Dubai's expanding infrastructure offers new opportunities for the shipbuilding segment

With a long tradition in boat building and a central location on one of the world’s busiest shipping lanes, Dubai remains a serious player in the shipbuilding industry. The UAE, as a whole, invested between $170m and $220m on boat design and boat building in 2013, according to the Dubai Council for Marine Industries and Drydocks World. While this includes pleasure crafts, the emirate also has a strong reputation in terms of commercial and industrial ship construction.

Attractive Credentials

“Dubai is a very good place for maritime business because of the supporting infrastructure behind you,” Lars Seistrup, managing-director of Damen Shipyards Sharjah, told OBG. The industrial precinct of Dubai Maritime City (DMC) offers key infrastructure and facilities for the industry, allowing companies to set up quickly without significant capital deployment. DMC offers 19 ship-repair plots and two ship lifts capable of handling 3000 and 6000 tonnes each. As with the rest of the emirates, the local maritime industry is highly competitive on input costs. In terms of labour, for example, Dubai is more cost competitive than the leading shipbuilding centre of Singapore, according to Seistrup.

These features are also drawing large international players to the local market. “In the midst of falling international energy prices, we believe innovation will be the key driver of the UAE’s economic growth, especially in the marine and offshore sector,” Juma Mubarak, the managing director of marine and offshore servicing company Mubarak Marine, told OBG.

Similar to its Asian role model, Dubai is also well located to capture substantial building and repairs work. Located at the centre of the GCC region, which holds 40% of the world’s oil reserves and a quarter of its gas reserves, the emirate generates significant business in supply vessels and associated infrastructure for the oilfield services industry.

This emphasis can be seen by the make up of Standard Chartered’s regional shipping finance portfolio based in Dubai. Approximately two-thirds of the bank’s loan book to the industry comprises supply vessels for the oil and gas industry.

Navigating The Waters

The outlook here is mixed. With crude oil prices falling by about 50% between June 2014 and early 2015, the prospects for the industry moving forward look uncertain. If producers scale-back on exploration and development expenditure, this will have a knock-on effect on oilfield services firms and subsequently shipbuilders. Despite this, many in the local sector are confident that order books will remain healthy moving forward. “What is going to make a difference is when Iran opens up. That will have a positive impact on the repairs market,” Seistrup told OBG. If the West strikes a deal with Iran and the sanctions regime is dismantled, there will likely be a considerable uptick in demand for services from Dubai-based builders and repair companies.

Since June 2014 the sharp drop in the oil price has had a negative impact on the oil and gas service industry in the GCC, Knut Mathiassen, regional head of shipping finance for the Middle East and Africa at Standard Chartered, told OBG. However, for oil tanker owners and container carriers the outlook is more positive, with lower fuel costs. The market, which is dominated by China, South Korea and Japan, is likely to be depressed for some time. An oversupply of tonnage in the shipping industry is affecting the shipbuilding sector (see overview). Yet new build business is not the only area that is slow. The flood of new vessels entering the market is also hitting the repairs market as older ships are taken out of service.

Local

However, while the environment remains challenging, local players are performing well. Drydocks World, perhaps the flagship company for the sector, is a case in point. The company has struggled to compete with China and South Korea in terms of the traditional shipbuilding market, and the company is therefore more focused on niche projects. For Dry-docks World, Europe is a major market. Locally, the geology of shallow water oil plays and substantial jack-up capacity provided by Singapore has meant that the company has struggled to find custom. Yet the company has come back from bankruptcy to win some substantial contracts in the last 24 months. Drydocks World had filed for bankruptcy locally after its debt burden became unsustainable on the back of acquisitions in Asia. With a key focus on repairs and the offshore industry, it has turned its fortunes around. In 2012 the firm completed a $2.2bn restructuring plan, and in 2013 earnings before interest, taxes, depreciation, and amortisation came in at around $110m, with a 12% increase in vessels from new customers and a 5% rise in total activity.

Unchartered Territory

A number of sizeable orders in the last 18 months have turned fortunes around for Drydocks World. In January 2014 it attained a $730m contract for the largest rig ever to be built for the North Sea. The order from Drill One Capital was part of a package that was expected to be worth as much as $1.4bn by the third quarter of 2014. This was followed in May 2014 by an announcement that the firm would build the world’s first liquefied natural gas (LNG) harbour tug in conjunction with Finnish group Wärtsilä and the Dubai Carbon Centre of Excellence. The vessel, which will be used by Drydocks World, will come at a cost premium but will help to position the company for a growing green market.

The global fleet of LNG-powered vessels is forecast to reach 1800 by the end of this decade and the fuel source is becoming a much greater consideration for the shipping industry in general. “With new EU restrictions expected to put pressure on global shipping companies to use more efficient, environmentally sustainable fuel, there is a growing need for significant build out of LNG bunkering infrastructure in the Gulf region to accommodate the shipping industry’s switch to cleaner fuel sources,” Jorn Hinge, president and CEO of United Arab Shipping Company, told OBG.

Drydocks World is beginning to excel in the green segment. In October 2014, it announced it had won a contract to build the BorWin3 high-voltage direct current converter platform in the North Sea, which will transmit power from offshore wind farms to Germany and is scheduled to come on-line in 2019.

Turning A Corner

This contract is a sign of Dry-docks World’s resurgence and reorientation following the fallout from the financial crisis. However, the reverberations can still be felt in the industry. “Asset values in shipping have moved like the Dubai property market. There was close to an 80% fall in asset values at the time of the crisis in 2009,” Mathiassen told OBG. This decline affected the whole maritime sector and led to numerous difficulties for companies that were not as resilient or fortunate as Drydocks World.

With the wider industry beginning to stabilise, however, the prospects for those firms that have survived are beginning to look up. Indeed, led by Drydocks World’s revival and the potential opening up of Iran, Dubai’s shipbuilding industry centred on Dubai Maritime City should continue to expand over the coming years, in turn helping the economy as a whole.