Some container lines may take a knock, shipbuilders sense opportunity

(SINGAPORE) Although the price of oil spiked just briefly to hit the US$100 level overnight, the impact in Singapore seems to be mainly psychological for now.

Some sectors will be adversely affected but it also spells opportunity for others. Economists concur on the limited impact of the recent rises.

UOB economist Ho Woei Chen said that the increases have been demand driven and therefore with the anticipated slower growth this year, there will be downward pressure on prices anyway. But the manufacturing, transport and logistics sectors will be burdened, she added.

Standard Chartered economist Alvin Liew added that with prices hovering around US$90 recently, hitting the US$100 level was seen as a matter of time anyway. These prices are driven by tight supply and robust demand, he said.

'If expectations for the overall market to slow down take place then prices will balance out,' he said. 'But pain will still be felt in the transport sector, in electricity tariffs and in terms of the CPI and cost of living,' he added.

Others agreed that reaching the US$100 level was no surprise. 'Crude prices had risen steadily over the course of the past 12 months, with speculative activities edging the value further upwards when it appeared that breaching the US$100 barrier was not impossible,' said DNV Petroleum Services managing director Tore Morten Wetterhus.

'Correspondingly, bunker prices had risen significantly last year, and unless crude prices begin to decline drastically in 2008 (we don't believe this will be the case), marine fuels costs are going to stay high for ship operators,' he added.

These high costs will affect the various shipping players in different ways. Those whose rates are tagged to fuel prices will see little impact while those who do not have these variables locked into their contracts may struggle to recover the increase in costs.

'We're pretty much immune to oil price movements unless something big happens at a global economic level,' said Mercator Lines managing director Shalabh Mittal.

STX Pan Ocean managing director IY Choi was confident that he would be able to immediately raise rates in reaction to any bunker price adjustment.

Dry bulk carriers like Mercator and STX typically have rate adjustment clauses built into long-term contracts and spot contracts always take into account the prevailing bunker rates.

The container lines and others that do not have these adjustment clauses built in will see some time lag before they can recover costs.

'There is no doubt that the increased oil/fuel prices will have an impact on the shipping industry; bunker costs now take up about 20 per cent of the entire cost picture,' said a spokesman from major line Maersk.

'How this is done may vary, however there is no doubt that we cannot continue to absorb huge increases in fuel costs with such slim profit margins,' the spokesman added.

Others like builders Keppel Corp and Marco Polo Marine see upbeat prospects. 'When oil prices go higher we expect more orders for the supply vessels we build,' said Marco Polo chief executive Sean Lee.

Meanwhile a Keppel spokesman said: 'So long as the oil price is sustained at above US$35 per barrel, there will be continued demand for new rigs to carry out exploration and production activities.'