Floating rates: region's new shipping fund

Why is shipping fund a good idea in the Middle East today?

Tufton Oceanic?s Marcus Machin and Apicorp  are confident of the shipping fund potential in the region.
Tufton Oceanic?s Marcus Machin and Apicorp are confident of the shipping fund potential in the region.

OPEC produced an average of 30.7 million barrels per day in February, 97,000 barrels more than the previous month, according to data compiled by Bloomberg. The 12-member group’s shipments averaged around 23.75 million barrels per day in the four weeks to March 30, 2.7% more than a year ago, according to Oil Movements, a Halifax, England-based company tracking cargoes.

This is music to the ears of refiners and cargo vessel owners, as the recession and a oversupply of vessels meant a glut in the petroleum shipping industry. Selected sectors of cargo shipping industry is looking to a recovery world over and specifically in the Middle East.

Marcus Machin, director, Tufton Oceanic says there are no long-term views to take on the industry as shipping is a cyclical. Tufton Oceanic has been researching the product tankers sub-segment extensively and has come to conclusion that there will be a growth in demand for transportation of oil products by 5% per annum over the next 3-5 years.

He identifies a number of drivers that substantiate this percentage of growth in the market. One of the key drivers is the growing number of refineries in Saudi Arabia and in South Asia.
He says this growth of refineries comes at a time when the supply of vessels has been severely constrained owing to a lack of availability of finance in the market for new build orders.

“The lack of capital infusion in new ship build orders also provides great opportunity for investment. We feel it provides a positive context for the growth in asset values and those are today reflected in charter rates,” he says.

This is the thinking behind the launch of the Apicorp Shipping Fund.

The fund that was launched in February is a 150 million dollar fund which was set up on 30% equity and 70% loan. Apicorp, the Saudi Arabia-based Arab investment bank underwrote the whole fund and Tufton is participating in it with a small percentage of capital infusion.

The Shariah compliant Fund is also the first Fund in the Middle East aimed at a specific vessel category. The tankers will be employed in the regional and international tanker market for five years to help meet the projected upsurge in demand for petroleum product carriers. The senior debt financing for the fund was provided by Standard Chartered Bank, SMBC, Riyad Bank and Natixis.

Petroleum Shipping Fund as an investment tool is fairly new to the Middle East region. But in the industry of petroleum shipping there are a lot of changes expected in the region.

The cargo shipping lines today are changing with the downstream expansions in the Middle East region. Earlier the shipping routes were fairly straight forward. Crude and basic chemicals were shipped out of the region and finished good were then shipped in.

But the Middle Eastern countries want to change all of that now and want to ship out high-quality clean petroleum products out of the region to high-premium markets like Europe. So, the refiners of the Middle East region today are in direct competition with those in Asia for the clean fuel segment.

“Trade patterns with shipping have definitely been altered today. There are a number of reasons for that. One of it is because refining is now moving closer to the source of products and the other is the bankruptcy that refiners in the developed countries are faced with. In the US we have already seen two major refiners shut down their units and last year there was a well-publicised shut down in Europe, Machin says.

This shift in refinery is a trend that is globally analysed. An AT Kearney Study of refineries says that the United States is forecast to become an exporter of products, reversing its long-held position as a massive importer. Western Europe, for its part, is seeing changes in asset ownership, with major players rethinking their portfolios and expediting divestments.

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These changes reflect a more deep-seated change than a simple transfer of assets. The conventional wisdom of vertical integration as the ideal and sustainable model for refiners is being challenged. More differentiated approaches are being discussed, in which asset specifics are considered, along with the broader issue of network integration.

Middle East export refiners are in talks with downstream integrated players or specialized retailers in Asia to secure market outlets in the context of future changes in supply and demand.

We are also seeing attempts to better lock in value from deeper integration with petrochemicals, lubricants, or other specialties, which are directing the discussion to the next level.

So, Tufton Oceanic and Apicorp reiterate that they have analysed the trend long and hard before the launch of the shipping fund and their confidence in the fund does not only stem from current market trend but also from the fact that the five tankers purchased for the fund have long-terms contracts that will be in place until the closure of the fund.

“All five ships have been fully employed till the fund ends. The ships have been contracted for the entire term of the fund, which is five years . It is a key element to this fund. This helps in maximising returns to the investor and reducing the risks associated with the fund,” said Ahmad Bin Hamad Al-Nuaimi, Apicorp’s CEO.

Al-Nuaimi also says that Apicorp was convinced of the shipping fund as an investment vehicle largely because of Tufton Oceanic’s long history of investment in the shipping industry and the current trend of increased downstream activity in the region.

“All the five tankers purchased for the fund are employed either in pooling arrangements (collective pools of various owners) or alternatively on medium-term charter to credit worthy shipping companies. So, they will trade internationally and will trade on established routes through the Middle East, Asia trades or possibly the trans-Atlantic trades,” he added.

Machin is positive about the fund’s outlook given the international shipping scenario today.
He says that while Norway has provided the most developed market for capital raising for shipping in recent years, and while; United States - based investment institutions have invested in the market, shipowners are still faced with considerable difficulties when seeking to raise funds. So, in those circumstances, for the shipping market accessing source of capital from the Middle East is a major step, he reckons.

“There have been a lot of attempts to launch a fund over the years, but not many have been successful. The preparedness of Apicorp to look at this sector of investment - is a significant development for the shipping market,” Machin concludes.

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