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24 Jul 2017

Qatari embargo: implications for the shipping sector

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"On 5 June 2017, Saudi Arabia, the UAE, Bahrain and Egypt severed diplomatic ties with the State of Qatar. Reports indicate that the move against Qatar is also supported by Yemen, a secondary government in Libya and the Maldives. Saudi Arabia, the UAE and Bahrain have now closed their air space and territorial waters to Qatar. Saudi Arabia also closed its land border with Qatar, Qatar’s only land border with another country. Egypt has also closed its airspace to all flights to and from Qatar. A direct consequence is that ports operated by the alliance against Qatar are now blocking Qatar-flagged vessels, along with other vessels that are heading to and coming from Qatar. In particular: The Saudi and UAE port authorities have now banned from their territorial waters all ships flying Qatari flags or owned by Qatari companies or individuals. UAE ports, such as Fujairah or those operated by DP World UAE Region, have banned all vessels destined to or arriving from Qatari ports, regardless of the nature of their call. In addition, DP World UAE Region extended the ban to all vessels loading or discharging cargo destined to or coming from Qatar. Reports were made of the Ports and Maritime Affairs at Bahrain’s Ministry of Transportation and Telecommunications suspending all marine navigation from and to Qatar with immediate effect. The Petroleum Ports Authority in Abu Dhabi is also reported to have issued a notice that Qatari-flagged vessels would not be allowed entry into Abu Dhabi Petroleum Ports. Egypt has not yet indicated whether it intends to block Qatar-linked vessels/cargo from using the Suez Canal - a common route for tankers. Practical implications in shipping These developments mark an unprecedented change in Middle Eastern relations, which will undoubtedly affect companies with trade routes to or from Qatar. Analysts suggested that companies with large trade volumes or retail operations in Qatar are likely to be most affected. These include logistics and shipping companies. Whilst all the aspects which may result from the current restrictions on Qatar are not yet apparent, we envisage the following operational implications are likely to be the most immediate in the shipping sector, all of which will have cost repercussions on the affected parties: The shutting of the land border crossing between Saudi Arabia and Qatar is likely to create long queues/delays. This may particularly impact consignments bound by road transhipment to or from Qatar. In addition, reports suggest that vessel supplies in Qatar, which are largely transited by road through Saudi Arabia, may be affected. Qatar is a major exporter of condensate, an ultra-light form of crude oil. The trade ban may make the purchase of Qatari crude and condensate more difficult. Indeed, very large crude carriers regularly conduct multi-loads of crude at multiple Middle East ports. Barring vessels that have called at Qatar from entering other ports in the region could require traders to vary their trading patterns. Bunkering is also likely to be affected. For instance, major bunkering ports such as Fujairah, where some three-quarters of tankers sailing through the Gulf stop to refuel, are refusing all vessels sailing to or from Qatar. On the transhipment side, some reports indicate that cargo is not allowed to be discharged onto feeder vessels to Qatar. In Fujairah, any Qatari cargoes already in port must be cleared within 24 hours. Ship managers are indicating they are encountering difficulties related to crew/personnel. For instance, it is reported that the Fujairah port’s immigration is not allowing crews to join or to sign off vessels coming from or bound for Qatar. In parallel, it is proving difficult to extract crew members and other personnel based in Doha given the current blockade. In relation to charterparties, these should be reviewed to establish whether they include a provision which specifically addresses blockades - for example CONWARTIME 2013 refers to ""blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever)"". A number of international operators are bidding for new contracts and renewals to operate their FPSO and FSRU vessels in the various oil fields including Al Shaheen. The uncertainly from the events this week will cast a shadow on the underlying charters supporting ship financing. There have been reports that banks in the region will refuse to deal with Qatari banks or refuse to recognise the Qatari riyal. We understand that some Saudi, UAE and Egyptian banks are suspending business with Qatari banks, such as recognising letters of credit and other contingent payment instruments until they have received guidance from their respective central banks. The international currency of shipping is the US Dollar so we expect limited exposure on this front. However, it may be possible that a shipowner could have an exposure to Qatari riyals if for example, a supply contract requires payment in US Dollars whist the sales contract income for the service or goods is in Qatari riyals. There have been no statements today from the Saudi Central Bank or from the UAE Central Bank. It has been reported that the UAE Central Bank has asked all commercial banks to report on their exposure to Qatari banks by Thursday (8 June 2017) before it makes a decision on how to move forward. Of course, the exposure of businesses to the current Qatari trade restrictions may be covered by insurance. It may also be managed through applicable contractual and local legislative provisions within the Middle East, including those which deal with force majeure and deviation. We expect to have more visibility on the operational and legal implications of the restrictions against Qatar as the matter unfolds. In any event, for the time being, there is no indication of the dispute de-escalating."

