These are difficult times for many in the sea freight business globally, with an increasing number of ships chasing a declining level of cargo trade, as world economic growth slows. Such a supply and demand imbalance will eventually correct itself, but in the meantime, the current storm is providing important lessons for maritime hubs such as Dubai.
The scale of the current fragility in the shipping market can quickly be seen in the fortunes of the dry bulk segment, as measured by the Baltic Dry Index (BDI). Calculated from an aggregate of charter rates for all varieties of dry bulk cargo ships, March 2015 saw the BDI reach an all-time low. This was largely the result of two factors. First, an oversupply of ships has been driving down rates. Prior to the 2008-09 global financial crisis, orders for new ships had been booming – the global order book in 2008 was almost 80% the size of the existing fleet. With the time lag between order and delivery, this meant a swathe of new vessels came on the market in 2011-12, at a time when many economies were still pulling themselves back out of the crisis.
Then, “In Q4 2013, there was a lot of optimism, and expectation of a recovery in the market,” Andreas Peter Schmid, research analyst for Dubai’s MUR Shipping, told OBG. “The BDI went up and a lot of new ships were ordered again.” This optimism, however, proved ill-founded. Key to the dry bulk market are deliveries of basic commodities such as iron ore and coal. China, the world’s engine of growth in this area, has seen its economic growth slowing. Consequently, orders for both commodities have been down, reducing demand for dry bulk carriers in their vital heartlands. “Container transportation has dropped to an estimated 1.5-3% demand growth, whereas the whole industry has increased capacity by 7%,” Christian Juul-Nyholm, managing director and head of Maersk Line for UAE, Iran, Qatar and Oman, told OBG. This has impacted the charter rates for large vessels in particular, such as the 400,000-deadweight tonne (DWT) “capesize” vessels, mainly used for iron ore, and the “mini-cape”, “panamax” and “supramax” classes – 100,000 DWT, 65,000-100,000 DWT and 40,000-65,000 DWT, respectively – which transport coal, grains and beans. The key for many shipping companies now is in delaying delivery of new vessels ordered in 2013. The first half of 2015 also saw the rates of scrappage jumping: some 20m DWT were demolished, led by Greece and Japan. Average speeds of vessels have also been cut, delaying delivery and spreading declining cargoes out. This increases fuel costs, but with bunker prices low, this is generally seen as an acceptable penalty. At the same time, oil and gas prices have slumped, leading many national and international oil companies to shelve new projects and mothball existing offshore platforms. This has been hard for the offshore supply and support industry, with companies specialising in this field also having to downsize and rationalise. Dubai’s ship owners have not been immune to this challenging environment. Falling rates have squeezed margins, with oil companies and other charterers seeking to negotiate prices downwards. The outlook for 2016 is generally seen as flat.
Weathering The Storm
Surviving these challenges requires a good deal of flexibility, along with an ability to ride out a lengthy period of low margins. Dubai possesses several advantages in this sphere. With many companies based in free zones, costs are low, enabling shipyards to change tack easily. Many yards are putting an increased focus on repair, offering a wider variety of services. Business downsizing remains a less complex process than in more developed markets. At the same time, low oil prices can benefit general traders, who have seen their operating costs fall. Maintaining a diversified fleet is thus a major advantage. On a global scale, mergers and acquisitions may also follow, as the emirate prepares for a more consolidated international environment.