The Great Eastern Shipping Company Limited (500620) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for being on virtual conference call with the management of GE Shipping. We're happy to have with us Mr. G. Shivakumar, Executive Director and Group CFO, with us for interaction. Thank you very much, sir, for taking time out. And we'll start with the initial comments from you. And then I will move to the question-and-answer session. Is that okay?

Yes, absolutely. Thank you.

Over to you.

Thank you. Thanks. Good afternoon, everyone, and welcome to this meeting where -- and thank you for showing interest in Great Eastern Shipping. Before we start, I'll just give some very broad comments on what's happening in our various sectors that we are in. The bad news first is on the tanker business, which constitutes about 60% of our fleet, and product tankers and crude tankers. Both are doing very poorly in the spot market for the last 12 months or so. We had that pre-spike in April, May 2020, when there was a huge surplus of oil. And therefore, ships were pulled into storage, et cetera. After that, though oil demand has recovered, world oil demand is recovered, it has not even come back to the levels of 2019, while the fleet has grown since then. And therefore, there is an oversupply of ships with the result that both crude tankers and product tankers are making very poor earnings. They are above operating expenses around or above operating expenses but still not enough to recover interest and depreciation on the spot market. Most of our ships are on the spot market. In fact, we only have one ship which is on time charter. So we are heavily exposed to the tanker spot markets. Coming to the better news. The LPG market continues to be quite strong. We are not currently exposed to the spot market directly. We have 5 LPG ships, all of which are on time charter, either 1-year or 2-year time charters, all of which are on time charter at profitable numbers. We have one coming off charter in the next couple of months, and there are inquiries for it. We will probably find the business for the ship because the market is pretty decent. Coming to dry bulk, which is causing quite a lot of excitement being recent -- in recent months. The dry bulk market is at its highest level in more than 10 years, which means that ships across the board in the spot market are earning in excess of $30,000. In the case of Capesize, they are earning $50,000 almost. And so that's -- out of our fleet of 14 bulk carriers, 11 ships are exposed to the spot market. We have 1 ship which is coming off charter in the next months. We have 1 ship which is coming off charter around Feb, March. And we have 1 ship which is locked in up to end of next year at lower rates than the current rates. So we have a significant spot exposure there. And we are enjoying that spot exposure, with ships all earning in excess of -- these 11 ships, these are earning in excess of $30,000 a day. So that's on the shipping fleet. In the offshore side, we have 3 rigs currently on contract, 1 rig which came off contract in April, May. She has now received our next 3-year contract. We have received a letter of award for the next 3-year contract. And she will do her work now for -- going on to that contract and go on to the contract within the next 4 weeks or so. So that will be all our rigs back on contract. Of the vessels, we had 5 vessels of contracts -- 6 vessels of contract, of which 4 are now have received their new contracts and will go on contract, 3-year contracts, within the next 4 weeks or so. We are not seeing yet signs of a recovery in offshore asset rates, that is, day rates. We have seen some in the sense that the rig rate is -- that we got recently is higher than the lows of 2017, '18, but still nowhere near where it used to be in 2015. So as the oil market tightens and crude oil prices go up, it is expected that we will -- that this market too will recover over the next couple of years. On the tanker side, the order book continues to be low, anchors and bulk carriers. The order book continues to be low for product tankers and by carriers. The order book is between 5% and 7%, which is a historical low. It's the lowest we have seen in at least 25 years, which gives us hope with regard to future supply. And hopefully, the market should tighten in the future. On crude tankers also, the said order book is quite low. It's about 10%, 11%. It's built up a little bit, but it's still a pretty low order book. We expect quite a bit of scrapping to happen. We've already seen scrapping picking up though not very high numbers, but there will be removals. There are regulations coming in, which may incentivize some removals. But most of all, these very poor rates and high steel -- scrap steel prices should incentivize removals. And on the other side, on the demand side, at some point, we see demand coming back to pre-COVID levels and going beyond that also. And again, this is -- this all hinges on the post COVID recovery . And once that happens, then we will see a very rapid tightening of the tanker demand supply balance. And hopefully then, you should have much stronger tanker rates as well. So that's what we are looking forward to our last disclosed net asset value was in excess of INR 550 a share consolidated. And we are trading at a significant discount to that. So that's my opening comments. I'm very happy to take questions. I'm sure -- we may not have covered a lot of the questions that you have but happy to take any questions.