20 Jul 2017

DNV GL releases updated DNV GL NOx TIER III compliance guide

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"Classification society DNV GL has developed a new brochure to offer a set of best practices for the design of ships subject to NOx Tier III requirements. It also offers guidance on the considerations that should be taken into account at the newbuilding stage. To ensure the success of any newbuilding plan, shipowners should carefully consider the future operation of their vessels in the newbuilding planning stage, including the implications of the different technological solutions for reducing NOx emissions and how to fulfil the NOx Tier III requirements. In order to fulfil the stricter NOx Tier III emission limits, ship operators have the possibility of choosing from various options. The optimal compliance option will depend upon many factors, including a vessel’s individual trading pattern, engine size and speed. The brochure examines selective catalytic reduction (SCR), exhaust gas recirculation (EGR), the use of alternative fuels, internal engine modifications, direct water injection (DWI), fuel-water emulsion (FWE) and intake air humidification. Installing NOx Tier III-compliant technology can offer benefits beyond simply achieving compliance with emissions regulations. Demonstrating a company’s commitment to ensuring sustainable operations has become increasingly important. In addition, the installation of Tier III-compliant technology also goes hand in hand with direct financial benefits, as many major ports offer substantial discounts on harbour fees if a vessel complies with third party environmental schemes such as the ESI."

