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29 March 2024

Down from the crest but optimism remains

Vikas Mohammed Khan (SUPPLIED)

Published
By Ashaba K Abdul Basti

The year started on a high note, but as it draws to a close it is being viewed as the worst year in the recent history, giving players remote hopes of a quick recovery.

The beginning of 2008 was characterised by an influx of new players into the industry as earnings were projected to reach their highest levels ever.

A frenzy of orders for bulk carrier, with a focus on Very Large Ore Carriers (VLOCs), Capesize and Supramax tonnage was shored up by the easily accessible credit facilities, as the positive performance of the industry gave lenders confidence.

While new players sprinted to cash in on the earnings from increased freight and charter rates for dry bulk carriers, tankers and container vessels, existing and established players grew uncomfortable at this trend, with growing fears that an oversupply of vessels could lead to the collapse of the market.

New orders of more than 500 dry bulk carriers, container vessels and tankers of various sizes worth more $20 billion (Dh73.4bn) were made from the Middle East, while globally new orders at the beginning of the year stood at a total of 8,000 vessels of all types and sizes.

United Arab Shipping Company (UASC), a leading container vessel owner in the region, placed a record order for nine A13-type ships, each with a capacity of 13,100 twenty-foot equivalent units (TEUs) worth Dh5.5bn to support its anticipated growth of 300 per cent by 2012. The contract, awarded to Samsung Heavy Industries, was the largest of its kind in the region.

Prices for newbuilds reached unprecedented levels due to growing demand, high steel prices and growing shortage of yardspace with orderbooks at most shipyards opening and closing almost immediately.

The price of a new Capesize reached $139m, while that of a Very Large Crude Carrier (VLCC) touched its record high of $170m as orders for supertankers escalated, driven by the high demand for oil in the Far East and the high prices of oil in the first half of the year.

But the growing positive mood within the industry quickly flipped to a sad one at the end of the second quarter of 2008 as the growing global financial crisis trimmed demand levels in global markets and led to the tightening of credit facilities.

FREE FALL 

Charter rates within the dry bulk sector took a free fall from their highs of $180,000 per day in July for Capesize vessels to less than $40,000 in November, leaving most players unable to break even and most of the new ones leaving the scene.

The dry bulk index, BDI, the barometer of shipping cost for commodities, fell from 11,793 points on May 20 to only 663 points on December 5, a 94.4 per cent decrease. Container shipping rates have taken a downward trend on major routes too.

"Some of us in this industry had predicted this situation, but no one ever expected that external factors such as the global financial crisis would have a big impact on the shipping industry," says Ahmad Essa Harib Al Falahi, CEO of Gulf Energy Maritime (GEM).

Analysts had predicted that the shipping industry throughout all its sectors would grow by an average of 20 per cent in 2008 globally and over 35 per cent in the region, but all projections have been revised downwards by more than a half, with a further slowdown in growth expected in 2009.

"From the high hopes that ship owners had at the beginning of the year, they are now struggling to see how they can survive the financial turmoil and get back to their feet as soon as possible," says Vikas Mohammed Khan, CEO of Emirates Shipping Line. "To me, this is a temporary setback, which will be overcome in the coming months as markets begin to pick up. People have to eat and therefore goods have to be moved."

According to Jamal Majid bin Thaniah, Executive Vice-President for DP World and Group CEO, Ports and Free Zone World, the effects of the financial crisis on the Middle East shipping industry have been blown out of proportion.

"The regional shipping industry is operating normally and is anticipating growth as usual. We have not seen any slowdown of activity at our regional ports, where we expect growth to be in double digits this year," he said.

EXPANSION

Regional ports have struggled with the problem of congestion due to increased cargo volumes and most of them have embarked on expansion programmes with a total investment of more than $20bn in the next three years.

Regional industry players believe their core markets of South Asia, Africa and the Far East will for sometime be insulated from the financial crisis and hope for positive but slowed growth next year.

However, an official at a leading regional container shipping company painted a gloomy picture for local container lines operating on international routes and told Emirates Business that the market outlook for 2009 was dim, adding that activity would most likely return to normal in 2010.

While the financial crisis has severely hit the shipping industry, some analysts think it was necessary if stability was to return to the industry.

"Although no one anticipated this situation, I think it was necessary to help weed out all the shipping mafia, people who simply entered the industry to make quick money. We see them going out one by one and this will help to bring back credibility to the industry," says Rohan Shetty, Group Managing Director, Kellett and Singleton Group.