Sure, sir. And thank you very much for your opening comments. We have a first question from Mr. [ Namit ].

Thank you, sir, for very detailed opening comments and a very candid perspective on the business. Sir, my question is around your thoughts on ways to narrow this discount in the sense that in spite of our [indiscernible] governance, prudence, discipline, capital allocation. And I'm conscious it's a cyclical business. But your thoughts on internationally, if you looked at business models or your thoughts here on -- over the longer term, medium term. What are you planning as a promoter group and management team, if at all, to try and at least start a journey, where the market takes cognizance and this discount gets narrowed? Because it seems like it's not -- given your prudence and discipline and governance, it's just not reflective here in the market. So just your thoughts on that?

Yes. Thanks. Yes. Good question, and it's something that we grapple with all the time because this, as you pointed out, has been going on for quite some time that we have a significant discount to our intrinsic value. We are -- by nature, our business is of capital allocation. We look to do that to the best of our ability. We have capital. We put it to work with -- in buying ships, in buying the ships that can give us the best possible returns. And that's what we look to do. The market and how the market treats that, unfortunately, is not within our control or even within our sphere of influence. So the way we approach it is this. We say we will do the best job we can for our shareholders in terms of investing the shareholders' money well in our business. And hopefully, that will, at some point, reflect in the valuations that are given to the company by the investors. Now what do you do when you don't get that valuation? Okay. There is -- you could do -- there is an option of, say, a buyback, which we have done in the past, which has given, on occasion, good value because you're paying at a significant discount. In today's situation, there is a very significant leakage on account of CapEx. I don't know if you are aware, there is a 20% plus tax, which is applicable on buybacks and which is a very significant leakage. And when we are thinking of it as a capital allocation possibility, we have to take that into account because it is a reality also. So we would -- and when we are looking at options -- and today, we are sitting on cash. We have surplus cash because the business has thrown out surplus cash in the last 18 months or so. And we are looking to deploy that cash. When we are looking to deploy it, we do look at this also as an option. However, it -- because of the leakage that you have, it is not looking like a very attractive option. It is a possibility for us to do it but only at the right price. Just as we will only buy ships at the right price, all other capital allocation will also be done only at the right price under the right time. So that's what we do. In the meantime, we will keep doing our business. We'll do our -- take our business decisions to the best of our ability in the interest of shareholders and hope that at some point, it starts reflecting in the valuations that we received from the market.

[Operator Instructions] Sir, in the meantime, if you can just give some -- your thought because the way we have seen our container market was like for so many are not performing well and there was very low, unsustainable rate for a long time in the container. And then suddenly, we have seen the rates have gone up substantially. Similarly, we have seen one of the longest cycle in history for shipping, both in tanker, crude as well as in offshore. So how do you see that [ count ] down and pan out going ahead in terms of recovery with the kind of underinvestment, what we have seen in offshore or the very unsustainable rates for a very long period historically for other segments?

