Charting a safe course: Domestic fleets work to meet rising demand

The advent of new rules on cabotage, coupled with vibrant GDP growth, a strong rupiah and robust domestic consumer demand, has put Indonesia’s merchant fleet under considerable pressure on to deliver. This has resulted in a surge of boat buying by the country’s shipping companies, with financing for this capital expenditure (capex) a going concern for the sector.

Thus, 2011 saw initial public offerings (IPOs), financing deals, as well as a significant amount of leasing and borrowing as a range of firms sought to refit and expand their fleets. Revenues have also been up, which has largely helped cover capex-induced debts in the short term, and in the longer term should make Indonesian shipping outfits more attractive investment prospects. The result should be an enhanced maritime transport infrastructure, with knock-on benefits for the nation’s economy – and for international investors.

GAME CHANGERS: Coming into force on May 7, 2011, the cabotage rule states that all ships working Indonesian waters must be Indonesian flagged (see analysis). In other words, foreign vessels can make the journey from other countries to an Indonesian port, but will then have to trans-ship any goods bound for other Indonesian ports to Indonesian-flagged vessels.

An exception to this rule, which has been introduced in stages, was made for specialist vessels in the oil and gas sector, but the overall effect has been to radically increase demand for Indonesian-flagged ships and favour domestic shipping companies with the capacity to take on the extra work. Concurrently, a range of economic factors are supporting demand. Continued GDP growth – 6.7% in 2010, and a likely 6.5% in 2011 – has resulted in a steadily growing level of demand for goods, as well as for export capacity. The strengthening of the rupiah for most of 2011 also made imported goods cheaper, giving rise to more demand. This has combined with the spread of economic prosperity beyond Java and demand for inter-island shipping.

DOWNTURN: Another factor affecting on the sector has been the growth of offshore oil and gas exploration and production activity (see energy chapter). This has led to an increase in demand for tankers, supply and service vessels and all manner of specialist and support craft. Many global shipping companies made major capital outlay into new vessels on the back of surging demand and were caught out when global economic downturn of 2008-09 hit and demand fell.

Thus, by 2009-10, there were large numbers of unwanted vessels on the global market, with prices falling. This was a happy coincidence for Indonesian shippers, however, who were in need of new vessels to carry the country’s contrary new economic growth – provided they had not become victims of the crash by placing their orders before the downturn.

MAJOR PLAYERS: Attention thus came to companies such as Buana Listya Tama (BULL), Arpeni Pratama Ocean Line (APOL), Pelayaran Tempuran Emas (TMAS), Humpuss Intermoda Transportasi (HITS) and Trada Maritime (TRAM), which between them make up the majority of the domestic shipping transport fleet. BULL, a subsidiary 100% owned by Berlian Laju Tanker (BLTA), attracted investors’ attention particularly when it launched an IPO in May 2011.

With Danatama Makmur as the underwriter, some 6.65bn shares were offered, netting Rp1.03trn ($123.6m). BLTA remained the majority stakeholder though, with 52.44% of the company. During the year, BULL also acquired six new vessels, bringing its total fleet to 21 vessels, including nine oil tankers, eight gas tankers, two floating production storage and offloading (FPSO) boats and one floating offloading boat, and two chemical tankers. As of November 2011, its capacity therefore stood at 633,869 dead weight tonnes (dwt). TMAS has also been involved in a major fleet rejuvenation programme. At the start of 2011, it put 11 of its 27 vessels up for sale, with those to be sold at least30 years old and expensive to dock. At the same time, the company planned to buy eight new freight container vessels, using the money gained from the sales, plus a bank loan, to cover this, as well as make investments in some new harbour cranes. At the same time, HITS has been highly active in the burgeoning oil and gas sector. In 2011 it embarked on an $80m expansion programme, aiming for four new chemical transport ships, due to arrive in late 2012.

HITS also signed a memorandum of understanding with Global Carriers in September 2011 to operate two of its vessels in a joint venture. TRAM, meanwhile, is also a major player in the oil and gas shipping segment. As of September 2011, it was the largest domestic FPSO provider, with seven vessels, or 26% of the FPSO market. The company also moved into coal mining logistics in 2011, as coal is a major growth sector requiring additional shipping, particularly as most mines are located in Kalimantan and Sumatra, islands that need extra maritime servicing.

PROFIT MARGINS: The majority of Indonesia’s shipping companies have been funding their expansion plans via increased borrowing, and this naturally brings its own risks. Thus, while revenue growth has been healthy for many this year, debt positions have left the companies with generally low net profit. TRAM, for example, increased revenues in 3Q 2011, year-on-year, by 32.16%, while seeing net profit fall 18.23%. BULL, meanwhile, used the bulk of the proceeds from its IPO to pay off loans taken out for capex. Its revenue had doubled over the first nine months of 2011, compared to the same period of 2010, from Rp375.3bn ($45m) to Rp752.95bn ($90.4m), while its comprehensive profits had soared 213.97% from Rp108.47bn ($13m) to Rp340.57bn ($40.9m). Debts are a particularly grave issue for any company which made major capex moves before the 2008 global downturn and thus entered the current sectoral expansion phase owing more.

LOOKING AHEAD: Nonetheless, looking at the longer term, with the fundamentals of the Indonesian economy and shipping sector likely to continue to be strong for some time to come, the current expenditure on new vessels and the refurbishment of old ones should pay off in terms of future revenue and profit growth. Shipping companies also need to continue to invest in new fleets, as the crop of tenders for servicing the oil, coal and gas sector in particular continues to grow. Indeed, for a company such as HITS, the state-owned oil and gas giant, Pertamina, is its largest revenue contributor. BULL was thus looking for bank loans worth around $50m in November 2011 as it sought to secure long-term contracts for FPSOs, gas carriers and floating offshore coal terminals, while other companies were likewise looking to expand their presence in this highly competitive, yet lucrative, market.

Naturally, the fortunes of the global economy will also have an impact on shipping going forward, both in terms of the impact on overall demand and on the pricing of financing for outstanding debts. Yet with a giant domestic market – and Indonesia’s track record of maintaining growth when others sink – there may still be grounds for seeing good sailing on the horizon.