Gulf shipping firms are on a historic buying spree for new ships that is raising fears of a looming glut on the high seas.
Gulf shipping firms fuelling shortage
ABU DHABI // Gulf shipping firms are on a historic buying spree for new ships that is raising fears of a looming glut on the high seas. The latest this week was a US$1.5 billion (Dh5.5bn) order from United Arab Shipping Company (UASC), which is jointly owned by several Gulf countries, for nine large container vessels. The order is reportedly the fourth-largest ever made in the shipping industry.
Surging global trade and intense demand for commodities such as iron ore, coal and grains is straining the current fleet of container and dry bulk ships worldwide. The global commodity boom has sent daily hire rates for ships to record highs, pushing orders for new ships to unprecedented levels. "We are probably seeing the greatest shipbuilding boom in history," said Raffi Vartanian, an analyst with Freight Investor Solutions (FIS), a ship broking firm with offices in Dubai.
"You have ore and oil carriers being converted to dry bulk carriers, there are new shipyards opening up every few weeks in China, Japan, and South Korea, and order books so heavy that if you ordered today, you wouldn't see your ship in the next five years." Encouraged by the growth of regional ports such as Jebel Ali, and the oil boom that has brought prosperity throughout the region, shipping firms based in the UAE have opened their wallets in record numbers.
"There are probably about three or four shipping companies that have placed billion-dollar orders in the last 12 months alone," said the Abu Dhabi-based chief executive of Emirates Ship Investment Company (Eships), Scott Jones. Eships's investment profile is much lower, with $175 million worth of orders for a converted transshipment vessel and small liquefied petroleum gas tankers. The record orders have created an extraordinary backlog. New dry bulk carriers are on order for an overall capacity of 253 million dead weight tonnes (dwt) or 60 per cent of the current capacity on the water (403 million dwt), according to FIS.
The record orders have created concerns in an industry that has long suffered from boom-and-bust business cycles. Some worry that the newly built vessels will flood the market and send daily charter rates crashing. "Shipping is often when you buy and when you sell ships," Mr Jones said. "If you go and buy a ship today, you will pay a huge price. At today's charter rates, you don't make that much money, but if the rates come down, you're in big trouble."
Eships, which operates a fleet of dry bulk and chemical carriers, has a strategy to lock in rates with long-term contracts with established industrial players, and therefore avoid any big downturns in the market. UASC said its order was motivated by the need to cut fuel costs and match the investments of its rivals in the cut-throat container ship business. "There is always a risk for overcapacity," said Jorn Hinge, the deputy chief executive of UASC. "But if you don't participate with the same assets, it is difficult to compete in the long run."
UASC's new ships are due to be delivered in late 2011 and used between Asia and Europe, where strong growth helped global container trade rise 20 per cent last year. Mr Vartanian said recent developments suggested that the arrival of new ships would be staggered, achieving a softer impact on the market. The global credit crisis would force shipping lines to cancel options due to a lack of financing options, he said. Also, 30 per cent of the ships on order to be built in Chinese yards did not exist yet. With millions of Chinese flooding into the country's urban centres, some of these yard projects may be swapped for residential development.
"What looks like a bust cycle over the next two years could instead be a deceleration cycle over the next five," he said. @Email:email@example.com