19 Jul 2017

PIL seen as next takeover target after OOCL

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"Pacific International Lines (PIL) is the next most likely takeover target in the fast-consolidating container shipping industry following last week’s $6.3 billion sale of Hong Kong’s OOCL to China Cosco Shipping, with the Chinese carrier seen as the most likely suitor for the Singapore-based company, according to maritime analyst Alphaliner. PIL wasn't immediately available for comment. The OOCL deal has left just four independent mid-scale carriers, each with market shares of between 1.5 percent and 2.8 percent, the industry analyst said. In the market for US imports from Asia, PIL had a market share of 1.5 percent in the second quarter, when the new global container shipping alliances launched, up 0.6 percentage points year over year, according to PIERS, a sister unit of JOC.com. PIL’s volume on the trade rose 67 percent in the same period to 58,407 TEU. Click to Enlarge Three of the carriers — Yang Ming, Hyundai Merchant Marine, and Zim Integrated Shipping Services — are government-linked, which makes them unlikely takeover targets outside their home nations of Taiwan, Korea, and Israel. The carriers’ cash-strapped status will further deter potential buyers, Alphaliner suggested. Yang Ming is in the midst of a recapitalization program mainly supported by the Taipei government, while HMM and Zim were financially restructured in 2016 and 2014, with their creditors acquiring significant stakes via debt-for-equity deals. “This leaves PIL as the only unencumbered candidate, and its niche position, in particular, on Africa-related trades, could make the carrier an attractive target for buyers keen on securing access to this emerging market,” Alphaliner said. Unlike its counterparts, PIL recently had to raise cash from asset disposals and provide collateral to secure bank loans to settle its outstanding debt. PIL is said to have sold two 2012-built capsize bulk carriers this year for just $26 million to 28 million apiece, taking a significant loss, and has pledged its shares in Singamas, the Hong Kong-listed container manufacturer in which it has a 41.1 percent stake, to raise bank loans of around $180 million. The proceeds from the sale of the bulk ships were used to pay off S$300 million ($219 million) of bonds due on July 17. PIL is obliged to sell its Singamas shareholding within 20 months for at least $180 million or at a price acceptable to its creditors, according to a stock exchange filing by the Hong Kong-based company on July 11. PIL, which is controlled by the Chang Teo family, does not publish regular financial reports, but it posted a significant net loss in 2016, due to “very low freight rates and a one-off bunker hedging loss” in the first half of the year. The company carries a total debt of more than $2.6 billion, according to Alphaliner. PIL has a close strategic alliance with Cosco, built up over recent years — it established a partnership with the Chinese carrier on the west and east Africa trades in 2016 and earlier this year signed a vessel sharing deal with Cosco and Wan Hai on the trans-Pacific trade. The carrier is due to take on the first of 12 new Chinese-built and financially-backed 11,800-TEU ships later this year and is expected to “rely heavily” on Cosco to find work for the new vessels, which are targeted at the trans-Pacific trades, including a planned entry into the US East Coast market in 2018. PIL and the other independent carriers have so far limited their efforts in the trans-Pacific to the US West Coast, but SM Line also plans to enter the US East Coast trade next year. In 2008, four Algerian men arrived in Halifax aboard a ship by hiding on a double-decker bus that was being transported to Canada from Liverpool, England. The bus was bound for Toronto, where it was to be part of the GO Transit fleet. In 2001, 36 Chinese stowaways were discovered to have spent two weeks in a container on the M.V. Pretty River after a worker at the Port of Vancouver heard voices coming from the other side of the metal walls. One of the illegal passengers claimed that the stowaways were destined for California, which was the ship’s final destination. Michael Broad, president of the Montreal-based Shipping Federation of Canada, said ships have security officers to track who gets on and off vessels and there is intense security at ports, including fencing, guards, cameras and 24-hour surveillance, in an effort to prevent illegal migrants and other unwanted activity. “It’s been quite some time since this has occurred and I can’t tell you the last time anyone was found in a container,” he said, adding that containers are sealed with a lock before they are loaded onto a ship. Stowaways that arrive in Canada are permitted to make an asylum claim, like any other prospective refugee applicant. But the shipping company responsible for the vessel on which stowaways arrive must pay a $25,000 bond to the federal government. That money is used to pay the costs of deporting the individual if their refugee claim is denied."

18 Jul 2017

GST impact on infrastructure: It will cut multiple taxes but will affect cost of construction

