Stormy weather for shipping industry

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
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The Indian economy is beginning to feel the freeze as the worst financial storm since the 1930s begins to thrash markets in the East. The financial crisis has begun to grip even the strongest Asian economies affecting all corporate sectors.

Those primarily dependent on the shipping industry, believing in their self-sufficiency, least expected to be victimized by the situation.

Credit crunch hits shipping

Container shipping, which enables the ferry of finished goods from electronics and toys to various perishable items, has taken a battering, especially on key routes from Asia to consumers in the West.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

The present financial crisis has tightened credit facilities, restricting large fleet growth and damaging the expansion plans of ship owners who have been unable to secure sufficient financing.

Ships, which are the main backbone of international trade and transport, have been severely affected by the drop in ship valuations and are beginning to show real rather than just theoretical declines. Bankers who are themselves financially stretched now are closely considering the issue of loan-to-valuation.

With ship values having dropped by a massive 70%, bankers face the predicament of enforcing legal rights on the assets they have financed, however, they are reluctant to become ship owners by possessing mortgaged vessels.

Banks may not enforce the loan-to-valuation clause, but will use this covenant to refuse to carry further loans which they may have pledged, or prevent the ship owner from drawing down credit lines any further.

Port activity interrupted

Labourers are now also sitting idle at ports and loading agencies and are stuck with heavy-duty equipment, like dumpers, which they had procured on a hire-purchase basis. On the other hand, importers are refusing to claim goods, which have suddenly become unwanted, leaving exporters to suffer abrupt losses and the sudden cancellation of orders.

To make matters worse, deals are being renegotiated when shipments are mid-sea. On an average, there are roughly a few hundred abandoned containers, which lie uncleared on all ports put together.

This figure has soared, resulting in ports resembling parking lots with thousands of containers, causing great inconvenience to the port’s caretakers.

Abandoned containers

Under the regulations pertaining to abandoned containers, the Tariff Authority of India issued an order wherein a time limit of two months has been prescribed for the levy of storage charges on abandoned full container loads and shipper-owned containers.

The ports are empowered to collect the demurrage if the cargo continues to lay at the premises beyond the stipulated period.

In line with the order, auctions are permitted only for cargo. Containers belong to shipping lines and must be returned to them.

The order directs the port trust to take timely action to sell the goods immediately after the period stipulated, to enable the lines to get back their containers, which have been held up simply due to abandonment by consignees and importers.

The port trust can exercise its power to proceed expeditiously to clear congestion at the ports and to minimize the losses suffered by shipping lines.

But this does not entitle a shipping line to issue letter of abandonment without waiting for the consignee to respond. The consignee must first issue a letter of abandonment.

A shipping line technically remains the owner of the cargo until a delivery order is issued by it in favour of the consignee. In this case, the line also can issue an abandonment letter provided it takes custody of the container and removes it from the port premises.

In such a case, the line will have to pay all the port charges accrued on the container and the containerized cargo from the date of landing to the date of clearance from the port premises.

Serious delays

With the existing credit crunch on the financing of new ships and ship liners finding it difficult to cope with the economic meltdown, delays in resuming the regular transport voyages of the liners due to port congestion would mean a further loss of freight charges.

This situation could also lead to multiple litigations such as those between ports and shipping lines, consignors and consignees, and shipping lines and consignors or consignees, which are largely dependent on individual contracts between the respective parties.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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