and with our entry into this segment, it will further solidify our presence as an integrated player in the global energy logistics chain.
“Our presence in the offshore segment further integrates us into the upstream space which allows us to leverage on our maritime expertise into spinoff activities,” he says.
Behind the exit of the liner business
As a result of the global economic crisis in late-2008, the shipping sector, especially the liner business, is the first industry to bear the brunt.
With weaker demand and a stream of new constructions, the liner industry at that time was caught in a situation of overcapacity that pressured the rates to historical lows and it has severely impacted the main trade lane of the liner business the Asia-Europe trade.
Following this, MISC decided to exit from the Grand Alliance, the world's largest container shipping alliance, that resulted in a pullout of its liner division from the loss-making Asia-Europe trade route.
MISC then focused on the intra-Asia trade but the overcapacity issue spilled over to this side of the region as well and again more shipping lines were affected by the plunging freight rates.
“We were doing quite well for a while in the intra-Asia trade, but as more players realised that the rates in intra-Asia had not dropped as much as the Asia-Europe trade, they also jumped on the bandwagon and the market became overcrowded.
“Shipping operators began using far bigger ships for economies of scale in the long haul trade and it has resulted in the shifting of medium size ships into the intra-Asia trade so there is a cascading effect,” he says.
Nasarudin says that for MISC to remain in the business it would have to invest very heavily.
“But, our capacity to invest much more in the liner business to make it work is limited. Even if we were to invest, there would a huge execution risk to compete with players that operate with higher economies of scale,” he says.
“In the liner business, you can get into a situation whereby one is able to earn US$50mil of profit in a good year but lose up to US$250mil in a bad year.
“So after having studied it carefully over a series of deliberations at the board level, we decided to exit the business,” he says.
Without the liner operations in the picture, MISC shipping business now revolves around LNG shipping as well as petroleum and chemical tanker operations.
Of those three segments, two are still grappling with volatile rates due to overcapacity, LNG shipping remains the group's star performer due to the long-term contracts of its vessels.
Nasarudin says its LNG ships are always contracted on longer terms.
“Out of the total of 27 ships in our fleet, 22 are contracted to Petroliam Nasional Bhd (Petronas) on long-term charter.
“This remains our core business and a source of secured income for the group.
“Currently, while all other shipping segments are on the downside, LNG rates have managed to hold and this is due to Japan's energy needs after the earthquake and tsunami.
“We foresee the demand to continue for the next two to three years and that rates will continue to be high,” he says.
On current updates, Nasarudin says MISC has recently delivered two floating storage units for the Lekas regasification plant in Malacca on a 20-year contract with Petronas.
“MISC is also looking at participating in the first FLNG (floating liquefied natural gas) unit with Petronas in the near future.
While the company enjoys stability of income in view of its focus on long-term contracts for LNG, it does not profit much from firmer spot rates.
“Nevertheless, on the flip side, when the LNG rates go down, we are not affected because of the long-term nature of our contracts.
“LNG is a bright spot in the shipping market. But if we look at petroleum, container, chemical and bulk shipping all are down, and it is the worst of times for the shipping industry,” he says.
Nasarudin says there is an oversupply of vessels in the petroleum market with little growth in demand and the sluggish market environment across the globe is also hampering the ability of the petroleum market to pick up.
“If we look at the rates, it's really horrible. On average in the second quarter of 2008, you can charter out a very large crude carrier (VLCC) at around US$140,000 per day but in the last quarter of 2011, it is difficult to get even US$20,000 per day,” he says.
Nasarudin says MISC's priority is to grow the portion of the petroleum tanker shipping that will give long-term recurring income stream, similar to that of the LNG shipping business.
“MISC is progressing into new opportunities such as dynamic positioning shuttle tankers and modular capture vessels (MCVs) to further compliment its position as the leading tanker operator in the US Gulf.
“MISC scored a first by securing a 20-year contract for the supply of two MCVs to mitigate oil pollution risks in the US Gulf states from a consortium of US oil majors led by ExxonMobil. This will help to build our source of recurring income within this business that will cushion the effect of a highly volatile market in the petroleum shipping segment,” he says.
Explaining the nature of overcapacity in the marketplace, Nasarudin says that in the past because of the volatility of oil prices and speculation, traders make use of VLCCs to store crude oil as one VLCC has the capacity for two million barrels.
“But today that play is no longer there or has dwindled. A lot of these VLCCs that were used for storage a couple of years back have been released back into the market for actual transportation. So the market has become saturated with vessels.
“And on top of that, scrapping or demolition of vessels has not been encouraging. If 60 newly-build VLCCs enter the market but only 10 is demolished in a year, demand growth may not be able to absorb this additional capacity, and rates are pressured downwards,” he says.
On chemical shipping, Nasarudin says it is also in an oversupply situation but to a lesser extent than the petroleum market.
“In the short term, the slowdown in economic activities particularly in China will impact the chemical trade negatively as it is very sensitive to global economic activities,” he says.
New business tank terminals
In 2009, MISC partnered VTTI, a wholly-owned subsidiary of Vitol and one of the world's largest energy traders, to develop the Tanjung Bin tank terminal project in Johor. Tanjung Bin commenced operations in April 2012 with 841,000 cu m of tank storage capacity.
“This eventually led us to acquire a 50% equity for US$840mil in VTTI in 2010 which transformed MISC into a global player in the tank terminal business with assets located worldwide.
“Today, through VTTI, we are one of the top five tank terminal owners cum operators in the world,” he says.
MISC via VTTI has a total of 7.8 million cu m of tank storage capacity across 12 terminals in 11 countries.
“More importantly, our decision to venture into this business was motivated by the recurring nature of income stream of tank terminals, thereby allowing us to develop another source of secured income besides LNG tanker shipping and the offshore business.
“VTTI is going through a rapid pace of growth and we expect income contribution from our terminal business to be material when key projects are commissioned by 2015 .
“High oil prices also presented new opportunities for terminals across the globe,” says Nasarudin.
Besides this, MISC also owns tank terminals with a total capacity of 647,000 cu m in Tanjung Langsat, Johor via a joint venture with Dialog and Trafigura.
Marine and heavy engineering
MISC's 66.5% subsidiary, Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), has recently acquired the former Sime Darby Engineering's yard and has increased its capacity to 130,000 tonnes. MHB is presently working on the integration of both yards for optimisation.
“The target of the yard optimisation exercise would be to concentrate on bigger and more complex projects. Upon completion, the entire project will add around 80% to the engineering and construction capacity and 25% of marine repair capacity.
“We are now poised to bid for more and bigger projects with higher value.
MHB's order book as at March 31 stands at RM2.4bil.
Commenting on MHB's lower revenue contribution to the group in 2011, Nasarudin says it was mainly because of the nine-month financial year.
“Also, we had this large project in Turkmenistan, the Block 1, whereby revenue for the project was recognised under MHB. “But last year, revenue for the project is recognised through a JV company that we have formed with Technip in Turkmenistan. The project is now completed.”
MISC is also fast establishing its footprint on the offshore industry, offering floating solutions mainly of floating, production, storage and offloading or floating storage and offloading nature.
“Going forward, we have the Shell's Gumusut-Kakap deepwater semi-submersible floating production system (which is under construction) at the MHB yard,” he says.