Double-digit growth for several shipping firms

Some regional players in the shipping industry are still recording double-digit growths and are on track with their expansion and acquisition plans.

This is despite the fact that shipping – the world's major mode of transportation – is one of the worst hit sectors and is up to now struggling to stay afloat during the recessionary wave.

Decisionmakers speaking to Emirates Business said it is not all gloom and doom scenario and there are plenty of windows of opportunities left open by the recession.

Dubai-headquartered Topaz Energy and Marine, for one, is looking at closing an acquisition deal in the first quarter of next year as asset prices continue to be depressed.

"Asset prices have not risen in the past six to eight months," Topaz CEO Fazel A Fazelbhoy, told this newspaper. "We still believe asset prices are at reasonable levels and we should be able to find opportunity either in existing fleets or a set of vessels that we could buy from a company who could be interested in exiting the market."

Its earlier plan to acquire a Singapore-based offshore marine services company may not push through but the subsidiary of Oman-listed Renaissance is still actively looking for acquisition opportunity in South East Asia. The offshore supply company is also on track to have 96 vessels by the end of 2010. "None of our contracts is cancelled. Our new build programme is on track," Fazelbhoy said.

Meanwhile, Dubai-based International Tanker Management has seen a 20 per cent increase in business compared to last year. ITM is a marine asset manager with branches in Germany, Singapore and Houston.

"We see a larger number of companies doing ship management. This year we have seen a 20 per cent increase in business over last year," said Lars Modin, CEO of ITM. "Today is good times for us. However, there is now more burden for us to work more and find cheaper solutions."

He said the growth is buoyed by an increasing number of ship owners turning to professional ship management firms.

"Usually for a $250,000 (Dh918,000) cost of a ship per year we were able to manage the cost at $150,000 only so you had a savings of $100,000 per ship. Now we see more and more ship owners going to this ship management model again," he said.

Another Dubai-based firm – Gulf International Marine Services Co – has seen 10 to 15 per cent growth in revenues year on year.

David Greenwood, General Manager at Gimsco, said the marine supplier is in a good cash position and is looking at doubling the space of its head office as well as increasing its operational team in the warehouse to cope with increased demand.

"With regards to company performance we have seen a year-on-year growth, which will probably be about 10-15 per cent at the current rate. However, November and December are always busy months for us so this could even be slightly higher," he said.

Greenwood gave an optimistic outlook for the region, saying the Middle East has been for centuries a trading hub.

"In recent years it has joined the global market in many arenas but it is still young in many respects and with youth comes enthusiasm," he said. "The general philosophy in the region is very entrepreneurial and in business generally people want to improve and grow."

All shipping companies from car carriers to container operators have been affected by declining volumes and their inability to achieve commercially viable freight rates.

Citing industry estimates, Sheikh Daij bin Salman Al Khalifa, Undersecretary for Port Affairs, Ministry of Finance, said container lines face a global loss of more than $10bn during this year.

"Many leading shipping lines could end 2009 in the red with results dragged down by their container shipping divisions," he said.

Companies in the offshore supply markets, although in the brightest part of the shipping sector, have also been affected, mainly due to oversupply.

Fazelbhoy said about 30-40 per cent of the existing fleet are being built right now. "That's a very large amount of vessels coming out," he said. "The only way that would balance is that vessels that are now reaching 25 years would get scrapped. That would depend on how the oil company reacts to scrapping the vessels and not taking them on hire."

"I believe there is an increasing amount of scrapings as the vessels reach the 25-year-old level and beyond – but there are not enough scraping to offset the oversupply. Oversupply will be a dominant factor at least for two to three years until demand and scrapings come back to new levels," he added.

But Al Khalifa, who is also the Chairman of General Organisation of Sea Ports in Bahrain, said the crisis brings forth many opportunities as well.

"In the current global economic conditions, the costs of latest technology and equipment have decreased and will continue to decrease considerably," he said.