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The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. However, the advent of GST is also expected to boost the infrastructure sector with the elimination of ´tax on tax’ and the introduction of input tax credit (ITC). Under the previous tax regime, it was a litigious issue of whether infrastructure contracts have to be treated as ‘supply of goods’ or ‘provision of service’ contracts, or as a composite works contract involving the supply of both goods and services. While Value-added Tax (VAT), a state tax, was applicable to the ‘supply of goods’, a service tax, a central tax, was applicable to ‘provision of service’. With the implementation of GST, these litigations will come to an end. The Central GST Act, 2017 (GST Act), specifically provides that ‘works contract’ as well as ‘construction of a complex or a building, civil structure or a part thereof’ shall be treated as the supply of services. Even though this provision will provide clarity to a great extent, it may not be able to eliminate ambiguity completely. Contracts in the infrastructure sector can be quite complex, and determining the nature of these contracts would be difficult. Under the previous regime, a majority of construction contracts, being work contracts, were subject to a combination of both service tax and VAT. A service tax of around 4.5% (assuming taxable component of the service contract is 30%) and VAT ranging from 1-15%, depending upon the state, was applicable to construction contracts. Thus, under the earlier regime, the effective tax incidence for an average construction contract, ranged from 11-18%. Moreover, there were several construction activities, such as the construction of roads, dams, irrigation, that were exempt from service tax. With the rollout of GST, the rate of 18% for works contracts is higher, and the difference is more prominent for construction activities falling under the service tax exemption category. However, this higher GST rate could be set off by the benefit of input tax paid and ITC on the raw materials. On the other hand, a higher GST rate could also result in higher costs, if there is limited scope for renegotiating construction contracts, and contracts that do not account for contingency factors. The cost of construction services will also be impacted due to credit restrictions provided under Section 17(5) of the GST Act. According to the aforesaid section, a contractor will not get ITC for the supply of works contract service for construction of an immovable property but can avail the benefit of ITC on construction services availed from the sub-contractor. Furthermore, the aforesaid section also provides that ITC shall not be available for goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account, used in the course or furtherance of business. Thus, these provisions are complicated and contradictory. We can see that implementation of the above-mentioned credit restrictions can have an adverse impact on the infrastructure sector. However, this does not seem to be the intent of the lawmakers, as seen from the ‘Schedule of GST Rates’, which clearly provides that full ITC will be available for the composite supply of works contracts. Thus, we cannot conclude that higher GST rate on works contracts will be neutralised by ITC until explanation and clarity are sought with respect to the aforesaid credit restrictions. GST would also make compliance easier by eliminating multiple indirect taxes. However, it would require contractors to register in multiple states owing to the requirement of registering at the place of supply of service. Contractors would also have to compulsorily register in a state where it supplies services but has no fixed place of business, owing to the concept of “casual taxable person”. These provisions will increase the compliance costs for construction companies. Furthermore, companies will have to incur the costs of upgrading their IT systems, as input credit would be available only after an online reconciliation of tax invoices. With the advent of GST, there will also be a change in the cost of construction materials. For example, a higher GST rate of 28% imposed upon cement would adversely impact construction cost. Similarly, electricity is not within the ambit of GST and input tax will be an additional burden for the infrastructure industry. We cannot conclusively comment on the impact of higher GST rate on the infrastructure sector, as there is still ambiguity with respect to credit restrictions. GST will boost the sector by eliminating multiple taxes and simplifying the law, but it will also impact the cost of goods and services used in construction and increase compliance costs. It is still very early to make a judgment on the new tax reform. We should wait till it concretises.

18 Jul 2017

FICCI's latest Manufacturing Survey finds improvement

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"FICCI's latest Quarterly Survey on Manufacturing suggests slight improvement in the manufacturing sector outlook in the first quarter (April - June 2017-18) of the fiscal as the percentage of respondents reporting higher production in first quarter have increased vis-vis previous quarter. More importantly, FICCI Survey suggests that the percentage of respondents reporting lower production has reduced considerably over the previous quarter thereby indicating a more positive outlook in months to come. The proportion of respondents reporting higher output growth during the April - June 2017-18 quarter has risen slightly from 47% January - March 2016-17 to 49%. Respondents reporting negative growth have come down to 17% in April - June 2017-18 from 27% as reported in the previous quarter, noted FICCI Survey. FICCI's latest quarterly survey assessed the expectations of manufacturers for Q-1 (April - June 2017-18) for eleven major sectors namely auto, capital goods, cement and ceramics, chemicals and fertilizers, electronics & electricals, leather and footwear, machine tools, metal and metal products, paper products, textiles and technical textiles, and textiles machinery. Responses have been drawn from over 300 manufacturing units from both large and SME segments with a combined annual turnover of over ?3.5 lac crore. However, the cause for worry was the rising cost of production (for a little over two-thirds of the respondents), the Survey noted. The cost of production as a percentage of sales for product for manufacturers in the survey has risen significantly as 69% respondents in Q-1 2017-18, against 60% respondents reported cost escalation in last quarter. This is primarily due to rise in minimum wages and raw material cost. In terms of order books, about 47% respondents in April - June 2017-18 quarter reported higher order numbers which is almost the same as that recorded in the previous quarter. Capacity Addition & Utilization The average capacity utilization as reported in the survey for the manufacturing sector is about 75% for Q-4 2016-17 which is similar to that of Q-3 2016-17. The future investment outlook remains less optimistic. Even now, 74% respondents in Q-1 2017-18 as against 75% respondents in Q-4 2016-17 reported that they don't have any plans for capacity additions for the next six months. Although, the bleak investment outlook seems to be waning if Q-3 2016-17 is taken into consideration (when 77% respondents had no plans for capacity addition). High percentage implies slack in the private sector investments in manufacturing is here to continue for some more months. Large volumes of imports, under-utilised capacities and lower domestic demand from industrial sectors and OEMs are some of the major constraints which are affecting the expansion plans of the respondents. On a broader perspective, in some sectors (like chemicals, capital goods, textiles machinery, cement, metals and paper) average capacity utilization has either remained same or declined in Q-4 of 2016-17. On the other side, some sectors including auto, textiles and electronics and electricals reported a rise in the average capacity utilization over the same period. Inventories As for the inventory levels, 87% of the participants in Q-4 (January - March 2016-17), as against an overwhelming 97% in Q-3 (October-December 2016), have maintained either more or same levels of inventory as their average inventory levels. Exports Export outlook of manufacturing sector for the first quarter of this fiscal also seems to be marginally improving as percentage of respondents expecting fall in Q-1 (2017-18) has come down from 22.8% in Q-4 (2016-17) to 18.5%. Hiring Hiring outlook for the sector remains subdued in near future as 73% of the sample participants in Q-1 2017-18 said that they are unlikely to hire additional workforce in next three months. However, when compared on a sequential basis, this proportion reflects a mild improvement over the previous quarter when 77% of the respondents were reportedly averse to hire additional workforce. Interest Rate Average interest rate paid by the manufacturers still remain high though have shown some sign of moderation with average rate of 11% but highest rates continue to be upwards of 14.5%. Sectoral Growth Based on expectations in different sectors, the Survey suggests that moderate growth is expected in metals, leather and footwear, machine tools and capital goods sector in Q-1 2017-18. Low growth is expected in sectors like chemicals, automotive, textiles and cement. Only in case of electronics and electricals high growth is expected for Q-1 2017-18."

