Posted on July 8, 2024
MUMBAI: India missed the liquefied natural gas (LNG) shipbuilding bus, but it should not miss the green shipbuilding bus, T K Ramachandran, Secretary, Ministry of Ports, Shipping and Waterways (MoPSW), is said to have exhorted more than a hundred senior officials and executives gathered at a workshop on ‘Revitalizing Indian Ship Building Industry’ in New Delhi on 4 July.
India’s net potential commercial shipbuilding market up to 2047 is estimated worth $62 billion, according to a document prepared by consultant KPMG.
The estimated value addition to the ancillary industry comprising Tier 1, 2 and 3 suppliers up to 2047 is pegged at $37 billion with potential to create some 12 million jobs, per KPMG.
Globally, more than 50,000 ships are to be built over the next 30 years as the shipping industry pivots towards green technology to cut emissions.
Ramachandran’s entreaty sums up an opportunity that went abegging exactly a decade ago for India to enter the big league in building sophisticated and technologically advanced LNG carriers.
And the miss proved to be costly.
It’s literally raining LNG tanker orders worth billions of dollars at Chinese and South Korean yards with Qatar Energy – the world’s largest liquefied natural gas company – facilitating ship owners to build such ships under a massive shipbuilding program on the back of assured time charter party agreements for as much as 15 years to haul the super chilled fuel to customers as it ramps up production to 142 million tonnes (mt) from 77 mt by 2030.
In 2014, when Prime Minister Narendra Modi stormed to power, state-run natural gas firm GAIL (India) Ltd floated a tender to hire nine LNG carriers from fleet owners to ship gas from the US beginning December 2017. Out of the nine LNG ships, three were to be built at local yards as part of the Make in India initiative of Modi.
Like in the case of Qatar Energy, GAIL decided then that it would not order the nine ships directly at shipyards—both overseas and Indian – but planned to time charter or hire the carriers for 18 years from fleet owners who will have to construct three of the nine ships in India. The plan ran into a big hurdle: none of the prospective local yards had ever built an LNG carrier.
Following extensive discussions, and with some deft diplomatic manoeuvring, state-run Cochin Shipyard Ltd and Larsen and Toubro Shipbuilding Ltd tied-up with Samsung Heavy Industries Co. Ltd and HD Hyundai Heavy Industries Co. Ltd, respectively, while the then Reliance Naval and Engineering Ltd signed a technical collaboration with Daewoo Shipbuilding and Marine Engineering Co. Ltd (now renamed Hanwha Ocean) for building the LNG carriers.
As local yards were entering a new segment of shipbuilding, they urged the government to extend financial help (the shipbuilding financial assistance scheme in vogue since 2016 was not finalised then) to get started and make it a success.
But the NITI Aayog under Aravind Panagariya was not receptive to the idea and the plan collapsed. GAIL then scrapped the tender and decided to hire LNG ships from the market to transport the cargo, dashing India’s hopes to get a toe hold in the lucrative LNG shipbuilding market.
“There is always a first time for anything. That’s how first South Korea and then China became shipbuilding giants backed by their governments. The GAIL episode demonstrated a lack of long-term vision by the government,” said a shipbuilding executive who was closely involved in the plan at the time.
The anguish over the below par performance of local yards in commercial shipbuilding was evident in a statement issued by the Press Information Bureau after the 4 July workshop.
“In the past, the Ministry of Ports, Shipping and waterways (MoPSW) has endeavoured to aid the growth of shipbuilding and ship repair industry through schemes such as the Shipbuilding Financial Assistant policy, Right of First Refusal (ROFR) policy, according infrastructure status to shipyards, etc. Despite these measures, commercial shipbuilding in India, has still not reached a position of strength compared to global shipbuilding majors, accounting for less than 1% of the global shipbuilding market, largely on account of lack of demand. Consequently, MoPSW is examining the policy measures to strengthen demand creation domestically given our requirement to strengthen our domestic fleets,” the PIB statement said.
The financial assistance to shipbuilders, both state-owned and private, is valid for a ten-year period beginning 1 April 2016, scaling down the quantum by three percentage points every three years, starting with 20 percent during the first three years, 17 percent for the next three years, 14 percent for the subsequent three years and 11 percent in the tenth year.