Yes. I'm a little afraid to talk about that because we've been talking about it for at least 2 to 3 years on the underinvestment and how it has to lead at some point to a recovery. It happened. We saw it happen in dry bulk. We saw it happen in crude tankers in 2013, '14, when you had very poor fleet growth in crude tankers. And suddenly, you had a small event, which resulted in a sudden spike in rates. It did not last long. It lasted for maybe 3 months because it was not a fundamental change in the demand/supply balance. But these are the things that actually drive the earnings. So for instance, we saw just 2 to 3 months of higher earnings on tankers in FY '21, just boosted our profits to a massive extent. That's all you need really in this business. You need those 2, 3 months and then your full year gets taken care of. The -- there has been a huge amount of underinvestment in offshore over the last more than 5 years. And that's -- that at some point will result in -- and this is -- so a couple of things. There's a huge underinvestment in new oil production capacity, which is likely to result at some point in a scarcity of oil. We see the oil majors under big pressure from their shareholders on the ESG front to say that stop investing in new production of oil and gas. We saw Shell having some difficulty. We saw Exxon having some difficulty. I think we saw in Shell's case, the Amsterdam High Court or Supreme Court gave an order against Shell as well, saying that you have to do something about showing what you're going to do about the environment and, therefore, to make less investments in oil capacity. So these are the kind of things which are happening, which potentially could result in a tightening of the oil demand/supply balance. If that happens, then you could have significantly higher oil prices, which will incentivize more oil exploration production. Yes. In the long term, with all the adoption of electric vehicles and other sources, noncarbon-emitting sources of power, you will have a reduction in the requirement for maybe coal or petrol, diesel, et cetera. But that's going to happen over a longer period of time. And in the meantime, capacity supply is getting cut in the shorter term and demand is getting cut over the longer term. And that's where you have maybe a mismatch, where you suddenly have a spike in prices of hydrocarbons, which means sudden demand for more offshore assets and, therefore, a potential for a recovery in the offshore market. Again, this is not something that you can really trade into because the offshore market is not as tradable as the shipping market. In shipping, if you see a cycle turn, you can quickly buy some ships. You can sell some ships based on your view. In offshore, you can't really do that. Our position is that we are just going to hold on to our position. We will have repricing at regular intervals. Next year, we have repricing of 1 rig. Year after that, we have repricing of 2. So we will keep doing that and with a low cash breakeven. And that will help us to then become a cash-producing company that is the offshore business. So yes, the fundamentals are lining up pretty well across the board for our -- for the businesses. Incremental supply of assets into the business, into the market is very low by historical standards. We believe that there will be significant demand growth. And therefore, you will have a fundamental tightening of the demand balances. And therefore, you would have much better rates. In the meantime, what have we done in shipping? We have brought down -- we have done a lot of CapEx in the last 5 years. With the CapEx that we have done in the last 5 years, we invested about $500 million in this period in ships, both new and secondhand but mainly secondhand. As it stands today, we have made an IRR, an unlevered IRR in excess of 15% on all the ships that we have -- on that portfolio of $500 million worth of ships that we bought between 2016 April and now. So we believe that we have -- I don't want to say we have cracked the model. But I think we can do our business in a way such that we are able to provide very decent returns on capital going forward and all the investments that we make. We have to be patient. And therefore, we are prepared to sit on cash rather than be in a hurry to invest at any price. That's what we will do. So we are positioned for a market recovery in the sense that we have a large part of our fleet in the spot market exposed to the spot market. And when the market recovery happens, then we will enjoy those earnings. Hopefully, the recovery will happen soon and we will enjoy those earnings on a large fleet. In the meantime, if you have a drop in asset prices or if the market continues to be poor, we are in a position to buy because our leverage is pretty light. We leveraged up a lot in this period from 2016 to 2020. We went up to 0.5, 0.55 net debt to equity. We are now down to 0.15 net debt to equity. We have a lot of room to buy ships. And we will be there to execute transactions. So we look forward to opportunities on this. We have a large capacity to take advantage of a high market. And we have spare cash to -- if the market goes against.

Got it, sir. Yes. We have a question from Mr. [ Vishal ].

I mean if you see the current portfolio in the coming few years, how do you see the proportion of the spot versus contracts? And the incremental contracts that will happen now, I mean, how different would be the pricing compared to the spot?

