C V Subba Rao
Apocryphal though it may sound, it was believed that Albert Einstein was not easily recognised by many people. Taking advantage of the situation and noticing that his boss was getting tired of explaining the Theory of Relativity to various audiences, his chauffeur, who had attended all the lectures, offered to switch places with Einstein, with the legend himself impersonating the chauffeur. After one lecture, a member in the distinguished gathering raised a doubt. Obviously not thorough with the subject, the quick witted chauffeur said, “Oh! That is very simple, even my chauffeur sitting amongst you will be able to respond to that.” Einstein then stood up and cleared the doubt for the embarrassed member. Obviously, the chauffeur hedged his bets well and got his option right!
Options is a familiar issue. The shipping business also works on the lines of keeping options open at various points of time. Most finance managers agree that appraisal of a project on the basis of the popular NPV, IRR method only, results in a flat yes or a no. That would virtually kill the options, as no time has been allowed for fresh information to be keyed in. Information flows in all directions; to capture it into an investment appraisal often sums up the strategic intent of the organisation. Sanmar’s foray into the shipping venture itself was an options approach to investment appraisal. Often in the shipping business, we venture into what would be a call option.
Project appraisal criteria of NPV, IRR, payback, etc., are employed, while simultaneously expending on premium, that is, the licence fees for the bid, the money spent in the exploratory work etc. At times decisions are often delayed to allow for fresh information to run in, which is then fed into the appraisal process for decision making.
The merchant trade is very diverse. From a self-styled Greek seafarer turned shipowner piloting his own vessel to the modern day oil company giants, more renowned for being called the Oil Majors, such as Exxon-Mobil, Shell, BP, etc., the sea has seen them all. An Oil Major sets up vertical integration, being the owner of the oil wells and the ships as well. Sanmar Shipping believes in a value chain that integrates business with technology. Technological skills, in navigation and engineering of the shore based seafarers are utilised in the cost-effective operations of the vessels. Business goals in keeping the vessels gainfully employed is achieved presently by operating in pool agreements with reputed charterers. The company gains tremendously on such trades, as the vessels are benchmarked constantly with other owners, and have till date been virtually rated the best fleet in whichever pool they figured in.
Secondly, the option of trading them in the pool insulates the vessels against market lows. Essentially, a “stable network” is created by a
combination of in-house management and strategic outsourcing, which in turn results in reducing overheads. Just as in the case of airlines where the Key Success Factor (KSF) cuffs the spread of variable costs vis-a-vis the passenger carrying capacity of the aircraft, so is the case with a Shipping Business. While at times spot trades offer a surge in revenues, these are more often than not buffeted by low income zones when the ship owner is left with no option but to scamper for the limited cargoes that are available for him to position his vessel back in lucrative zones.
In these times, with all countries expressing allegiance to improving the safety of all things alive and kicking, humans and fish alike, quality remains the buzz word. The division is an active signatory to the Drug & Alcohol (D & A) and Ship Emergency Response Service (SERS) procedures of the Lloyd’s Register (LR). While the former seeks compliance of the ships’ crew towards discipline, the latter creates procedures for LR to advice the ship, with Sanmar in conference, for a contingency, such as a grounding, collision, etc. The annual premium that the company pays to LR on this account is nominal, and brings in raised brand value and the goodwill in the world market.
The author is Assistant Vice President-Technical, Sanmar Shipping Limited.