New shipowners in the region and worldwide are increasingly finding it tough to obtain financing from banks even though the industry is still among the least touched by global economic problems, says analysts and industry players.
A host of new shipping companies might have to fold and enter other lines of businesses as conditions for financing shipping projects continue to tighten globally.
"Shipping start-ups are more likely to struggle with raising funds than companies that already have long standing relations with banks. There will be a weakening in the market, and we think that we will see several projects having trouble with receiving financing," said Alessandro Tricoli, shipping consultant at Fichte & Company Legal Consultants in Dubai.
"The industry has been an attraction to many new players, but with financing conditions getting tougher, there is a likelihood that many of them will have to shift to other lines of businesses."
All sectors of the shipping industry have enjoyed higher returns in the past two years with most companies posting over 30 per cent year-on-year revenue growth and with demand for oil increasing and air freight rates shooting up, returns on shipping are projected to grow further.
However, despite the decent returns on shipping, banks still consider it a risky venture and most of them believe that the returns being enjoyed will drop soon.
The recent sub-prime crisis in the US and its effects on the global credit market has increased the reluctance of major banks in providing finance to the shipping industry, with a number of them lowering their financing percentage from 80.
While tighter credit conditions have made it harder for some shippers to obtain loans to buy new vessels, those with long-term charters – where the ships are leased out on a fixed daily rate for years at a time – say having a fixed revenue stream has made it easier to obtain funding for acquisitions. Established Middle East shipping companies have since last year made orders for new builds worth about $100 billion (Dh367bn).
"Newcomers in the shipping industry will now have to partner with existing players who already have standing relationships with banks or use influential figures in order for them to secure financing. However, most of them will find it hard getting even 80 per cent finance," said Eivind Grostad, senior vice-president and regional manager for DNV Maritime.
According to Grostad, a number of new shipowners are beginning to cancel their new building orders as they fail to sustain financing.
"The cost of building new ships is going up almost every month due to increasing steel prices and a shortage of yard space amidst a huge demand for new builds. This is making it harder for newcomers to fund their new projects," said Grostad.
Globally, the shipping industry has relied on debt for either new builds or acquisition of a fleet, and the lack of financing is likely to hamper growth significantly. Shipowners globally are facing a $500bn funding shortfall for new vessels they have ordered since banks are getting increasingly reluctant to lend.
Regional shipping companies rely on banks in Europe and the US for financing since regional banks have refused to venture into ship financing in favour of financing for other sectors such as real estate and commodities where they see a low risk.
About 10,000 merchant ships are on order worth about $800bn in total, and as many as 50 per cent of those ships haven not been financed yet.
According to analysts, rising funding costs could curb the delivery of a record number of new coal, iron ore and grain transporters at a time when ship-hire rates are near a record.
Analysts are also predicting that as much as 10 per cent of the vessels on order could be jeopardised.
Shipping, and especially dry bulk carriers, has in past quarters seen booming demand and day-rates, with a rising need for iron ore from growing economies such as China boosting profits in the dry bulk industry.
But with more shipping tonnage entering the market from 2010, and supply outpacing demand, a correction is expected from 2009, further worsening in 2010, believe industry analysts and some lenders.
"Liquidity and financing difficulties could dampen the expected downturn, due to tonnage being delayed or cancelled," said Abdullah Al Shuraim, chairman of the board for Gulf Navigation Holding.
Shipyards, some of them new, have also struggled with a shortage of skilled labour and technical difficulties, which further hamper growth in ship supply.
"We have seen that many shipyards are starting to have problems with providing refund guarantees. We think the market in most segments will come down, but both tanker, offshore and especially the dry bulk market is today at historically high levels, so it may come significantly down and still see good earnings," added Al Shuraim.
Al Shuraim said the nature of the capital-intensive industry was a challenge although even with weaker markets many could deliver good results.