Okay. Yes. So typically, we have had -- over the last 5-plus years, we have typically had about -- at least about 70% to 75% of the spot market at all times. The way we measure it -- and when I say 70% to 75%, on a rolling 12-month basis, how many -- how much of our capacity. So you -- each ship has 365 days from -- 12 months from today. Out of these 365, to 45 ships, how many of your days are locked in? Typically, we've been at not more than 20% to 25% locked in, in this period over the last 5 years at any point. If we get very strong pricing, we are okay to go up to 30% to 40% also locked in. We will keep about 50% of our fleet open for 2 reasons. Some of the ships are quite old. So if you've got a 16- or 17-year-old product tanker, for instance, you can't fix it on time charter. It's very difficult to fix on time charter. And therefore, it's better to operate on the spot market. Also, you need to trade out of ships. We are -- we actively play the cycle, and you can't trade out of a ship if it's on a time charter because it's with -- it's contracted with a customer. They will not let you sell the ship. And therefore, we will keep a significant capacity on spot. So today, we probably stand at about 15% of our capacity fixed of our next 12 months' space. We could go up on this if we get the right pricing. For instance, in dry bulk, because the rates are so high, we would be looking for ways to lock in more capacity because the pricing is so high. However, it's still at a significant discount. Let me give you an example. Kamsarmax bulk carrier in the spot market today earns somewhere between $35,000 and $40,000 a day. And when you're talking about spot market, this is per voyage. A voyage is typically between -- you can do -- the longest voyage you can do is to carry grain from East Coast to South America to the Far East. That typically takes between 90 and 110 days. Or you could do a 40-day voyage, which is, say, from Australia to the Middle East. Now so you can fix on a voyage, which is about 35 to 45. If you want to go out and do a 1-year time charter on the ship, on the same ship, exact same ship, you say, "I want a 1-year time charter," the rate that you would get is probably somewhere around $26,000, between $25,000 and $27,000 a day. So you have to take a big discount upfront in order to lock in that charter, which we are not averse to doing because in very strong markets, you have to take that backwardation in, too. But that's the difference between the spot market rates and the time charter rates. That's in a market which is pretty strong, very strong, which is a dry bulk market. Now let's take a market which is a polar opposite, which is the group tanker market. Suezmax crude tanker in the spot market is currently earning $6,000 and $10,000 a day, depending on what voyages are they. Typically, these are between 30- and 60-day voyages. It's $6,000 to $10,000 a day. A 1-year charter on this ship would be $16,000 to $17,000 a day, which is a significant premium to this rate. We have fallen into this track book of saying we'd rather do the $16,000 a day because at $7,000 or $8,000 a day -- it's better than $7,000 or $8,000 a day. But here, it helps to have a historical perspective. The historical perspective is in less than 10% of the last 25 years, you have finished with an average of $16,000 a day less than on this type of ship in the spot market, operating in the spot market. So your downside protection -- the downside that you're protecting is really limited. And you're foregoing a lot of upside because you could easily go to $30,000 a day. So we are not inclined to fix in the tanker market because you're not getting a big downside protection. In any case, you will earn -- the odds of you earning more than that rate are pretty high and you might as well do that. And you can try it out, $8,000 a day voyages because you've got the cash then to write it up. So that's what we are going to do. So in a very weak market, your time charters will be higher than your spot rates. In a very strong market, the time charter rates will be lower than your spot rates. So in dry bulk, if you're fixed on time charter, you will get lower than the spot rates. In tankers, if you are fixed on charter, you will get higher than your spot rates.

This is very helpful...

In these cases, we would be more inclined to do the dry bulk time charter than the tanker time charter in case I was not clear because on a historical basis, it's a high number. And that's what we are looking at. We just look at it on a historical basis, is it a number to lock in?

Sir, can you comment on asset prices, particularly what we are seeing? When is that impact of set prices, particularly on secondhand, is the charter market? But on other, what we have seen particularly older vessel is the steel price impact -- steel price going up? So -- yes. So if you look at it in terms of -- typically when we acquire old vessel and the impact of steel price on the vessels, which may not be -- so do we take that in calculation while acquisition of these states? And to what extent it is impacting our decision, if you can highlight on that.

