Ocean Drive

Maritime trade is soaring as more logistics companies use the Middle East as a portal between the Far East and Europe. But can the region and the rest of the world handle the increasing number of ships using the world’s oceans?

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By  Laura Barnes Published  January 8, 2005

|~||~||~|Sea trade in the Gulf has boomed over the past few years, with more logistic carriers using Middle East ports as a transit point between the Far East and Europe. The region is also benefiting from changes in the wider market, as China, the Indian Subcontinent and the Middle East emerging as major players in world trade, approaching the levels of North America and Europe. The dry bulk cargo sector, which encompasses commodities carried in bulk and major bulk products, such as iron ore, coal, grain and steel products, has experienced strong worldwide growth especially in the Gulf and Subcontinent. “The shipping markets are enjoying an unprecedented bull run across the tanker, dry and container sectors. Freight rates have hit unprecedented highs,” says David Taylor, vice president, Maritime London and special advisor to the International Underwriting Association. The increase in trade in the dry bulk cargo sector is being driven by a range of factors. The most important is economic growth, as there is a strong correlation between growth in GDP and demand for dry bulk cargo. This effect is being seen in a number of Middle East and Asian countries, not least China, where the dry bulk cargo market is booming due to the growing manufacturing industry. “The general trend is a 2:1 ratio of trade:GDP, so with a strong growth in GDP there is inevitably a strong trade growth. Looking at China, a major player in the sea trade at the moment, it is forecasted to have a 10% GDP growth for this year. Likewise its industrial production and dry bulk shipping market are also going from strength to strength,” says Fred Doll, managing director, Doll Shipping Consultancy. “In the Subcontinent, India had a growth rate of 7% in 2003, with a predicted 6.5% for 2004... Iran and Saudi have likewise seen a 1-2% increase in predicted GDP growth, so these countries’ cargo exports are also rising, relative to their GDPs,” he adds. “The outlook for the dry cargo market, is that the demand for commodities in the Asian market — in the short to medium term — will remain firm, thus underwriting a solid freight market,” agrees Farouq Rahimtoola, chairman, Pakistan ship agents association and chairman Ray Shipping Enterprises Ltd and Asia Marine Ltd, Karachi. Alongside the general increase in GDP, within the local market, the booming construction industry is also driving up demand for dry bulk cargo, as heavy bulk building materials can only be transported by sea. Of particular importance is the demand for iron ore. India for instance, forecasted exports of 70 million tons for 2004, whereas in 2001 only 34 million tons were exported. Similarly, in the Middle East, iron ore imports were up from 16.7 million tons in 2003, to a predicted 17.5 million tons in 2004. Aside from iron ore, the other main dry bulk goods in the local market are coal and steel. Agricultural exports, grain in particular, is also becoming of increasing importance. “The main grain and oilseed exporters in the region — Saudi, Iran and Iraq — are forecasting a growth of 7%,” notes Doll. Jebel Ali has been the main beneficiary of this growth in cargo in the region, with its total bulk cargo rising from 5,559,889 metric tons in 1997 to 9,830,352 metric tons for 2003. Container TEU output similarly saw an increase of 514,341 metric tons to 1,096,326 metric tons for the same period. ||**|||~||~||~|Other ports in the Gulf however, are also experiencing a boom in the export and import of dry bulk cargo, mainly due to the Middle East diversifying away from oil and gas — the liquid bulk market — to dry goods instead. For instance, Khorramshahr Port in Iran — near the southern Iraqi province of Basra — has seen a significant growth in the loading and unloading of cargo. The container terminal, for example, achieved a growth of 80% in its port operations for 2004 against its performance for the previous year. Fujairah in the UAE has similarly seen rising levels of cargo, driven by the growth of the Northern Emirates’ quarrying industry. “Fujairah produces a lot of gabro, which is a tough type of rock used for building roads, runways and so on,” explains John Mittelstein, marketing manager, port of Fujairah. “Some of that obviously goes by road to Dubai, but a lot is exported to Qatar, Bahrain and Kuwait by sea,” he says. “We have been steadily increasing into that market. Two years ago we moved six million tons and for 2004 it is predicted to reach nine million tons and the market is growing,” he adds. Fujairah seaport exports a large amount of this material, but its cargo import market is presently a lot smaller. However, demand is steadily increasing at a rate of one to two million tons a year. The main import commodities at Fujairah port are copper concentrate and coal, which are used in the production process at cement plants. The port will also see further demand over the next couple of years, a steel plant is being built in the emirate, which will require iron pellet for use as fuel, which originates in Brazil and some areas of the Gulf. The port will import an extra two million tons of fuel for the factory, and this figure will grow steadily, reaffirming the prospects for its dry bulk cargo market. Although the global market may be buoyant, a cloud on the silver lining is emerging — congestion. As market demand increases, the number of ships on the seas is also increasing, and many ports are unable to cope. This is a problem at ports around the world including Jebel Ali, which has suffered delays throughout the summer and is still reporting heavy backlogs because of the number of ships flooding the market. “The problem with fleets increasing is the impact of congestion and the delays at ports,” comments Khalid Hashim, managing director, Precious Shipping. “For example, at Australian iron ore ports, 125 ship days were lost due to congestion last year alone,” he continues. The main cause of this is the sheer number of ships on the sea, and the rise in dry bulk cargo fleets does not seem to be abating as order books for new ships are full beyond the end of 2006 with no old ships being scrapped. Currently the dry bulk cargo fleet comprises of a large number of smaller vessels, like handymaxs, which are often only half-full. This is creating a huge amount of inefficiencies and congestion at ports, and the situation looks set to get worse. It is estimated that from now until 2006, there will be an increase of 634 vessels entering the seas — exceeding 49 million metric ton deadweight — as more new ships are launched and none retired. “Over the past year a large number of cargo vessels have been delivered. In total, 49 capesize freighters were delivered, that is 8% of the total fleet and no capes were scrapped,” says Doll. “Likewise panamax vessels are also following the market trend with 77 vessels delivered — 7% of its fleet — with no vessels scrapped. If this trend continues it will cause serious problems for the maritime sector, even though there is an increase in demand,” he adds. The only way to combat the problem of an ageing and increasingly large fleet, is for dry bulk companies to consolidate their operations. This has been achieved in the bulk liquid and tanker sectors, but it has not yet occurred in the dry bulk cargo market. “Consolidation in this market is lagging behind other areas, like tankers. Companies are trying to consolidate, but there have been no major moves yet,” says Rohan Shetty, managing director Scan-Trans Shipping Middle East. The reason the dry bulk sector is lagging behind is because of its highly fragmented market structure, which means that less economies of scale can be gained from mergers, unlike in the tanker industry. “Owning [just] two or three ships makes you a big player in the market,” comments Shetty. However, despite these challenges, the market is still strong and the Middle East is perfectly situated to benefit. “The region is an location for sea freight,” says Shetty. ||**||

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