"Rationalising of costs and increasing effectiveness and efficiency of production are intrinsic opportunities for companies to explore in times like this."

And while litigation cases continue to increase as defaults and restructurings mushroom, the fact remains that not all cases are negative, said John Forrester, partner at Holman Fenwick Willan.

"Believe it or not, despite all the doom and gloom, I have also worked on some new loan financings but it is noticeable that these were for strong corporate shipping credits where the finance was provided in large measure by their usual house bankers," he said.

"Each deal took much longer than normal – one had to be substantially restructured to get it off the ground which delayed things by about four months – and the terms were far tighter than less than two years ago when we were documenting similar projects for the same parties," Willan said.

Most of the outsourcing companies that can provide cheaper support to ship owners are also doing quite well, Modin said.

"Today is a good time for clever people who have kept a cool head in the boom," he said. "Now they are in the situation where they can look at price and buy new ships. But those who have not are in big trouble."


Handling the global slowdown

Three basic but vital things are needed to address the current problems – problem identification, solution identification and solution execution – said a senior maritime lawyer.

"I know this sounds trite and that the problem may be glaringly obvious but what I would encourage is a proper review of the legal documentation because it is amazing how often clients don't fully understand the intricacies of a problem or how their own documentation deals with it. One wrong move could be very costly," said John Forrester, partner at Holman Fenwick Willan.

He said identifying a solution is easier said than done but what is necessary is for the parties to think about the alternatives so that they can deal realistically with the problem.

The solution could be as simple as renegotiating a contract or as difficult as foreclosing on a loan, he said.

Executing the solution is where good legal advice should definitely be sought. For example, amending a loan agreement and forgetting to involve the guarantor could release the guarantor from its guarantee. Another tip is to make the continued benefit of concessions conditional upon the counterparty not being in breach of the amended contract.

"A good example of this is where an owner agrees to reduce the charter-hire under a charter," he said. "If the charterer fails to pay at the new reduced rate then the original rate should be reinstated from the date of the original reduction so that the owner has a claim for the full amount that it would originally have been entitled to, not just the unpaid balance of the reduced hire."


Signs of recovery

The maritime sector is pinning its hopes on the global economic recovery, which appears to be improving as per agencies and bankers reports.

After a deep recession, the IMF said the global economic growth has turned positive, driven by wide-ranging, coordinated public intervention that has supported demand and reduced uncertainty and systemic risk in financial markets.

World Economic Outlook says after contracting by about one per cent in 2009, global activity is to expand by three per cent in 2010; advanced economies are projected to expand sluggishly through much of 2010.

Average annual growth in 2010 will be only modestly positive at about 1.25 per cent, following a contraction of 3.5 per cent during 2009.

Real GDP growth is forecast to reach five per cent in 2010 in emerging and developing economies, up from 1.75 per cent in 2009. The rebound is driven by China, India, and other emerging Asian countries.

Economies in Africa and the Middle East are expected to post solid growth of close to four per cent, helped by recovering commodity prices. "There are many pundits who forecast green shoots but the rate of decline has certainly slowed down," Fazelbhoy said.

Al Khalifa said there are already clear signs of economic recovery in many parts of the world and there are encouraging reports from the US and a number of countries indicating that the worst is over and that there are clear trends of recovery. "I am sure that it will not be long before we see the signs of full recovery in the economies around the world," he said.

"I feel that if the Group of 20 leading nations, set to replace the G8 as the hub of global economic co-operation, works in harmony to create a new and better world economic order, and enlists the support of other nations in this regard, it will be a huge positive development for the entire world," he added.

But some are not as positive.

"The outlook depends on whether the US gets back to its feet again or it continues to struggle," Modin said. "India and China were not able to carry the momentum. We expect 2010 to stay as it is now and we'll see a moderate growth of three to four per cent from 2011 to 2012. It also depends on oil prices as when it's higher there is a tendency for more trade."

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