Yes. Absolutely Yes. So the asset prices, what has happened and why we have not invested so far. Under normal circumstances, if the spot market rates have been doing so badly over the last 12 months, you would have had much weaker asset prices. And we would have thought that asset prices would have come to the levels at which we would like to invest in tankers. However, this time has been a little different for a couple of reasons. One is possibly that people made a lot of money in the previous 12 months because our tanker markets were pretty strong. And therefore, there is no distressed selling. Interest costs are low as well. So you don't have a big cash outflow on a daily basis. But more important as a factor seems to be that -- and we can see this because prices went up between January and June despite the freight markets being so poor. Ship prices went up because steel prices have gone up. And the steel prices have pulled up ship values at both ends. Both ends meaning the most modern ships and the older ships. So let's take, for instance, a 5-year old ship. And let's take, as an example, a Suezmax crude tanker. A Suezmax crude tanker newbuilding, if you ordered in January this year, would have probably cost you somewhere around $55 million, $56 million. The same ship, if you order now, if you went out to order now, would cost you somewhere around $66 million, $67 million, okay? So we are talking of a 20% increase in price. This price increase has happened, one, because of the price of steel increasing but also because shipyards have become more busy building containerships because a lot of container ships have been ordered, building LNG ships because a lot of LNG ships have been ordered, building car carriers. And this is a very strange thing, where you see the consequences of completely unrelated things. More car carriers are being ordered today and -- because there will be more electric vehicles. And why is that? The average electric vehicle is likely to be heavier than the average internal combustion engine. And again, some of you may be more experts on this than me. And this is something that I came across in the last couple of days. And therefore, the capacity, which is built in a car carrier, a ship which carries cars, is different that you need a different configuration and the best capacity. So if a ship could earlier carry 5,000 cars, if it's carrying electric vehicles, that capacity comes down by X percent because the car is simply more heavy. And then that changes the carrying capacity of the ship. And therefore, more of them have to be ordered. When more of those ships are ordered, it takes up the slot which was going to be used for construction of a crude tanker or a bulk carrier or a product tanker. That's where you are having scarcity in shipyard capacity. And therefore, the shipyards are not keen to give it away cheaply. And therefore, they are raising -- they're getting pricing power. So when the newbuilding goes from 55 to 66, then a person who had a 5-year-old ship, who was pricing it at $45 million or $48 million, now says that, "I don't want $48 million. Your newbuilding -- your other option is to buy a newbuilding ship, which is $66 million. If you want my ship, then you have to pay me $55 million." So that price is getting pushed up because the comparable ship has gone up in value. At the very old end, a 20-year-old ship is likely to get scrapped. A Suezmax tanker typically has 25,000, 24,000 tons of steel. Early this year, the price of scrap steel was 400 tons -- $400 per ton, okay? So typically, in one of these ships, you would get $9 million of scrap value. Now what has happened, China is disincentivizing blast furnace production and saying you have to go to electric car furnace, which means the input -- so you're going to use less iron ore and coking coal. And you're going to use more of scrap steel as an input into the steel production. And therefore, the demand for scrap steel has gone up. As a result of that, the price of scrap steel has gone from $400 per ton to $600 per ton. That ship is now worth -- the scrap value of that ship is now $13-plus million, of that tanker which I mentioned. So the person who had a 17-year-old ship, who was thinking of selling it for, say, $13 million, $14 million, now says that, "This ship has 3 years life and then it's worth $13 million. So now I'm going to price it at $18 million and not $14 million." And therefore, the prices have gone up for that also. And that's where across the spectrum, you'll see prices of ships going up because of what has happened to steel prices and to yard capacity. So the downside of that is people like us who are waiting to buy ships and who are being disciplined in the price ideas of buying ships are not able to invest because the price is 10% higher or 15% higher than what we would -- what we are willing to pay. But we are okay with that. We are willing to sit on cash. So the other thing we did -- and this is the other question that comes to our mind. And we are always looking at how can we do this better. So we thought that you have a price. So let's take it as equivalent and explaining it in investment terms. You say, "I will buy stocks only at a PE of 16," okay, just as an example. And you find that by keeping that stringent condition, you are sitting on cash for a lot of the tanks. So you say, "What happens if I buy stocks at a PE of 20 rather than 16?" And we did that equivalent saying that, "If I buy a ship at price -- and my price is I'm only going to buy if the price is less than $30 million. What if I say my price limit is not $30 million but $35 million? I will have to keep cash for less time. So money will be invested in the business for more time and I'll make more earnings." We have back-tested this over the last 10 years. And we found that though you sit on cash for more time by virtue of having a more stringent price limit, the overall return that you make because you are able to invest cheaper, and you will always get opportunities to invest, is to the tune of 4% in the IRR. And we are talking of between 12%, 13% IRR and an 8%, 9% IRR. So that's the difference in having the discipline and not having the discipline. So we are also looking within ourselves to see which model works better to see if we can do better. Basically, our thing is you have to -- we are a portfolio manager of ships. Is there a way we can do this better to earn better returns and to do the capital allocation better between holding cash and holding ships?

Got it, sir. That is really a great insight because I think we get to learn a lot from your discipline as the -- we really acknowledge the way you have ability to sit on cash for very...

[indiscernible].

Patiently. And -- yes. So if you look at now in terms of asset allocation, 2 areas where we are now really, almost things are making it difficult. There was one, what you said is the tax on the buyback. And now the steel pricing is also impacting the buying decision. While on the other hand, government is promoting PLI scheme with exports. And not only they want to increase the export, but if you look at -- and we, as a country, are spending a lot of money on transporting or importing that material to the country. And they want to also capture the pie of the rate market, exciting market as a country. And so there is obviously the shipping subsidy, what they have been -- already announced. But similarly, they also want to capture a market in container side also, which we are not present as a country. So long term as a growth opportunity in terms of capital allocation with the government's plan and structurally with -- it is a completely different market as a container. But do you think of that as a long-term entry point with the capital market if government continue to support as investment opportunity?

