They are the superhighways of world trade. About 90 per cent of exports are shipped through the sea lanes that criss-cross the globe. Every day, thousands of huge cargo ships carry a range of products, from Barbie Dolls to BMWs. But as the global economy slows, shipping firms are having to rethink their strategy.
Choppy waters
Shipping The National charts the performance of the UAE's maritime industry as it navigates uncertain financial waters. Learn more
"It is depressed this year," says Captain Ranjan Mookherjee, the managing director of Vega Ships Management in Dubai.
"Cargo movements are less compared to last year and I don't expect the shipping industry to jump up again in the near future."
While the industry is being dragged down by cooling demand for goods, prospects for a recovery are being hampered by a glut of capacity, a lack of financing and the threat of piracy. Tom Arnold spoke about the shipping outlook with Knut Mathiassen, the Middle East head of shipping finance for Standard Chartered, Jasmine Fichte, a maritime lawyer and managing partner of Fichte & Co, a Dubai law firm, and Capt Mookherjee.
What's the outlook for the shipping industry this year and next?
Mr Mathiassen:The general outlook is mixed.In some sectors such as tankers and chemicals, the charter rates are low and are likely to remain low throughout 2013. The market environment for the container shipping industry is also challenging, and the big operators are predicting losses in this sector for 2011. This is due to capacity surplus on the main trade routes: Asia-Europe and transatlantic. However for the dry bulk sector the general consensus market outlook is better but this important shipping sector is also suffering from an overhang of new buildings ordered prior to 2010.
Ms Fichte:There is a huge difference about whether we speak about offshore, tanker, container, liquid natural gas and cargo. Offshore is still doing well and was not that affected by the credit crunch. Container business suffered the worst. Freight rates are still not good and a lot will depend on oil prices. In general the outlook is not good for the next two years.
How do the prospects for the industry (this year and next) compare with the situation during the global financial crisis in 2009?
Mr Mathiassen:The global crisis in 2009 was severe and we are still feeling the effect on the shipping industry from oversupply. If you consider the European crisis, we have the possibility of a double-dip effect on the demand side. One catalyst is the container market which directly and immediately is impacted by a slowdown in economic growth. The new European crisis is negatively impacting European banks which are dominant in ship finance and this will hurt liquidity in the ship finance market.
Ms Fichte:The situation is definitely better now as all companies have adjusted to the situation and many firms have streamlined their operations and cut expenses.
Capt Mookherjee:It's improved. Ship owners have ordered ships. There's no employment for ships, but their order books are full. There's a very tricky balance that needs to be found between availability of tonnage and availability of cargo to fill that tonnage as there's a mismatch at the moment.
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When do you expect an upturn in the shipping industry?
Mr Mathiassen:The general consensus seems to be from 2014 in the main shipping segments of dry bulk and tankers.
Ms Fichte:Personally, by 2013 at the earliest.
Capt Mookherjee:I don't have a crystal ball. It's very difficult to tell because there's so many dynamics at play. For example, China's GDP has come down and that's one of the driving forces of demand in the shipping industry.
How big a concern is the excess supply of fleet capacity?
Mr Mathiassen: When we study the new building order book in Asia (South Korea, Japan, China) we find that there is still a serious overhang of vessels yet to be delivered. There is 28 per cent of the world fleet on order, 6,000 vessels, with approximately 40 per cent in the dry bulk sector, 27 per cent in the container ship sector and 20 per cent in the tanker segment. It is considered that the ship-building sector, notably in China, has been quick to react to the financial crisis and actually reduced prices sharply to attract new orders and this has not helped the market balance. The new building price index has reduced by 25 per cent from 2008 at the height of the shipping boom to September 2011. On the other side we are seeing increased scrapping and demolition of old vessels where scrap prices are near record levels.
Ms Fichte:In the worst-case scenario, vessels will go directly from the yard to the break up yard.
