Mercator a shipping company? More like an energy major — soon

HK Mittal has spawned about 15 businesses in his lifetime, and most of them were promoted by Mercator Lines, the shipping company he bought a long time back.

Of late, the company has been changing colours, and what’s emerging is an entity that’s into big-time coal mining, some oil & gas exploration and dredging, among others.

As a shipping analyst from a domestic brokerage points out, “Mercator’s now about the play of energy than a play of shipping”.
Mittal understands the synergy well.

“Shipping and coal is a very deadly combination,” he told DNA in an interview.

Mercator owns four mines in Indonesia, two of them fully, and is in the process of buying out the balance 50% stake in the other two.

The company has developed three of these from greenfield status. Work is in progress on the fourth one too. The total reserves in the four mines is pegged at 70 million tonne.

Plans are afoot to acquire two more, taking the total count to six, and potential reserves to over 100 million tonne.

To be sure, Mercator’s mining operations are small currently compared with what the Tatas and the Adanis have.

“The strategy is not to buy a big mine, the focus is on the logistics and infrastructure available. Many people ignore the logistics costs involved when buying a mine,” Mittal said.

Mercator is also believed to have brought a significant stake in an Indonesian logistics firm which gives it access to a small port with a jetty for barges.

The company aims to produce 5 million tonne of coal this year and increase it four times to 20 million tonne after three years.
But that’s nothing compared with what it owns in Mozambique — a mine with recoverable reserves of 1 billion tonne and potential reserves thrice that.

Mittal plans to invest $500-600 million developing the mine, but only after 2-3 years.

In the offshore segment, the company’s long-term investment plan is of $1 billion.

Mercator plans to have 4-5 more floating storage and offloading (FSO) units in the next five- six years.

How does the low-profile Mittal execute all this fast diversifications?

The strategy is simple, he says. “Hire the best person in the trade. If you get the wrong guy, your project will be delayed, costs will mount.”

The teams set up for both coal and offshore explains this well.
A few years ago, when Mercator entered the energy segment, it picked the best mining talent from the Tata Group. For the oil & gas exploration business, he hired a senior official from British Gas. They then set up their teams.

And in situations where he could not find the best person, Mittal plans an exit strategy. “We could not find a very great team for our oil rig segment. So we gave it to GE Shipping on contract,” he said.

He may even exit the business if a lucrative offer comes by.
“This diversification into offshore and coal has given the company long-term revenue visibility, which is very good,” said Kapil Yadav, shipping analyst at Dolat Capital.

The diversification was mainly to reduce the cyclical effect of the shipping industry. “In the next three years, more than 70% of the company’s revenues should be from the non-shipping segment,” said Mittal.

In the coming years, analysts expect Mercator to be more sharply focused as an energy player. “While, there are plans to exit the oil rig business, the company could also look at exiting the tanker segment. With the dry bulk fleet being used for its coal trading segment, it would be a more energy focused player, which looks positive,” the analyst said.

“We do have an expansion plan on the shipping side, but we will be cautious,” he said.

A strategy well-honed by shipping tycoons from Greece and one that the Sheths of Great Eastern Shipping have employed with aplomb — which is to buy ships in a weak market and sell during the good times - is what Mittal is looking at.

He compares this to the stock market. “Frankly, shipping is like managing a share. Everybody wants to sell at a peak and buy at a low. But you will never get the high and never get the low. If you are very smart, you will get near to low and near the highs.” Earlier the tankers, Mercator owned were old (average age 18-20 years) and therefore this strategy did not work.

His fleet now is considerably younger: the average age of tankers is now 8 years, while those of bulk carriers even younger at 6 years. “We’ll do the same thing as our peers, of selling when the market for ships is close to a peak,” he said.

What does the serial entrepreneur do next?

“There is no point in taking up a new project, when there is so much potential in the existing ones,” he said.

But all options remain open. “There is no point in sticking to a project if selling brings in value. Why not?”