The tanker sector has remained firm during the financial crisis, although freight rates on spot markets have been falling as a result of slowed demand for oil, low oil prices and production cuts by Opec.

Tanker owners in the region believe that the current crisis will present them with opportunities to order for new vessels at much lower prices than those quoted at the beginning of 2008.

"We have a strategy to expand our fleet to support our long term plans. From this crisis we see opportunities from low prices of newbuilds and struggling companies seeking big players to acquire them at affordable rates," says Abdullah Al Shuraim, Chairman of Gulf Navigation Holding.

"We are very optimistic about the future and the oil production cuts by Opec will have negligible impact on the tanker sector because the demand for oil worldwide will never stop and the oil has to be transported."

He believes that tanker owners, especially those whose vessels operate on time charter contracts would continue to make profits even if the financial crisis continues in 2009.

FLEET SIZE

Despite the current financial turmoil, the National Shipping Company of Saudi Arabia (NSCSA) has said that it would go ahead with a plan to double it fleet size by 2011.

Although no order cancellations have been registered for tankers, analysts believe that demand for newbuilds will slowdown in 2009 as owners adopt a "wait and see" approach to critically assess the impact of the financial crisis.

Fears of an oversupply of vessels by 2010 in all the shipping sectors have been overcome due to the high wave of order cancellations especially within the dry bulk and container sectors that have resulted from lack of financing from banks.

Mushrooming greenfield yards, especially in China, have been closing down and some of them are shifting their focus from building new vessels to repair and conversion activities.

Local shipbuilding firms hope to reap big from the current crisis as demand for conversions is growing, with most non-performing bulk carriers and container vessels being considered for conversion into Floating Production Supply and Offloading (FPSO) vessels and (FSOs). Local shipyards are hoping to grow by over 25 per cent this year and the same is expected for next year, however, most of their growth potential is hampered by a severe shortage of yard space to allow expansion. "We build vessels for a financially healthy sector that has not been highly affected by the current financial crisis. Demand for our services is high and we hope to keep growing throughout next year," says Geoff Taylor, CEO of Drydocks World.

MARITIME OFFICERS 

He believes that prices for new builds at most shipyards is expected to drop next year due to the falling prices of raw materials and equipment. The price of steel, an essential part in the cost of new vessels has been falling and so is the price of oil.

Fears of a shortage in maritime officers that were sparked off by an anticipated oversupply of vessels due to the huge orders made at the beginning of 2008 have started to wane as industry players are convinced that a majority of the orders might not actually materialise.

Struggling shipping companies continue to lay off some of their experienced staff while more officers from collapsing companies have become redundant, making them available to more established players.

While industry players remain optimistic about 2009, fears of sustaining themselves remain as banks may not be easily attracted to the industry especially given its volatile performance in 2008. "Traditionally, banks have always been reluctant to lend to the shipping industry, but the recent positive performance of the industry had given them a level of confidence to finance the industry. However, this year's developments might easily turned them off completely," says Essam Bella, Regional Managing Director for Clarkson, a London based shipbroking firm.

Some international banks that had already committed themselves to financing some orders from the region are asking their clients to review the orders by trimming the size of fleet on order, given their gloomy outlook of the market and the effects of the financial crisis on their equity. But according to Jonathan Hill, Managing director of shipping funds at Tufton Oceanic in Dubai, banks will not stop lending to ship owners but strict conditions would be adopted.

"The money is available; it is up to the client to convince the bank. Banks will not stop lending to their established and well regarded clients, however strict conditions could be applied for new comers," says Hill.

"However, while shipping firms might secure financing, it would not help much if their clients fail to secure funds to finance movement of their cargo, so the challenges still remain and shipping firms need to work with high credit worthy clients."

DANGER OF PIRACY 

While the industry might overcome its current financial hurdles, the danger of piracy on major sea routes has been considered the industry's challenge for the century, whose solution has eluded many stakeholders.

Fears of piracy reached high levels this year when Somali pirates off the coast of Kenya hijacked a Saudi owned supertanker, Sirius Star, carrying two million barrels of oil crude and 25 crew members.

The problem has led to an increase in both hull and cargo insurance premiums for vessels sailing through the Gulf of Aden. Some ship owners, such as Maersk Line, have diverted their ships to the Cape of Good, which is safer but costly due to the long distance.

Joint military operations by countries have been mooted, with shipping firms such as the Iranian Shipping company considering using private armed personnel to guard all their ships going through the Gulf of Aden.

Recent weeks have shown signs of revival in the dry bulk sector with demand for iron ore in China improving.

However, analysts believe that it will be several months before the sector returns to the previous levels.