Capt Mookherjee:It's a big concern. We've seen that in the early 1980s - from shipyard to graveyard, we saw that again in 2008-09 - many ships were mothballed. Now we are seeing it again, many, many ships are waiting for cargo.
How much of a challenge is shipping finance - either to restructure existing debt or secure new loans?
Mr Mathiassen:The new European crisis will hurt funding for new projects as many of the larger and active shipping banks worldwide are the European banks which are suffering due to the European debt crisis. There is little impact on restructuring I think, it is lending of new money that is the problem. In the GCC region we see an increasing role for Islamic finance and funding in dirhams.
Ms Fichte:It's a heavy challenge. There is no ships finance at the moment and it will take a long time before banks will be prepared to provide loans again.
Capt Mookherjee:It is a big challenge to restructure debt. Many companies are defaulting on their debt. Some are not taking delivery of orders or cancelling them. Even now, many companies are paying fines to the shipyard. Banks are reluctant to provide finance, too.
Is piracy a real threat to the shipping industry or has it been overblown by the media?
Mr Mathiassen:It is an increasing problem and is costing the shipping industry as a whole by increased insurance costs and protection expenses that will reduce net earnings. It is difficult to quantify these costs. I don't think [the] media has overblown it too much although there is obviously press coverage a little out of proportion sometimes.
Ms Fichte: Piracy is a serious, real threat and as long as there is no solution for Somalia it will not stop. Armed forces need to be on each ship or crew is refusing to sail and this does not only impose more costs but lots of other problems.
Capt Mookherjee:Piracy is a real threat as the knock-on effect is very big. If those boys on board carrying the cargo are not willing to come to serve this area there will be serious issues. None of our ships have been attacked and it depends on the ship owners whether they carry armed guards.
tarnold@thenational.ae
Learn more about Qasr Al Hosn
In 2013, The National's History Project went beyond the walls to see what life was like living in Abu Dhabi's fabled fort:
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The top two teams will qualify to play at the World T20 in the West Indies in November
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Secret Pigeon Service: Operation Colomba, Resistance and the Struggle to Liberate Europe
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What is an ETF?
An exchange traded fund is a type of investment fund that can be traded quickly and easily, just like stocks and shares. They come with no upfront costs aside from your brokerage's dealing charges and annual fees, which are far lower than on traditional mutual investment funds. Charges are as low as 0.03 per cent on one of the very cheapest (and most popular), Vanguard S&P 500 ETF, with the maximum around 0.75 per cent.
There is no fund manager deciding which stocks and other assets to invest in, instead they passively track their chosen index, country, region or commodity, regardless of whether it goes up or down.
The first ETF was launched as recently as 1993, but the sector boasted $5.78 billion in assets under management at the end of September as inflows hit record highs, according to the latest figures from ETFGI, a leading independent research and consultancy firm.
There are thousands to choose from, with the five largest providers BlackRock’s iShares, Vanguard, State Street Global Advisers, Deutsche Bank X-trackers and Invesco PowerShares.
While the best-known track major indices such as MSCI World, the S&P 500 and FTSE 100, you can also invest in specific countries or regions, large, medium or small companies, government bonds, gold, crude oil, cocoa, water, carbon, cattle, corn futures, currency shifts or even a stock market crash.
Strait of Hormuz
Fujairah is a crucial hub for fuel storage and is just outside the Strait of Hormuz, a vital shipping route linking Middle East oil producers to markets in Asia, Europe, North America and beyond.
The strait is 33 km wide at its narrowest point, but the shipping lane is just three km wide in either direction. Almost a fifth of oil consumed across the world passes through the strait.
Iran has repeatedly threatened to close the strait, a move that would risk inviting geopolitical and economic turmoil.
Last month, Iran issued a new warning that it would block the strait, if it was prevented from using the waterway following a US decision to end exemptions from sanctions for major Iranian oil importers.