The government incentives in import cargoes. As you said, they have announced a scheme recently, and it's a good scheme though it doesn't make a big difference to the way we look at the business. It's another comfort which we get that we are getting a cargo support. On the container side, we look at it again as another sector. We will look at it as another sector like bulk areas or product tankers or crude tankers or LPG. And we will look at it opportunistically. If we get an opportunity to invest at a decent price, we will look at it. And we will not -- again, one of the advantages of our business is that it is not highly dependent on licensing or incentives. And therefore -- we are an international shipping company, which happens to be based in India. Yes, we have some advantages being based in India in terms of the access to the cargoes. So we look at that. But we will look at most of our investments from -- as though we have to run them internationally.

Understood. Yes. So we have a question from Mr. [ Jan ].

Thank you, sir, for giving this detailed explanation of the market. It is really useful. I just have one question on the rig side. I mean you very well explained the situation on the shipping side in the different markets. But this is a market which is -- I would say that oil and gas market, where I think everybody is looking at putting in -- like thinking twice before putting in money. Even the oil and gas producers, while -- and even the newer projects, they will definitely make sure whether they end up making money or not because there are so many factors which are influencing the decision at this point. How you -- as a service provider in this sector, how are you looking at the situation? And reading out -- I'm saying not only from a 1-, 2-year perspective. But let's say, if you were to look at the capital allocation in this business, how do you see next 7, 8 years or in terms of like allocating the capital and also the returns which you are expecting in this business?

Yes. Great. Thanks a lot. Yes. So one is we have found out in the last -- so we started investing in the offshore business or in the subsidiary of ours 15 years ago. One thing that we have learned in this business is it is very different from the shipping business itself in the sense that it goes through its cycles with the big disadvantage that you cannot play the cycle. In shipping, you can actually take a call and say that, "I'm expecting this market to go down or I am expecting this market to go up." And you can do a big investment or a divestment based on that. In offshore, you don't have the liquidity to do any of that. So you are -- you have to go through the second, okay? So in that sense, yes, it's very different from shipping. In terms of capital allocation, we have put in -- and so the last investment we did in the offshore business was a little over 10 years ago. I think in early 2011, we put in the last investment into the offshore business. Ever since, they have been self-sustaining. They have also got not too much leverage. They have about $170 million, $175 million of bank debt. They have about $100 million in cash equivalent. So they are okay. They can manage by them. So we are not expecting to have to put in more cash into that business. So when we think of capital allocation, we are only thinking of capital allocation towards shipping rather than for offshore. So that's one thing which I want to clarify. Coming to your fundamental question on what is this -- what is the outlook for oil. Now let's model what can happen to us. You're absolutely right. Oil companies are being pushed to not invest in the shipping -- in the new capacity, okay? And I mentioned that in my opening remarks as well. So what happens? And why is this? One is there is an ESG concern among their stakeholders. The second is they themselves may have a worry that I invest in capacity. I do drilling today. I do exploration today. The field will actually come into operation 5, 6, 7 years from now. And who knows what will be the demand for oil? Whether there is still demand for oil in that period, okay, whether there will still be demand or I would have invested -- and I will not get a return on that money at all. So that's what is the concern for them. Sorry, one moment, just give me one second, please. Sorry. Yes. So yes, a lot of these oil companies are going to cut back on their investments going forward and especially the super majors who are listed in the West who are Western companies, like Shell, Exxon, Chevron. All of them are going to have -- and BP, of course, are going to have challenges in investing in new capacity because of their regulator, their stakeholders, et cetera. So the supply of oil is likely to plateau or come down, okay, from those super majors. What is going to happen to the demand for oil? Have we already peaked in demand for oil? Or is at peak 1, 2, 5 years away? That is the question then. What is going to lead to that drop in demand for, let's say, gasoline or diesel? Yes, electric vehicles are going to come. Maybe they will be 5% of all new cars sold in this year. Maybe they will be 10% of all new cars sold this year. But you still have 1 billion-plus internal combustion engine vehicles which are out there and which will need to move. Assuming that the economy is running as normal, the demand will still be there. It is possible that the supply of oil drops off quicker than the demand for oil, in which case, you get a significant tightening. Now you get that tightening. You get, say, $100 oil, okay, which doesn't seem too far off. We're already in the high 70s. At $100 oil, you still don't have -- so then your next question would be, "But what's the use of having $100 oil if Shell is not going to invest, BP, Chevron, Exxon are not going to invest?" But that oil has to be produced. Already, your oil inventories, at least in the developed countries are below the levels that they were in 2017, '18. So your spare capacity of stock, crude oil stocks are already below where they were 3 to 4 years ago, okay? So you don't have too much of buffer, which is built up. Of course, China has built up some strategic results, but it's still at a level which it was in 2019. So somebody has to produce this oil if the demand is there for that oil. If the production is not there, then the price can just keep going up till such time you find that classic economics scene, where your supply and demand curves can interstate. You have to find that price point. And the other people, like for instance, ONGC. ONGC has only one purpose in life, okay? The objective of the company is to produce oil and gas for India's requirements. They have to look for and produce oil and gas. They can't say that, "Now I'm not going to produce oil and gas. I'm going to go into electricity generation through wind power," okay? It can be a small part of their business. That activity has to go on. The national oil companies will probably take advantage of this price of oil. And they will increase their efforts to find more oil and gas. And that means more demand for oil and gas assets. It's just one scenario that I'm painting because it appears to me that the supply of oil is -- could possibly drop off faster than the demand for oil. As it is, you have the spare capacity of OpEx is down to probably 3 million barrels a day, which -- they are pushing up the production every month by 400,000 barrels a day. But the spare capacity is not that much, which means that the tightness is not too far away in the demand/supply balance volume.

