Grindrod won't need to ship up

While almost every business in every sector is feeling the pinch of rising fuel prices and soaring commodities, shipping company Grindrod is one company that, if anything, has only benefited from soaring global trade.

Posting trading updates ahead of its interim results last week, the company has alerted shareholders to the likelihood of an increase of 85% to 95% in earnings per share compared with last year’s figures.

In 2007 the company’s profits sat at more than R1-billion.
Shipping markets are simply “very, very strong”, says Grindrod chief executive Alan Olivier. Grindrod has a fleet of 37 ships, with another eight on order, according to its 2007 annual results.

With 85% of the company’s profits generated through shipping and related business and 20% generated through non-shipping business, the continued boom in commodities and high freight costs should keep things buoyant in the shipping industry.

Grindrod owns shipping companies such as Unicorn and Island View Shipping, which operate internationally. But the company has widely diversified into trading, freight and financial services.

“Whether it’s fuel prices or the impact of high commodity prices, these [different sectors] go hand in hand,” says Olivier. “This does affect everybody to a certain degree, but we need to examine the effects on each sector separately.

“For us it’s had no effect,” he says. “Demand is higher than it was at this time last year; freight rates are higher than they were this time last year.”

But the company’s greatest strength is its shipping business, which carries bulk goods and commodities, including dry bulk such as grain and coal as well as wet goods such as chemicals and liquid fuels. It operates a small container-related business in the Southern African region under Grindrod Intermodal.

In addition to freight demand, Olivier says that Grindrod’s port and terminal business provides services for fast-moving commodities such as coal and iron ore, which do a swift trade.

Grindrod famously expanded into port operations, buying a controlling stake in the Maputo Harbour in Mozambique through a 48% share in Portis Indico, the company with concession rights to the port for the next 15 years.

This has put the company at odds with parastatal Transnet, which has ultimate access to all of South Africa’s extremely profitable ports, making Transnet loath to privatise South Africa’s overburdened ports.

Olivier is outspoken on the issue: “Grindrod is a company with enormous resources and skills. South Africa would benefit from public-private partnerships to increase the efficiencies in our infrastructure.

“Its important to say that [Transnet] are trying ... but working together we would achieve a lot more.”

Grindrod Freight also operates logistics businesses on land, which includes transport of containers and motor vehicles by rail and road. Olivier admits that this portion of the business has cooled off as consumers have begun to feel the pinch.

“The outlook is mixed,” he says, “but the commodity-driven side of the business remains booming. The message at the end of the day is the sectors driven by commodity demand far outweigh the other sectors of the business.”

But, says Olivier, although shipping business remains good there are some “restrictions on the supply because of infrastructure”.

Ports and landside infrastructure have not been able to cope with the demand in commodities trade, he says. Even large mining houses did not wholly anticipate the commodities boom and everything from ports to mine production is “playing catch-up”.

Despite market talk of a downturn in commodities, with gold slipping to record lows late last week, Olivier says that more growth can be expected once the “catch-up” process is completed.

“It takes time to build new capacity,” he says. “This has put a cap on growth. But growth will improve once new production and infrastructure comes on stream.” But working as a double-edged sword for the industry is the lack of new ships to cope with increased global trade.

Olivier says that because commodity demand outweighs ship supply, freight charges have been high—good news for Grindrod, but there is a large order book for new ships.

“A lot of ships have been ordered but a large percentage have been delayed,” he says.

This is partly because of over-commitment by shipyards, production problems as a result of skills shortages, hefty prices for raw material and the global credit crunch, which has made it difficult to finance ship construction. When the new ships do come online, Olivier is not at all perturbed that a sudden glut may force shipping prices down.

As long as commodity demand remains high, he says, as indicated by the strong forecasts released by mining giants such BHP Billiton and AngloAmerican, the company should continue its recent success.

But sourcing skills in shipping, as with every other sector, is becoming increasingly competitive.

“For the size of the market South Africa actually has a good set of skills,” says Olivier. “But as freight and shipping increases, skills in demand increase. All ship owners are in the same position. At the end of the day we have the worldwide market to address that.”

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