Bright future forecast for shipping

Strong market returns experienced by the shipping industry in the Middle East in 2007 are expected to continue through the coming few years, industry experts have said. And the region’s shipping sector will escape the significant impact of the US sub-prime crisis and subsequent economic slowdown, they said.

Shipping companies based or operating on Middle Eastern routes achieved an average growth of between 25 to 30 per cent in both the dry bulk and VLCC (very large crude carriers) markets last year, said experts who foresee the same trend continuing this year.

“There are clear indications of a brighter market for 2008, we do not foresee a reversal of the 2007 fortunes. The entire shipping industry is witnessing an unprecedented boom,” Sharafuddin Sharaf, president of UAE Ship Owners’ Association, told Emirates Business in an exclusive interview.

The buoyancy expressed by shipping companies in the region stems from the fact that demand for oil and gas worldwide is increasing while prices are also climbing steadily. The Middle East is positioning itself as a hub between Europe, which sees a growing demand for commodities, and the Far East, which currently has the highest demand for energy as it becomes more industrialised.

As demand for oil increases, world oil consumption is projected to reach 93.7million barrels per day (bpd) in 2011 compared to 83.3 million (bpd) in 2005, said experts.

“The demand for Middle East oil will be a big lure for more shipping companies to operate in the region. We expect investments especially in crude carriers to increase tremendously this year as operators seek to tap into the market,” said Sharaf.

With an expected 17 per cent growth in Asia, the continent is expected to have a total throughput of 20 million TEUs (20-feet equivalent units) of dry cargo this year.

Last year, UAE terminals increased container cargo throughput by 19 per cent to 11 million TEUs, with Dubai’s ports of Jebel Ali and Port Rashid growing at 20 per cent to reach 10.7 million TEUs. The growth in UAE ports matched the 19 per cent average set by the Middle East, Europe and Africa.

Jebel Ali Port, one of the largest in the world, is expecting a 27 per cent increase in cargo container throughput from the current 11 million TEUs to 14 million TEUs in February 2009. While some sectors of the Middle East economy have felt tremors from the current US economic crisis, the problem is not likely to dampen the optimism shared by Middle East shipping operators.

“Today, there is a paradigm shift in trade which has lessened dependency on the trans-Atlantic route. New routes such as Asia-Europe and Asia-Middle East are now the busiest of all. So any slowdown in the US economy will have a negligible impact on the Middle East shipping performance,” said Ken Bloch Soersen, President and CEO of United Arab Shipping Company (UASC).

Soersen said UASC was aiming to benefit from the shipping market growth and that it would invest Dh7.3bn in the purchase of new container vessels to raise its current number of vessels from 38 to around 60 by 2012.

In order to tap into the growing tanker market, last year UASC decided to diversify and enter a joint venture with local business people to open United Arab Chemical Carriers (UACC) with an initial investment of Dh5.1bn, a quarter of which was raised in a private placement. Last year, UACC placed orders worth Dh2.1bn for 10 chemical tankers to be delivered in 2012.

Investments in the Middle East shipping industry for 2008 are expected to exceed Dh50bn, according to analysts. Middle Eastern companies that have placed large orders for new VLCCs include: UACC, Qatar Gas Transport Company, Vela, National Shipping Company of Saudi Arabia, National Iranian Tanker Company, Gulf Energy Maritime, Gulf Navigation, Emirates Trading Agency and Emirates Ship Investment Company.

However, new orders will face delays in delivery, as world shipyards are fully booked two years in advance. There are 170 VLCCs and 141 Suezmaxs on order. There are also 1,549 container vessels on order worldwide and the last deliveries for the current orders are expected to be made in 2012.

The International Marine Organisation (IMO) has set a timetable of 2010 to 2015 for the phasing out of all single-hull tankers due to environmental concerns. While shipping operators in the Middle East are catching up with the IMO ruling by making orders for only double-hulls, most of them will be left to ponder on what will become of their existing single-hull fleet as the deadline approaches.

According to the industry analysts, this year will see increased conversion activity as shipping operators seek to convert their single-hulls into either container liners or workboats, something that will put more pressure on shipyards. “Conversion of single-hulls is thought to grow by 10 per cent this year. The reason for this is two-fold; there are market-induced conversions, which include both on-going conversions to offshore, and the recently emerged practice of conversions to bulk carriers. Then there is the mandatory conversion, which is forced by regulations.

“The only market value opportunity here is scrapping,” said Tom Clifton of London’s Capital Shipbrokers.

With deliveries of new double-hulls expected before the complete phasing out of single-hulls, uncertainty remains on the likely impact of a short-term oversupply that is set to affect the demand-supply balance. Some analysts insist the short-term oversupply will have no impact on shipping rates as the demand for single-hulls in the Middle East is already waning in favour for double-hulls. “Companies in the Middle East are increasingly losing their appetite for single-hulls as they strive to be compliant with all environment standards. There is no possibility of a short-term oversupply of vessels this year,” said Clifton.

By the end of 2006, there were 502 VLCCs in active service worldwide, of which 65 per cent were double-hulled. Industry experts said despite a drop in VLCC charter rates for all Gulf outbound crude oil early this year, fluctuation of charter rates would be negligible throughout the year as demand for oil was not about to falter soon. While investments in the shipping industry increase, it appears that existing players will continue to dominate the market as analysts continue to see a reluctance of new players entering the market due to lack of confidence. The lack of self-assurance partly stems from the fact that conventional banks in the Middle East are still hesitant to provide finance for ships.

“The trend is that existing players continue to do well while others shy away from the business. The general mentality in the Middle East is that one cannot make it as a new player, but also the fact that banks are reluctant to provide finance is also another hindrance,” said Mathieu Philippe, General Manager at Dubai’s office for Barry Rogliano Salles (BRS), an international shipbroker.

However, Sharafuddin Sharaf of UAE Ship Owners Association said that for the UAE’s case, there was a growing interest among members of the business community to enter the shipping industry and that these moves are being supported by the government.

He said that among the core objectives of the Ship Owners Association was to provide necessary shipping knowledge to business people with the aim of building their confidence to enable them to invest in the sector.