Revitalizing the Indian ship building industry has now gained a sense of urgency as the Maritime India Vision 2030 aims to move India’s shipbuilding and ship repair ranking to the top 10 globally, while the Maritime Amrit Kaal Vision 2047 sets an even more ambitious goal of reaching the top 5.
The annual output of the Indian shipyards needs to be increased from 0.072 million GT to 0.33 million GT by 2030 (to meet MIV 2030 targets), says KPMG.
The Maritime Amrit Kaal Vision 2047 has also set a target of handling 1,300 mt of coastal cargo carriage and a greater proportion of Indian overseas cargo to be carried out on Indian owned/ Indian built ships.
Indian owned/flagged ships presently account for only about 5% of the total overseas cargo carrying requirements of the country. By 2047, India must seek to transport at least 20 per cent through ships that are domestically owned and built, KPMG said.
In order to achieve 5% of overseas cargo by Indian built ships by 2047, the output of the Indian shipyards needs to gradually increase to 11.31 million GT per annum. Reaching this output is likely to put India in the top 5 shipbuilding nations, per the Amrit Kaal Vision 2047 target.
To achieve the minimum of 5% of carriage of Indian overseas cargo in addition to growth in domestic cargo capacity by 2047, the additional fleet capacity required, and the consequent domestic shipbuilding demand is estimated at 59.74 million GT over the next 23 years (including replacement of aging ships in the current fleet).
KPMG said that lack of demand and high cost of capital are among the most significant challenges faced by the industry.
It cited low demand for domestically constructed ships from the commercial shipping industry (domestic and global), lack of access to low-cost capital in Indian shipbuilding sector, both for the buyers as well as the shipbuilders, outdated production methodology and lack of adequately skilled manpower for modern shipbuilding, the capacity available in the shipyards for construction of commercial vessels is limited as the industry skewed towards naval vessels, lack of standardised design and economies of scale leading to higher cost and limited global competitiveness.
Ancillary industry is also not adequately developed to indigenise shipboard equipment and material.
It identified three areas as a “closed loop” which is constraining the growth of Indian shipbuilding. These are global competitiveness in terms of infrastructure, capability, global competitiveness in terms of build periods, production efficiency, quality and cost; investments, inflow of technology / know-how, upgradation/expansion, infrastructure and capabilities (all through foreign collaboration if required) and attractive value proposition in terms of significant market demand.
During the workshop, local shipbuilders told MoPSW that “demand aggregation has to come from ship owners and cargo owners”.
“Indian ships are getting old and need to be replaced. If the fleet owners tell us now, then only shipyards can gear up in terms of infrastructure, capacity and other things. Who is going to do that? Who is going to buy/order new ships? They are always buying second hand ships from overseas. Even for repairs, they are relying on overseas yards,” said an executive with a private shipyard.
“That is why we said a clear mandate has to be given like the Jones Act in the United States of America, whereby anyone undertaking coastal shipping (carrying cargo on local routes) must use ships made in the U.S., that are owned by Americans and employ U.S. nationals. We can talk of shipbuilding over and over again but unless and until a mandate is passed, nothing is going to happen,” he stated.
“The first and foremost point is to make the local shipbuilding industry globally competitive by addressing the financial cost implications, as finance cost for shipbuilding in India is one of the highest in the world,” he pointed out.
The local shipbuilding industry has also called for extending the ship building financial assistance policy beyond 2026 for another 10-15 years at a fixed rate of 20-25 percent and 30-35 percent for hybrid/green vessels.
Further, they want the scope of the state aid to be suitably liberalized to benefit the micro, small and medium enterprises (MSMEs) as the resources available to them limit their development.
With top shipyards in China, South Korea and Japan fully booked till at least 2028, some spill over orders from global fleet owners, particularly for green, emission free ships, have started flowing to India.
This is a good opportunity for India to grab more orders and the yards have to gear up if they want to do it.
However, capacity constraints are a real challenge for the yards.
“In the absence of a clear visibility on pipeline of orders for the next ten years or till 2030, who will build infrastructure to create capacity. Local fleet owners prefer to shop overseas for buying or ordering ships. But top tier yards overseas are not accepting orders. Hence, local yards have to develop the infrastructure to take up orders. While state-run yards have the backing of the government to develop infrastructure, private yards have to fend for themselves. They are not even getting an inch of land from the state governments. Dredging is not being done where yards are located and that is the responsibility of the state governments. That’s why private yards are not able to come up. There is no connect between the Centre and the state governments on various issues facing the shipbuilding sector,” lamented a second executive at a private shipbuilding company.
