Gulf shippers take on global peers

23 October 2008

Regional firms are challenging the dominance of international rivals by investing heavily in new vessels.

In 2007, the number of Gulf-owned ships increased by more than 10 per cent to 2,217, according to London-based shipping analyst Lloyd’s Register.

Over the next four years, that figure will have grown by a further 13 per cent, when the region’s shipping companies take delivery of the 278 vessels currently on order.

The orders are part of fleet expansions being rolled out by the region’s biggest shipping companies in a bid to challenge their international counterparts, which still dominate the Gulf’s container, general cargo and car-carrier sectors.

Riyadh-headquartered National Shipping Company of Saudi Arabia (NSCSA) plans to buy eight crude carriers and 10 chemical carriers by 2009, and 16 chemical carriers by 2011.

The UAE’s United Arab Shipping Company (UASC) will take delivery of nine new-generation container ships, each with a capacity of 13,000 20-foot equivalent (TEUs) units from 2010.

Qatar-based Nakilat has taken delivery of 29 liquefied natural gas (LNG) carriers since the company was set up in 2004, with a further 25 due for delivery by 2010.

While in the past, Gulf companies involved in distributing state oil and gas reserves invested in ships to extend their control over the supply chain, Gulf shippers are now trying to extend this influence, with analysts predicting that as petrochemicals and aluminium exports rise, regional ownership of the liquid bulk and dry bulk vessels used to transport these products will follow suit.

Growing investment

Global investment in the shipping sector grew by more than 161 per cent to $238bn between 2004 and 2007, according to London-based Gulf shipping investment analyst Clarksons.

In the same period, Middle East countries increased their investment in the sector by 186 per cent, topping $12.6bn last year.

Despite this investment, GCC orders in 2008 account for only 5 per cent of the 320 ships ordered globally, according to Norwegian bank Nordea.

GCC-ordered vessels have a combined capacity of 24 million deadweight tonnes, representing a total spend of $20bn.

“That may sound impressive,” says Eivind Grostad, senior vice-president and regional manager with Norwegian shipping risk-management specialist Det Norske Veritas.

“But for the Gulf to generate 5 per cent of world orders is tiny when you consider the region’s oil and gas resources.

“Regional investment in shipping is minute compared with investment in real estate - $20bn is peanuts compared with Dubai’s fast-developing property market.

The region still lacks banks and investment companies with specialist interest in, and knowledge of, shipping.

And there is a sense that bricks and mortar make for reliable investment, yet shipping is a moveable asset that can follow demand around the globe.”

Market turmoil

The turmoil in world markets exposes the risks underlying investments in the sector. The drying up of liquidity has effectively halted trading in the syndicated loan sector that finances new ships.

“It is hard enough to keep existing syndicated loans going, let alone to start new ones,” one asset finance lawyer tells MEED.

“Ship owners will be lucky to get any debt funding. They need to stump up far more equity than six months ago.

“In many sectors, orders for new buildings are drying up, while acquisitions of second-hand tonnage are falling, as this is more expensive.”

Ken Bloch Soerensen, chairman of UASC, is negotiating finance for new buildings. UASC is also a partner in United Arab Chemical Carriers, which has ordered 10 chemical tankers for delivery between 2011 and 2012.

Funding for the $1.2bn order comprises 30 per cent equity financing and 70 per cent debt.

To fund the deal, UASC secured finance in the international markets and made a down-payment in June.

“With the chaos in the financial markets, there is undoubtedly an impact on companies’ ability to raise capital, when it comes to getting the banks to honour their earlier commitments or in new negotiations,” says Soerensen.

Meanwhile, freight rates have fallen globally, a clear sign of a slackening of demand in the summer of 2008.

Lower rates reduce ship owners’ profits and add to the pressure on banks, as shipping is heavily leveraged. This means there is a real risk of weaker carriers folding or selling up.

“Even with the good times that container lines have enjoyed over the past few years, the profits may not be enough to carry some through the coming downturn,” says Soerensen.

“Dry bulk rates are also coming down after the bull run of the past few years.”

In late summer, the sector changed from one where cancelled orders helped to ease imbalance between supply and demand to “total carnage”, according to Jeffrey McGee, director of shipping markets at UK-based Drewry Shipping Consultants.

The global merchant marine fleet has a total capacity of 1.14 billion deadweight tonnes.

Confirmed orders to 2012 will add a further 595 million deadweight tonnes, representing growth in capacity of 52 per cent.

Yet global trade is growing at 6.5-7 per cent a year. Prolonged recession could turn global shortage of capacity into a glut, says McGee.

So far, the crisis has been concentrated in dry cargo rather than the liquid bulk trades generated from the Gulf. And despite recent falling oil prices, the Gulf has healthy capital reserves.

So could the troubles facing international shipowners present an opportunity for canny regional investors? “If they are willing to be patient, and do not rush into anything immediately,” says McGee.

But the need to engage with the international banking system to finance ships is a major concern.

“Would I invest in dry bulk vessels, cruise ships or shipyards? Definitely not,” says the asset finance lawyer.

“Would I invest in oil and gas, when the balance between tanker supply and demand is so finely poised? Probably not. Would I invest in LNG tonnage? Maybe.”

With LNG deliveries set to peak next year, financing for the sector is proving resilient. “The LNG sector is shielded from cycles affecting the wider market,” says Grostad.

“It has the backing of oil and gas companies, and of regional governments that need to deliver gas already sold on international markets.”

Making progress

By 2010, Qatar’s Nakilat will own 25 LNG carriers, plus 20-60 per cent shares in 29 ships, amounting to an $11bn investment in ships and facilities.

“We have financed most of the ships through bank loans, through South Korean credit agencies and with US-based capital,” says Muhammad Ghannam, managing director of Nakilat.

“We raised $4.3bn in 2006, followed by a further $1.5bn raised from 12 international banks in July [2008]. We negotiated very good rates, despite the turmoil in the international markets.

“Our tonnage is a strategic asset that will be the backbone of Qatar’s LNG supply chain. Mean-while, our additional financing requirement is small, and will not be needed until next year.”

If regional shipowners are minority players in other sectors of shipping, the Gulf looks set to dominate LNG shipping within the decade. Nakilat alone will own 15-20 per cent of the world’s LNG carriers by 2010.

Lloyd’s Register predicts the world’s LNG capacity will reach 348 billion cubic metres by 2014, with the Middle East share increasing to 43 per cent, up from 24 per cent in 2007. As the world’s LNG fleet has grown, ships have become a commodity for investment.

“There has been significant growth in purchase of tonnage by independent investors,” says Soerensen. “Internationally, a lot of new money has come into the shipping industry.

The financial crisis may weaken this trend in the short term, but the situation is unlikely to change in the longer term.

And for individuals, governments or groups with liquidity to spare, there could be new opportunities to buy up tonnage. “Crisis or no crisis, in the shipping industry, as in other industries, cash is king,” says Soerensen.

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