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Sun 10 Aug 2008 04:00 AM

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Riding out the storm

How oil and petrochemicals transport specialist Gulf Navigation Holding is managing to play the global economic crisis and the credit crunch to its own advantage.

How oil and petrochemicals transport specialist Gulf Navigation Holding is managing to play the global economic crisis and the credit crunch to its own advantage.

All around the world, a financial storm is brewing over the credit crisis sparked by the US mortgage market. Every week asset building projects fall by the wayside as international banks and financial institutions rein in their lending.

For a ship-owner to forge ahead with purchasing new fleets in such a time of inflated prices and unsteady financing requires clear planning, a solid financial base and terrific ambition.

Some of the orders being put through shipyards will be defaulted on. This will enable us to go ahead with our expansion at the right price.

After just an hour with Abdullah Al Shuraim, it is clear that his company, Gulf Navigation Holding, is chock full of all three qualities. The specialist oil and petrochemicals transporter has a unique growth strategy that recognises the forces which dictate the current financial crisis and uses them to its advantage.

Although the company is relatively young - it was founded in Dubai in 2003 and was subject to an IPO just two years ago - the founding boards are all industry veterans with an impressive range of contacts. It is this wealth of experience that saw the operator turn profits of US$31 million in 2007 - an increase of 120% from the previous year.

Gulf Nav currently has around $730 million in assets and owns 18 ships, with aggressive plans for expansion. But at a time where the prices of vessels are skyrocketing, the freight firm is naturally electing to chart its development course extremely carefully.

"Every year we are receiving new ship builds," says Al Shuraim. "In 2007, we received several chemical tankers and VLCCs. This year, it seems every few months we have received new ships. This will mean more revenue for the company."

"At the moment, the company is in a good financial position," he adds. "It has solid cash to secure long-term plans to increase fleet to acquire ship companies, new contracts or second-hand ships at the right time."

"We feel that at present the prices for new building are very high. Due to the fact that shipping is cyclical, you need to look at the long-term value of your investment. What we are currently doing is monitoring the market and trying to make our moves at the right time."

He says that the company is acutely aware of the credit crisis and how the phenomenon is quickly spreading to shipyards. Banks are becoming increasingly jittery about handing out vast sums of money to customers with an unproven record that wish to finance new-build projects.

Al Shuraim believes that around 40% of the current orders in shipyards around the world have not yet received financing from banks. Others have put the figure as high as 70%. Of those speculative orders, he says, around 10-15% will be cancelled owing to banks refusing to pay the required money. "Some owners who are not in a strong financial position will default on their orders," he argues.

"Some of the orders being put through shipyards at present are speculative; some come from owners who are going to be under pressure from their credit standing. Furthermore, some orders will be cancelled due to banks deciding to withdraw financing.

"This is because of the problems that banks are facing and the international situation right now. Banks are under a lot of pressure to rein in lending. The upshot of this is that pressure will be put on owners to the extent that they forfeit their orders," explains Al Shuraim.

"All of this has an impact on the market and will put pressure on the prices of new builds. Moreover, second-hand ships will also be affected. Their prices are linked to the prices of new ships, so owners will make a lot of profit on their sales."

However, this will mean that companies that are in a strong financial position or those that have forged close relationships with banks will be able to step in and cherry-pick those orders that have fallen by the wayside.

"This may create an opportunity for us to take orders which have been defaulted on," indicates Al Shuraim. "The prices of ships now are on the very high side. These defaulted orders will generate an opportunity for us to go ahead with our expansion plans at the right price."

"We have done a lot of analysis in various sectors of market and are monitoring things very closely to take decisions at the right time," he adds.

"We are looking at both prices of existing contracts and new builds. When we see an opportunity that is a good long-term prospect for the company, we are financially in a position to enter into a contract. We have built very strong relationships with banks to secure the finance required for such deals, meaning that we can take these opportunities when they come, whether that is in a month, a few months or next year."In January, Hong Kong-based shipper Jinhui announced that it was calling off the construction of two giant ore carriers, citing "negative sentiment clouding the global financial markets".

The firm was forced to pay a $4 million cancellation fee for the ships, which were priced at $122 million each. Bosses announced in a statement that the company was not able to obtain financing despite a 15-year charter contract from a "first-class steel mill".

Officials at Athens-based shipper Oceanaut Inc announced in February that the firm had cancelled a $700 million deal to buy nine dry bulk carriers.

We are concentrating most of our fleet in medium to long-term charter, therefore protecting ourselves from any downturns in the market.

It is believed that any orders which require more than $500 million in bank financing will end up on the scrap heap and the ensuing spate of cancellations has led many to suggest that the rate of ship building is set to fall in the near future. In February an executive at Dalian Shipbuilding Industry Ltd, one of China's leading shipyards, said that the amount of new builds could fall significantly as a result of the credit crisis.

Shares in shipyards have also suffered. Hong Kong-based Guangzhou Shipyard had 38% wiped off its share price in the last three months, while Yangzijiang Shipbuilding dipped about 55% over the same period.

On the other hand, a fall in shipbuilding activity could prevent a glut of ships coming into the market, thus halting a drop in freight rates.

Perhaps in part due to the question mark that hangs over the longevity of current freight rates, GulfNav has tied up the majority of its fleet in long-term contracts to shield the company against any possible downturn.

"Shipping is a long-term business," says Al Shuraim. "We are concentrating most of our fleet on medium to long-term charter. By doing so we are protecting the company from potential downturns in the market because we are secure in the long term."

"We are signing long-term contracts with strong cash companies like SERBIC and Shell," he adds. "As a company, your liquidity is in a good position if you sign long-term agreements. This is because you enjoy good terms with financial institutions, who are aware the deal is long term and who view their financing as secure. As a result, you can obtain a very good margin; most of or fleet is tied up for two to 15 years."

However, the company entered into a "pool" arrangement with Stolt-Nielson at the beginning of July, which consists of six ships with a 50:50 ownership deal. The idea is that the pooled ships will take short-term contracts in order to capitalise on the current high freight rates.

"The most profitable way of operating is through a pool," says Al Shuraim. "It adds excellent value to us for operating these chemical tankers in the most efficient way."

"Most of our assets are in fixed-rate deals generating a steady flow of cash protecting us from drops in the freight rate in the future. On the other hand, a smaller portion is free to take short-term chartered contracts, benefiting from current freight rates."

However, Al Shuraim expects that freight rates will be buoyed at least in the Middle East region by the continuing demand for oil. "We will see more oil refineries in this region in the future," he says.

"The demand in oil will undoubtedly continue at current rates and, being producer of 40% of the world's oil, there will always be a need for shipping oil in this region."

Although Gulf Nav is relatively young, the 23 founders of the company all have a great deal of experience in the region.

"Al Shuraim himself has been in the shipping industry for 12 years and was the CEO of National Chemical Carriers, a subsidiary of the National Shipping Company of Saudi Arabia. Many of the other founders have experience in transporting oil," says Al Shuraim.

"Through the years we built up expertise in this sector and strong relations with major players in the industry," he adds.

"This has helped the company to make the right decisions at the right time. We are enjoying very solid time charter arrangements with Class A customers. We took decisions, negotiated good prices, and used our experience and contacts to win the big contracts."

"We are only one of a handful of companies transporting oil in this region," Al Shuraim concludes.

"The biggest are the government-owned fleets. We only have 7-8% of the total fleet in this sector so there is room for us to grow. With the contacts we have and our experience in this field, the opportunity for us to obtain more business is always there."

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