Oversupply is key challenge faced by shipping lines

The year 2009 is slipping into the past leaving the global shipping business into troubled waters. Falling freight and charter rates, fallen dry bulk, liquid bulk and containerised shipment orders from shippers, rising bunker charges, banks unwillingness to finance, and above all overcapacity because of the demand-supply mismatch kept the anchor low in most of the major shipping routes around the world.

Although the rates are hardening in recent months, it is too little for the crisis-ridden global shipping sector.

Michelle Byrne, Head of Shipping and Freight Transport at Business Monitor International (BMI), the global industry research and analysis firm based in London, said: "The main challenge facing not only the shipping lines in the Gulf [but also globally] is oversupply. The container sector is still struggling with a dearth of vessels, compared to the volumes of trade that are out there that need shipping. This has affected lines' rates, which have been pushed downwards and are only now being pushed back up."

The global economic downturn severely impacted the global shipping and oil conglomerate, AP Moller-Maersk Group, with the revenue for the nine months of this year declining 25 per cent to $35.3 billion (Dh129.7bn), compared with the same period last year. The group posted a loss of $706 million during the period compared to a profit of $3.6bn a year earlier.

Another major mishap in the global shipping sector was when Frontline, the world's biggest supertanker operator, reported a net loss of $5.6m for the nine months of this year.

However, the year thankfully saw no major shipping company going under.

John Manners-Bell, Chief Executive of Transport Intelligence, a London-based research and analysis firm on the logistics industry, said: "The shipping market saw no major company failures although Maersk made huge losses and several others were bailed out by governments or private investors. Falling rates and plunging volumes were to blame."

However, this year turned out to be a much better year for the dry bulk sector than many would have predicted, according to analysts. BMI in its report said: "The Baltic Dry Index was quick to reverse the collapse in freight rates seen in the first half of 2008 and by the mid point of the year the index had recovered to 2006 levels."

Signs of recovery

The recovery was stronger than many ship owners could have hoped for, especially given the collapse in freight rates suffered by the container shipping and tanker sectors, it said.

The report said this year, the potential for a much steeper decline in dry bulk shipping was offset by a notable surge in the seaborne trade of iron ore – the largest single dry bulk commodity, accounting for 27 per cent of total cargoes – which actually increased by about three per cent year-on-year.

Strong Chinese demand for the material proved vital to this growth.

China's iron ore imports increased by more than 20 per cent year-on-year in 2009 as its share of the seaborne iron ore market increased from 58 per cent in 2008 to 66 per cent, offsetting the reduction in volumes shipped to other major import markets such as Japan and South Korea.

There was no shortage of activity this year among dry bulk owners as market sentiment fluctuated between caution and optimism. While freight rates made a steady fight back from their collapse in the second half of 2009, some companies saw the continued uncertainty in the dry bulk sector as incentive to limit their exposure to coal and iron ore shipping markets by expanding into less cyclical areas, the report said.

Other companies have seen growing supply trends within the dry bulk sector as reason to expand their market presence.

The world's largest dry bulk shipping line, Mitsui OSK Lines, saw the recent increase in Chinese imports as an opportunity to boost its long-term sales pipeline, strengthening its relationship with two of China's largest steel makers, it said.

Some also reportedly took the recovery as a sign to expand their fleets, taking advantage of the bargain rates offered by Asian shipyards, desperate to reverse the collapse in new vessel orders seen at the beginning of the year.

In November, China's Yangzijiang shipyard reportedly took on $300 million in newbuild orders to build eight new large bulk carriers.

While it is difficult to accurately predict the effect that this will have on the demand and supply balance within the dry bulk market in 2010, most indications are pointing towards a critical level of overcapacity.

The GCC is the single largest market for VLCC tankers, with more than 70 per cent of the VLCC fleet trading out of this region, according to London-based EA Gibson Shipbrokers.

However, rising fleet capacity combined with weak global crude oil demand weighed on liquid bulk sector as well.

According to BMI, despite increasing emerging market consumption, the crude oil shipping market is largely dominated by demand from the developed world – notably North America and Western Europe, which account for 30 per cent and 24 per cent of global demand, respectively.

According to the report, global oil consumption this year decreased by 2.1 per cent from last year's level.

"The large tanker market, which includes the VLCC, Aframax and Suezmax class of vessels, has suffered most from plunging trade on long-distance voyages from the Middle East to developed markets in Europe and North America," it said.

According to McQuilling Services, the New York-based marine transport advisory firm: "Tanker supply has been bolstered by the past few years' bullish ordering, but effectively whittled away by contango-driven storage plays, slow-steaming, and a surge in the disposal of single-hulled tonnage ahead of IMO deadlines."

There is another challenge of the declining price of the tanker vessel, whether a new vessel, five-year old, or 10-year old.