Yes. That was a fairly elaborative explanation. Just wanted to have another point. Looking at this, I mean, I understand that these are the tight situations. But how is the service providers like the top operators are going to take the call? Maybe you would have decided you would not be investing. But in general, do you have a sense like how the markets are going to behave? Because they are in -- they are also synchronized with the decisions of the investments of oil companies in that.

That's correct. So what is -- the other thing which is happening is that availability -- so if your question is are people now investing in new capacity of rigs and oil services offshore vessels, no, they have not. People are looking for other uses for some vessels that they have or their buildings. They have wind turbine servicing vessel. There is no new capacity coming in, obviously. The market -- offshore market has been very bad for more than 5 years now. No new orders have gone into them for new rigs. Rigs have been scrapped. Over the last 5 years, we have seen more than 100 jackup rigs get removed from the market. So there is very little new capacity which is really getting created. On the flip side, you have a lot of rigs which are -- which have been what we call cold stacked. And you have rigs which are cold stacked for more than 3 years, and that's in our presentation as well. You have 60 rigs which have been cold stacked for more than 3 years, which means that they are unlikely to come back into the market unless the market is exceptionally strong. So today's day rates are probably somewhere in the $30,000 to $50,000 per day range. Unless you can get rates of, say, $100,000 a day, it doesn't make sense to spend the money to take that rig out of cold stack because you had to spend $20 million, $25 million. So the capacity is very, very restricted. And therefore, it won't take much additional demand for drilling services for the pricing to go up significantly. But nobody is investing in the business. See, everybody has lost hope on the business because so many people have just lost money. It's like our stride. We put money into that business. We haven't lost money in the -- but we have come down significantly from where we were. The amount of value that was in that business in 2015 at the peak, it's come down significantly from there because asset values are collected by 50%, 60%, 70% since then. But no new investments are going across the world into the offshore drilling business because there is -- capital availability has also become a problem in a lot of these countries. Lending to buy a rig, a lot of banks will just not do that because the bank also is now answerable. What are you doing about the environment? Are you lending -- a couple of days ago, I saw that some banks are not -- are going to stop lending to coal-fired power plants. These are the kind of things which are happening, which are also restricting capital's availability in the business.

I think in the meantime, sir, if you can highlight about the scrubber and -- basically, highlights are for oil or -- oil investment. And how do you see the space now -- we're in now pending scrubber implementation [indiscernible]?