18 Jul 2017

Cochin Shipyard proposes to issue IPO to finance infrastructure project

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The Cochin Shipyard Limited (CSL) has embarked upon two major infrastructure expansion projects - International Ship Repair Facility at a cost of Rs. 970 crore. and construction of new Dry Dock with a cost of Rs. 1799 crore. In order to finance these projects it has proposed to issue Initial Public Offer (IPO). The entire proceeds of the funds raised through IPOs will be used for partial funding of the projects.

12 Jul 2017

Aid for Trade: ITC launches Export Potential Map for more targeted trade

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"The International Trade Centre (ITC) today unveiled Export Potential Map, the latest addition to a series of online tools that makes it easier for businesses and countries to identify what goods and services to export and to where. Presenting Export Potential Map at the Aid for Trade Global Review, which takes place at the World Trade Organization (WTO) in Geneva on 11-13 July, ITC Executive Director Arancha González said: ‘Export Potential Map is an innovative tool that will enable developing countries and their companies to make better export decisions based on rigorous economic analysis. It will allow companies to target new markets and for policymakers to optimize their policies and support programmes for their exporters.’ To ensure that companies can target new markets it is important that they have evidence on trade costs and expected demand. This is also crucial to allow policymakers and trade support institutions to optimize the policy environment and support programmes for existing and would-be exporters. Yet, figuring out a country’s export potential – and especially, which goods and markets would best contribute to sustained economic development – is as complicated as it is necessary. Export Potential Maps helps companies, institutions and policymakers get answers to these questions, allowing them to rapidly understand their country’s export opportunities. Building on ITC’s methodology for assessing trade potential, Export Potential Map translates complex economic analysis into practical information about new export markets and products. Export Potential Map pulls in data from a range of sources including import and export data, tariffs, gross domestic product, and geographic data. Based on this data, the tool can quickly carry out evaluations of a country’s potential to export: in specific sectors and to what markets. This represents a unique opportunity for developing countries to ramp up their exports. For example, least developed countries (LDCs) on average export to four markets only. Export Potential Map suggests additional markets that offer good demand and tariff conditions for goods exported by LDCs. In addition, the tool helps identify options to diversify and expand the range of products LDCs export. Information on Export Potential Map is available for 222 countries and territories at a very detailed product level. The web tool has a user-friendly interface and innovative visualizations that can be easily downloaded, shared on social media and embedded into reports or websites."

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