It is vital, he said, to consolidate the requirement for ships and generate a demand aggregation for 5-10 years to help the shipyards invest in capacity expansion and get return on investments.
India’s ability to take up more commercial orders due to lack of slots in top global yards have also been crimped by the preference shown by state-run yards – both under the MoPSW and the Ministry of Defence – to take up government-funded naval contracts. This is partly because the listed yards are under constant pressure from the stock market to perform.
“We have grown up in defence shipbuilding. All yards want to do defence ships and they are very comfortable with that. Because nobody is going to question them over the price and delay in construction. But, if you have to compete and deliver in the commercial shipbuilding market, then cost, time and quality become key factors. Yards will face heavy penalties for non-compliance with contractual terms, which is not the case so much in defence contracts,” the private shipbuilding executive said.
This view was echoed by Mark Darley, Chief Operations Officer at Lloyd’s Register, one of the world’s top providers of classification and compliance services to the marine and offshore industries.
“I would focus on the financial risks and then on the quality and delivery risks. How do we deliver ships on time, on budget to a quality that is commensurate with other yards. And with the current availability in other east Asian yards, there are owners looking for opportunities elsewhere and there are shipyards looking for capacity elsewhere to make the most of the shipbuilding boom,” Darley told ET Infra during a visit to Mumbai in February this year.
Shipbuilding is heavily subsidised in China and South Korea, but people don’t say it, a third shipbuilding industry executive stated.
“Today, India has the capability to make big ships, we are not inefficient as we were. But the problem is that the cost price of the ship and the selling price of the ship is so close that whatever cost price you give, there is no cost price to the Chinese, they will kill you,” he quipped.
“The shipbuilding financial assistance given by the government is only to cover the duties and taxes. It is not a level playing field with the Chinese because the Chinese are giving discounts at cost price, at steel price, at different levels. So, it’s a myth that we get assistance from the government. That we have to really understand,” he noted.
Ship building is a strategic necessity. Taking the order is one thing, how you can sustain yourself is another, he said.
According to this executive, the reason why shipyard slots are not available globally is because from 2011, there has been a huge consolidation in the shipbuilding industry in Japan, South Korea and China “to keep the price of ships to the absolute minimum because shipyards were not making money”. They shuttered a lot of inefficient yards.
Today, some 75 percent of the ships that are being built globally, are controlled by nine shipyard clusters, three each in Japan, South Korea and China.
“And what we realised is that if India has to enter into this, we have to do it in two ways; one is to enter into a space which is strategic for us, in the sizes which are strategic, and this is how the Indian shipbuilding industry is doing it. When the global demand starts to move up, you find that there are just about 46 yards that are building 65-70 percent of the global ships. When the spillover comes, the yards which are perennially occupied are what we call the first-class yards. There are about 70 first class yards. So, when the spillover occurs, it comes to the second-class yards that is India,” the industry executive said.
“When there is a crest in shipbuilding, the second-tier yards open up and start building the orders which lasts for 1-2 years. But there are no continuous orders coming because as soon as the second-tier yards start to fill up, the first-tier yards open up and start to take orders. So, we are finding out how we can sustain ourselves and that’s where we need to understand that first is to enter into a market where the large yards cannot compete with, which means, go in for smaller size vessels because most of the larger yards have huge steel volumes.
So, you can enter into yards which do not have such huge steel volumes. Second is to get into ships which require a certain amount of customisation which means getting into disruptive technologies which are coming up like hybrids, dual cargo carrying ships, and so on where competencies have not precipitated in the large yards.
But the third most important part is that when you get the opportunity to enter, we must become a first-class yard and that means the three areas of competency which is clearly our strength, we need to do the same thing by training which is very important for shipyards to create competencies. First, is managing the supply chain, second is understanding how to assemble it and the third is training in the assembly and skill sets which the government must introduce if you want to sustain it,” he said.
Ship repair is relatively easier because the key points of ship repair are location and speed. The ships need to come in and get out at the right time and third is competency. When the ship sails out, you shouldn’t give more problems than when it came with and the fourth is pricing, he added.