About Proto21
Date started: May 2018
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Sector: Additive manufacturing (aka, 3D printing)
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The biog
Mission to Seafarers is one of the largest port-based welfare operators in the world.
It provided services to around 200 ports across 50 countries.
They also provide port chaplains to help them deliver professional welfare services.
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'Young girls thinking of big ideas'
Words come easy for aspiring writer Afra Al Muhairb. The business side of books, on the other hand, is entirely foreign to the 16-year-old Emirati. So, she followed her father’s advice and enroled in the Abu Dhabi Education Council’s summer entrepreneurship course at Abu Dhabi University hoping to pick up a few new skills.
“Most of us have this dream of opening a business,” said Afra, referring to her peers are “young girls thinking of big ideas.”
In the three-week class, pupils are challenged to come up with a business and develop an operational and marketing plan to support their idea. But, the learning goes far beyond sales and branding, said teacher Sonia Elhaj.
“It’s not only about starting up a business, it’s all the meta skills that goes with it -- building self confidence, communication,” said Ms Elhaj. “It’s a way to coach them and to harness ideas and to allow them to be creative. They are really hungry to do this and be heard. They are so happy to be actually doing something, to be engaged in creating something new, not only sitting and listening and getting new information and new knowledge. Now they are applying that knowledge.”
Afra’s team decided to focus their business idea on a restaurant modelled after the Leaning Tower of Pisa. Each level would have a different international cuisine and all the meat would be halal. The pupils thought of this after discussing a common problem they face when travelling abroad.
“Sometimes we find the struggle of finding halal food, so we just eat fish and cheese, so it’s hard for us to spend 20 days with fish and cheese,” said Afra. “So we made this tower so every person who comes – from Africa, from America – they will find the right food to eat.”
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Four reasons global stock markets are falling right now
There are many factors worrying investors right now and triggering a rush out of stock markets. Here are four of the biggest:
1. Rising US interest rates
The US Federal Reserve has increased interest rates three times this year in a bid to prevent its buoyant economy from overheating. They now stand at between 2 and 2.25 per cent and markets are pencilling in three more rises next year.
Kim Catechis, manager of the Legg Mason Martin Currie Global Emerging Markets Fund, says US inflation is rising and the Fed will continue to raise rates in 2019. “With inflationary pressures growing, an increasing number of corporates are guiding profitability expectations downwards for 2018 and 2019, citing the negative impact of rising costs.”
At the same time as rates are rising, central bankers in the US and Europe have been ending quantitative easing, bringing the era of cheap money to an end.
2. Stronger dollar
High US rates have driven up the value of the dollar and bond yields, and this is putting pressure on emerging market countries that took advantage of low interest rates to run up trillions in dollar-denominated debt. They have also suffered capital outflows as international investors have switched to the US, driving markets lower. Omar Negyal, portfolio manager of the JP Morgan Global Emerging Markets Income Trust, says this looks like a buying opportunity. “Despite short-term volatility we remain positive about long-term prospects and profitability for emerging markets.”
3. Global trade war
Ritu Vohora, investment director at fund manager M&G, says markets fear that US President Donald Trump’s spat with China will escalate into a full-blown global trade war, with both sides suffering. “The US economy is robust enough to absorb higher input costs now, but this may not be the case as tariffs escalate. However, with a host of factors hitting investor sentiment, this is becoming a stock picker’s market.”
4. Eurozone uncertainty
Europe faces two challenges right now in the shape of Brexit and the new populist government in eurozone member Italy.
Chris Beauchamp, chief market analyst at IG, which has offices in Dubai, says the stand-off between between Rome and Brussels threatens to become much more serious. "As with Brexit, neither side appears willing to step back from the edge, threatening more trouble down the line.”
The European economy may also be slowing, Mr Beauchamp warns. “A four-year low in eurozone manufacturing confidence highlights the fact that producers see a bumpy road ahead, with US-EU trade talks remaining a major question-mark for exporters.”