Yes. So scrubber is now -- yes, that story is sort of over now. Our last scrubber has been installed on our Capesize bulk area in the month of July. So that's now been 2 months since we installed that. So now our scrubber investments are over. We invested in total about $18 million to $20 million in that for installing those scrubbers. I think we'll end up with a fairly disappointing result on those. We had targeted at least 10% to 15% IRR on those. I don't think we will achieve that. We will recover capital certainly. We'll probably make a positive return. But I don't think we are going to make the target return on that investment. So we are jotting that down as one of our failures and moving on. So the scrubber story is sort of over. The transition happened quite seamlessly. We had a disruption in the month of January 2020, when the changeover happened, December, Jan. But after that, COVID took hold. And therefore, there was a lot of fuel available. We thought there will be a scarcity of fuel. But because COVID came in and in any case, you had so much plus oil, that scarcity never took place. So the scrubber thing is over. The next big event to look forward to is in 2023, where you have new regulations kicking in. These are the EEXI regulations, which are, again, environment and emissions. It's to do with the emissions of the ships. Some ships may become difficult to run under those circumstances unless you spend a little bit of money. So there may be a little bit of a challenge for some very inefficient ships unless you spend a little bit of money. And spending money is $100,000, $200,000, doing some minor tweaks on the engines. But it's, again, going to put pressure on some of the older ships. And presumably, they will -- some ships may have to be removed or scrapped. Talking of scrapping, the scrapping potential is pretty high. That's another thing which is giving us some confidence. Over the last 5 years, we have seen less than 10% scrapping of crude tankers, product tankers, bulk carriers, all of them. And therefore, a lot of scrapping potential has built up. We should see much more scrapping happening in the next year or 2, which, again, combined with very low new ships order book, should help to tighten the market.

Yes. That was helpful, sir. Apart from that, is there any regulation? Because what we have seen that, globally, a lot of the emphasis is on decarbonization. So we already have moved to low sulfur oil as well as now you are talking new emission. But what do we heard that there is a transition for LNG or some renewable fuel for shipping? So how do you read that we are [indiscernible] from that, like methanol?

Yes. That's also been a good positive factor. So if you want to order a ship today -- and these are emission norms which are going to come in from 2030, that you have to reduce your emissions by 40%. And there is a real worry that you order a conventional ship today, even at what is called an eco ship, which has a lower consumption, that still you have emissions because you're using fuel oil. Okay, maybe low-sulfur fuel oil, but your carbon emissions are still there. People are saying that you should use LNG. And there are LNG -- LNG fuel technology is already available, too, though it's much more expensive. People are talking of ammonia. People are talking of methanol. And now they've started talking of hydrogen issue, okay? So ammonia obviously is a zero-carbon fuel. So that's -- those are the options people are talking of. They are not practical today because the technology has not yet developed for building those. Now if you have to order a ship today, it's going to deliver in 2023 or 2024. It has to run for 20 years after that, so you have to run up to 2044. And you have to think of that ship as running up to 2044. If there is a regulation -- regulatory cliff coming in 2030, then how do you think of it when you are assessing the risk of this ship having regulatory obsolescence? Because then suddenly, they say that you need to have all LNG ships and there is a technology step change which happens in 2023. Then you start having all LNG-powered ships or methanol- or ammonia-powered ships. So that's also keeping ship owners from ordering new ships. And that's also keeping the order book under control. So there is a lot of -- there's environmental regulation, which is coming, which is just leading to a lot of uncertainty. It's positive -- see, unless you have to go out and raise capital, it's a positive because it just means that there is less capital enthusiastic about investing in the business in new assets. And therefore, assets are likely to become cheaper, which enables us to invest. At the same time, the trade flows remain the same. That is not changing based on this decarbonization because your -- you have a car which runs on petrol or diesel. You have to continue to run that car. And therefore, the trade flows remain the same. And therefore, demand for ships remains the same. But the fleet does not grow. And then you have a tightening of the market. So that's what we are hoping for it. With only the environmental regulations, though -- or somebody who has to comply with them. As a shipping company, we have to comply with them. But all of it is just disrupting life as usual, which just causes inefficiencies in the whole system. And when the system becomes more inefficient, the -- the market becomes tighter.

Understood, sir. I think there are no more questions. So we'll close it. And thank you very much for taking time out and interacting with the stakeholders and investors. And it is always pleasure listening to you and understanding your views. Thank you very much, sir.

Thank you.

Thanks a lot, Mr. Shivakumar. We really appreciate you taking the time. Thank you, sir.

Thank you.

Thank you all for being on the conference.