Members of the Self-Defense Forces search for missing people in front of a fishing boat stranded during the March 11 earthquake and tsunami in Higashimatsushima, Japan. Kimimasa Mayama / Bloomberg News
Members of the Self-Defense Forces search for missing people in front of a fishing boat stranded during the March 11 earthquake and tsunami in Higashimatsushima, Japan. Kimimasa Mayama / Bloomberg NewShow more

Earthquakes and floods bite into global shipping profits



The torrential rains and burst rivers that flooded much of the Australian state of Queensland at the beginning of the year wreaked havoc on the country's economy, wiping tens of billions of dollars from its GDP.

But what is less known about the natural disaster, estimated to have cost the country as much as A$30 billion (Dh117.58bn), is its effect on the global shipping industry.

Up to 30 million tonnes of iron ore worth about A$4.26bn was unable to be dug out, processed, carted and then shipped off to the world's factories in China and elsewhere after mines were flooded.

"The negative impact on exports caused by recent flooding is expected to have a significant impact on the national accounts numbers for March," said Wayne Swan, the Australian treasurer, after data showed yesterday that exports dropped by 8.7 per cent in the three months to March, representing the biggest quarterly fall in 37 years.

Weather conditions and the boom-bust nature of the shipping sector are crucial factors in global trade. More than 90 per cent of the world's goods are carried by ocean-going vessels.

When natural disasters strike countries that produce commodities, the resulting delays cause ripples across the world. Meanwhile, in windfall years the shipping industry gorges on profits, an estimated US$80bn (Dh293.84bn) in 2004.

Apart from the problems in Australia, the Japanese earthquake and tsunami disaster in March also hit the shipping industry.

The devastation was enormous.

The insurers Lloyd's of London has taken a $3.8bn hit as a result of earthquakes and floods in the first quarter of this year, and predicted the high number of major claims in the aftermath of the catastrophes would lift insurance prices this year.

Maritime experts said the impact on US trade was difficult to gauge. The main ports in Japan, the world's third-largest economy, were spared.

But car factories and electronics plants sustained major damage, and broader production disruptions persist amid ongoing power shortages.

This is likely to affect ocean and air cargo volumes for months.

In April, foreign crew members refused to sail near Japan's earthquake-crippled nuclear power station and into some ports, even outside the exclusion zone, forcing shippers to use Japanese vessels instead to transport goods.

"Crews do not want to go there. Even Chiba, crews still do not want to go," Kyuho Whang, the chief executive of South Korea's SK Shipping, said at the time, referring to the radiation leaks at the Fukushima nuclear complex on the north-east coast of Japan.

"So they rely more on the Japanese vessels than the foreign vessels."

Apart from natural disasters, the shipping industry has also had to overcome other problems. In the boom years before the global downturn, shippers reinvested profits and ordered new vessels.

Hardly surprising then that overcapacity has become an affliction as economic cycles have turned times of plenty into periods of mere survival.

"The exceptionally weak day rates in the dry bulk shipping market in the first quarter of 2011 were due to weather disruptions around the globe," says Doug Garber, an analyst with FBR Capital Markets.

Shipments of iron ore and coal declined by 50 million tonnes in the first quarter, or 11 per cent below average, due to bad weather in Australia and Brazil.

In addition there was a supply bottleneck in South Africa and export permit delays in Indonesia, Mr Garber pointed out.

As a result, the shipping industry's bellwether indicator, the Baltic Exchange's main sea freight index, has more than halved in the past six months and is close to levels last seen during the global downturn in 2008.

There are also expectations the onset of India's monsoon this month will also reduce iron ore exports as rivers rise, making it harder to transport goods.

There were worries in the shipping sector the economic recovery seen by other transportation sectors, such as airlines, has largely passed by maritime companies. But hopes brightened in the past two weeks with a recent upsurge in activity.

The Baltic Index, which is based on daily ship chartering rates, rose close to a two-month high last week to 1,467 points - up more than 10 per cent since the beginning of the rally. The growth has been largely attributed to growing demand for cargo vessels plying the Atlantic Ocean.

Nigel Prentis, a director with HSBC Shipping Services, said shippers' profits were being hard hit because they were unable to charge sufficiently high rates for vessels such as capesize cargo ships, which typically haul 150,000 tonnes of iron ore or steel each, and are so named because they are too large to fit through the Suez Canal and instead travel around the Cape of Good Hope.

"In percentage terms it is quite a big gain but it is still [average daily earnings] of under $10,000 for capesizes, which barely covers the operating costs. So it is nothing to get terribly excited about," said Mr Prentis.

Another looming worry is the effect of deliveries. Global shippers, including companies from the Middle East, participated in an historic order spree between 2006 and 2008, and many of these orders are now being delivered, adding additional excess capacity.

In 2007, the United Arab Shipping Company ordered nine ultra-large container ships, each capable of handling 13,000 20-foot containers, in a deal with Samsung Heavy Industries of South Korea worth Dh5.5bn. It is due to receive the first vessel this summer. The Abu Dhabi National Tanker Company also invested heavily prior to the downturn, and is expected to have received 15 new vessels from South Korean shipyards by the end of this year.

In its latest research note on the Middle East transport sector, Nomura Securities said it was "surprised" by the extent of vessel overcapacity for very large crude carriers, capable of handling 2 million barrels of oil.

"Shipping rates have not responded to the rise in oil production," it said. Although Nomura believes the market for these oil tankers will improve in the medium term, "we are now turning more cautious", the company concluded.

Owners of dry bulk carriers may have more to cheer about. A poll conducted by Reuters found the shipping industry expects sea freight demand to grow by up to 15 per cent in the second half compared with the first half, primarily due to the resumption of exports from Australia.

* with agencies

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”