ABU DHABI // The higher costs of shipping commodities, food and construction materials, which have emerged as a key element in soaring inflation in the UAE, will continue for the next two years, according to forecasts. Inflation hit 11.1 per cent in the Emirates last year, the highest in 20 years, as a six-fold surge in oil prices since 2002 has sparked a wave of spending in the public and private sectors. A booming construction industry has pitted Gulf builders against resource-hungry China and India, who share a similar insatiable demand for steel, cement and commodities such as coal, grain, iron ore and alumina.
"China has become the manufacturer of the world, and it is now the manufacturer of inflation around the world," said Scott Jones, the chief executive of Emirates Ship Investment Company, the UAE's largest shipping firm. He said the UAE was not immune from the effects of Asian demand, which had been pushing up the price of metals and other commodities. As demand for raw materials has gone up, the need for a means to ship them has also risen, and this has triggered a global shortage of ships. The cost of chartering a capesize bulk carrier - which typically holds 175,000 deadweight tonnes and is popular for transporting coal and ore - has nearly quadrupled in the past two years, according to Freight Investor Solutions (FIS). In a recent forecast, FIS said the market for shipping rates looked strong into next year and 2010.
Similarly, the cost of purchasing used ships has also witnessed sharp increases. A five-year-old capesize carrier has risen from US$46,000 (Dh168,000) in 2003 to more than $140,000 this year. Attempting to capitalise on the high prices, shipping firms have placed a record amount of new shipbuilding orders. The number of ships on order is so great that it represents about 60 per cent of the ocean-going fleet of bulk carriers in use today.
Ironically, prices for new ships have risen due to the growing cost of steel, a primary material, tying the price of ships to the rising costs of one of their most common cargos. "It's a bit of a snowball," acknowledged Mr Jones. One of most important changes has been the rise in oil prices. Like other forms of fuel, shipping fuel, called IFO (intermediate fuel oil) has soared. In the past three years, for every dollar increase in world oil prices, global transport costs have risen by one per cent, according to a May report by CIBC World Markets.
The study suggests that transport costs have grown so substantially, they are creating a potential counterweight to globalisation. It found the recent surge in costs to be equivalent to a nine per cent tariff on global trade. Rising transportation costs, most notably in shipping, have even eroded the gains from 30 years of free-trade agreements. "The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today," said Jeff Rubin, the chief economist and strategist at CIBC, in the report.
The price rises have been highly volatile, reflecting the vulnerability of global shipping. "Whether it is a drought in Australia or a general strike in Argentina, all these things constrain and play with supply and demand curves in any given week," said Raffi Vartanian, a shipping analyst with FIS. The fluctuations have triggered a growing market for freight derivatives and hedge funds, in addition to investment banks such as UBS, JPMorgan Chase and Barclays signalling interest in opening new shipping investment products.
While shipping firms may benefit from new investment, they have also had to deal with other cost fluctuations. The boom times have exhausted the supply of qualified shipping crews, forcing shipping firms to raise salaries to compete for talent. Dry-docking charges have also risen. @Email:igale@thenational.ae