According to McQuilling Services, current asset prices compared to 2008 average prices are about 40 per cent lower across all tanker classes (incorporating newbuild, five-year and 10-year old vessels) with many industry players expecting asset prices to continue to decline in 2010.

UAE remains buoyant

Shipping business in the GCC and the UAE did not completely escape the global financial crisis.

However, the ripple effects of the woes were definitely much less intense compared with the global shipping sector. Leading terminals of the UAE as well as the region are still expanding. Major shipping companies are also still posting profits and Sharia-compliant financing emerging as a credible ship finance source.

In case of the UAE, one of the major happenings this year was the announcement in August by Drydocks World-Dubai, the region's premier ship repair, conversion and new building company under the Drydocks World group, that it has successfully carried out its first operation on the advanced 6000-tonne ship lift at the industrial precinct in Dubai Maritime City. The industrial precinct at DMC also has another ship lift with a capacity of 3,000 tonnes, which is operational already.

A month earlier in July, Drydocks World-Dubai announced it had renewed its long-standing association with BP Shipping with the signing of a new agreement.

Additionally, in June Drydocks World-Dubai, installed a trial version of a grounding avoidance system on the 46,803-tonne oil tanker, British Tenacity for BP Shipping. This installation of such a system on a sea vessel was an industry first.

In the same month, Abu Dhabi Ship Building (ADSB) started work on the first of two steel landing craft being built for the Royal Bahrain Naval Forces. The contract for the vessels, ADSB's first new building contract for Bahrain, was won against stiff competition from international shipyards.

Another highlight of the shipping business in the UAE was in October when DFM-listed Gulf Navigation Holding, one of major ship owning and maritime services company in the region recording a net profit of Dh11.62 million in the first nine months of this year.

The port throughput at the UAE's ports was also much better than expected.

The global marine terminal operator DP World's UAE's third-quarter container volumes fared better than the global average, remaining in line with the same period last year.

Additionally, the volume of cargo handled at Sharjah Container Terminal and Khorfakkan Container Terminal (both managed and operated by Gulftainer) saw an increase of 11 per cent for the first nine months of this year jumping by 300,000 TEUs compared with the same period last year.

Khorfakkan Container Terminal, a transshipment hub, is also undergoing expansion and in October two new container gantries were delivered to the terminal.

Other major happenings included Abu Dhabi National Leasing, an asset-based financed subsidiary of National Bank of Abu Dhabi, lease financing for two brand new dry bulk vessels amounting to Dh273m to Stellar Shipping, an affiliate of Al Ghurair Group in Dubai in December.

Another instance of the alternative ship finance taking hold in the UAE was when private equity backed Gulf Marine Maintenance and Offshore Service Company (GMMOS), a UAE-based provider of marine services to the offshore oil and gas industry, announced this month the acquisition by Stanford Marine, its chartering division, of five offshore support vessels as part of Abraaj Capital and Waha Capital's expansion strategy for the business.

GMMOS is 51 per cent owned by a Fund managed by Dubai-based Abraaj Capital and the remainder by Abu Dhabi-listed Waha Capital.

Another Dubai-based shipping company Topaz Energy and Marine announced this month that it raised $42m from Standard Chartered Bank Dubai for its fleet expansion plans, taking its total financing raised this year to $150m.

Regional moorings

The shipping and ports sector in the GCC, outside the UAE, too remained fairly buoyant. One of the most significant achievements was the official opening of Bahrain new Khalifa Bin Salman Port (KBSP). The port is designed to accommodate a container capacity of more than 1.1 TEUs annually in addition to cruise ships facilities and warehouses.

The maritime industry Bahrain achieved another milestone in September with its implementation of a new international maritime system for tracking and identifying ships. The General Organisation of Sea Ports (GOP) completed implementing all the necessary requirements for the "Long Range Identification and Tracking of Ships" System, a system whose implementation is obligatory by all International Maritime Organisation member states.

Another major happening was the completion of the first phase of Jeddah Islamic Port's newest container facility, Red Sea Gateway Terminal, this month. Located at the northern end of the Jeddah Islamic Port, work at the SR2 billion (Dh1.95bn) greenfield container terminal, commenced in January last year. The 1.8 million TEU, second-generation terminal constructed under a BOT agreement with the Saudi Port Authority, is due to be fully completed by the third quarter next year.

In Qatar, Qatar Navigation and Qatar Shipping confirmed in July that the evaluation process of the proposed merger of the two companies, as announced on the Qatar Exchange on May 7 this year, has begun and is proceeding on track.

The month of March saw the completion of Qatargas-2 shipping construction project with the delivery of the 14th ship.

The construction project completed the eight Q-flexes and six Q-maxes vessels, which started in 2006 at three different shipyards.

Other major happenings included Swire Shipping, the global liner shipping company, commencing in January its Middle East Service linking the US Gulf and US East Coast with Dammam and Jebel Ali.

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