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Dubai has the ports and support infrastructure... Creating a national shipping line to make full use of the changed dynamics in logistics supply would make sense. Image Credit: Gulf News Archive

The COVID-19 has highlighted our fundamental dependence on transport infrastructures, with an unprecedented demand for logistics during the crisis.

According to analysis by Dubai Chamber, the UAE’s maritime freight connectivity was a major factor in ensuring vital supplies reach global markets even as air transit channels - especially passenger airplanes which carried cargo - were restricted after countries halted flights.

But as the UAE’s logistics sector continues to play a key role in efforts to fight the pandemic, it also points to an area of opportunity we have yet to tap into. The shipping industry handles close to 90 per cent of global trade, and while we enjoy the world-class infrastructure of Dubai Ports World and Jebel Ali’s role as the Middle East’s biggest transshipment hub, we are missing the presence of a homegrown global leader in shipping.

Costs are favourable

Shipping is somewhat countercyclical to oil prices. Since fuel is an important component of operating cost, low oil prices now mean lower operational expenditure and higher profitability - a trend that is clearly reflected in the recent run-up in various shipping companies.

Following the International Maritime Organisation (IMO) marine fuel standards change early this year (IMO 2020), the Very Low Sulphur Fuel Oil (VLSFO) costs have dropped from the peak of $800/MT to $300/MT in the last four months, providing tailwinds to the shipping industry through lower vessel operating costs.

When oil prices are in contango - when contrary to normal times, future prices are higher than spot prices - demand for tankers also increases as oil importing nations and commodity traders line up tankers to purchase cheap oil in the spot market and sell forward contracts to lock in gains. This usually leads to higher vessel chartering rates and, recently, Very Large Crude Carrier (VLCC) rates went as high as $300,000 per day from just $15,000 only a year ago.

While the rates have now stabilized to around $50,000, they are still higher than last year’s average.

Create a mega player

The UAE is home to several successful smaller shipping companies, but a new line to challenge global shippers is the logical next step and could, in fact, play a critical role in battling the downturn. Such a player can benefit from economies of scale and from new trade patterns brought about by the pandemic.

Consolidation across shipping companies can also leverage the potential of regional downstream petrochemicals market growth, especially with the new oil refineries projects dotted across the Middle East. As GCC economies tap to capture a higher proportion of petrochemicals value chain, the region will see a paradigm shift away from crude oil export to homegrown petrochemicals complexes that diversify the economies.

This presents an opportunity for a strong domestic shipping powerhouse to cater to regional demand growth.

Global trade has, historically, been the main driver of economic prosperity. Ultimately, building a consolidated global shipping line can help shape a sustainable base for the UAE’s future growth across the entire Indian Ocean region while making global trade even more accessible.

- Ajit Vijay Joshi is head of Public & Private Markets at Shuaa Capital.