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Ask the expert: Ahmed Al Falahi

What is the current state of the shipping industry?
COMMENT, Ports & Free Zones

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Question: What is the current state of the shipping industry?

Expert: Ahmed Al Falahi
CEO, Gulf Energy Maritime (GEM)
GEM is the Middle East's largest independent petrochemical shipping line.
Speaking at Middle East Money & Ships, in Dubai.

While this industry is one of the most dynamic sectors in the region and, of course, the most vital, linking the East with the West, I will start by focussing on the tanker business rather than talk about the overall shipping industry.

Gulf Energy Maritime's expertise has been in the clean products and chemical transportation business and I must say that GEM has had a great record so far.

One of the main reasons for this is that global investment in oil refining capacity is increasing. Regional oil refineries are stepping up their production to meet rising demand. These projects are valued at US$122 billion, due for completion before 2013. Reports say that once completed these GCC projects alone will have the total capacity to produce the equivalent of six million barrels of petrochemicals a day.

Some analysts feel that further fresh investment in the oil and gas industry could materialise as countries seek to turn cheap sour crude into transport fuels and make healthy price premiums.

With new refineries being announced so very often, ship owners have been encouraged to place new building orders, anticipating the huge demand on the energy transportation sector.

It was at this time that GEM too placed an order to take its fleet strength to 19 by end of 2009, making it the largest private commercial tanker operator in the region.

This decision was based on the demand for new oil and chemical tankers due to the gap created by IMO's regulations on phasing out single-hulled tankers by 2010 and the forecast of new refineries being established. But this was our decision.

What has led the rest of the industry to venture into new buildings? One of the key reasons the rest of the industry has ventured into new buildings has been the easy availability of funding for such high capital investments. If you look at global figures, the syndicated bank market is relatively an important one. Among the largest "shipping banks" approximately $150 billion is outstanding to the shipping industry, a figure expected to increase due to the finance requirements of ongoing orders being placed.

In light of this it is worth noting an Intertanko statement recently issued. "Over recent years tanker owners have invested an average of nearly 32 billion US dollars a year in new ships and today over 75 percent of the internationally traded fleet is double hulled."

Regional banks even provide attractive and lower interest rates for ship financing as compared to real estate financing.

What puzzles me though is that with new ships orders costing much more than those ordered around three years ago, and with the increase in bunker costs, and operating costs, how then are profits justified?

But the figures speak for themselves. The industry, quite simply, has never had it better. New building contracts for 2006 topped $75 billion of which 35% was arranged by German banks followed by Scandinavian countries with 17%. Middle East new building financing orders have been mainly dependent on regional banks which allocate close to a double digit percentage figure for ship financing

Let's examine GEM. With 19 vessels we have sufficient employment for the future but until then we will follow the demand-supply rule and be more focussed on what we deliver and watch the market closely. Our decisions for newbuilds will be based purely on a careful analysis of market trends. We will not follow any speculation in this market and neither should anyone else. So until there is a justified demand we will be careful on how we order new ships.

We were on top of the wave three years ago in terms of newbuilds. The only requirement then was to ensure that fleets have double-hulled ships and in those three years we have nearly already filled that gap - over 75%.

That brings us back to the question - why is there such a huge growth in new ship orders?

While industry trend has been a major factor in this growth, financing has aided that growth and we need to ensure in keeping with market trends that financing be given where it's most needed, and right now it's towards the support infrastructure for all those ships sailing the seas.

It is natural that the handling capabilities, logistics and facilities improve to cope with this traffic. From supplies, bunkering and repair, to ship finance and maritime law, the region has become a sophisticated global shipping environment, thanks to the strong leadership and vision in the Middle East. This is where I think bank lending should now concentrate on. What we need is adequate infrastructure to support it and adequate regulation to govern ship ownership. I might not have provided all the answers but I leave you with enough room for thought.

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