A free fall in worldwide shipping rates is threatening financial ruin on firms exposed to the daily charter market, where dry cargo vessels that commanded US$228,000 (Dh837,000) for daily hire in June now may earn less than $3,000. There are also steep declines in the rates for container ships and oil and chemicals tankers, as the global economic crisis has cut demand for commodities in growing markets such as India and China.
"We will see owners who will maybe go bankrupt, or having to sell their assets," predicted Abdullah al Shuraim, the chairman of Gulf Navigation, a Dubai-based oil and chemicals tanking firm. Shipping is historically a feast-or-famine industry, and a five-year boom is now heading towards bust. Finance is the lifeblood of this capital-intensive industry but this is now drying up due to the global financial crisis. Banks are reluctant to lend money, leaving transport firms with big ship orders and no financing. Banks are also reluctant to provide financial guarantees to allow ships to embark on voyages, leaving some unable to sail if they do have cargoes.
Trading volumes are down sharply at financial exchanges that specialise in future shipping contracts, called forward freight agreements (FFAs). "FFAs opened with some improved bids but very little selling interest," Freight Investor Solutions, a UK-based exchange, wrote in a daily note on Saturday to investors. In the Gulf, a few locally owned firms represent a small fraction of the total movement of goods, commodities and petrochemicals.
These operators say they are insulated through contracts as long as 15 years in duration, which were signed when rates were higher. But as the global economic crisis reverberates into the region, their customers may be forced to renegotiate to mitigate the effects of falling commodity values. Mr al Shuraim said companies usually balanced their transport assets into long-term and medium-long-term time charter, with a small minority from their fleet played on the spot market. Gulf Navigation operates a fleet of 18 chemical and oil tankers that are mostly on long-term contracts with global giant such as Royal Dutch Shell and Saudi Basic Industries Corporation (Sabic).
"Most of our fleet is on long-term time charter, but we will see a major impact on some owners who are playing the market on a higher percentage on the spot rather than the short-term and mid-term," Mr al Shuraim said. "Some owners are playing the market." The chairman also takes solace in the fact that liquid tankers often feel less of the volatility seen with dry bulk carriers. While dry bulk rates have dropped 90 per cent from record highs this summer, the impact on tankers has been less dramatic, averaging 10 per cent declines according to estimates.
Abu Dhabi-based Emirates Ship Investment (ESHIPS), with a fleet of 14 vessels including oil and chemical tankers and dry bulk carriers, was also protected from market volatility because it sought sanctuary in long-term deals, said Scott Jones, the chief executive. "We have zero ships on the spot market," Mr Jones said. "We are insulated." ESHIPS has contracts between one to 10 years, and lists among its customers oil majors such as Total of France and Statoil, the Norwegian oil company.
The demand for commodities that reached a peak this summer also helped push up the price of newly built vessels. With the financial crisis, ship valuations are also dropping. The United Arab Shipping Company (UASC), the region's largest locally owned container shipping firm, placed one of the largest vessel orders in history with a Dh5.5bn order for nine large container vessels. But UASC, which is jointly owned by several Gulf countries, said it had no regrets with the order.
"These kinds of ships do not exist on the second-hand market," said Jorn Hinge, the deputy chief executive of UASC, who predicted further pain for shippers. "This is just the beginning - we'll see some shakeouts coming." There are concerns, however, that as commodity rates fall precipitously, exporters of goods such as petrochemicals and oil may be unable to continue paying high rates for transport.
Mr Jones said he was unaware of exporters demanding to renegotiate shipping rates, but said some were asking shippers to delay picking up certain shipments until market conditions improved. At Gulf Navigation, Mr al Shuraim said he believed his contracts were safe. "It works both sides - they don't come to you and negotiate when the rates come down, because you don't go and negotiate with them when the rates are high."
The real consequences of the financial turmoil on shippers may not be known for another few months, analysts say. "We may really see some fallout in the first quarter of next year," said Raffi Vartanian, an analyst with Freight Investor Solutions. firstname.lastname@example.org