Breakbulk Prospects Optimistic Despite Fuel Cost, Tariff Concerns
When this index crashed (along with most global stock exchanges), it had a devastating impact on the multipurpose/breakbulk sector. Commodity prices collapsed and freight rates plummeted. At the same time, a surge of newly built vessels began flooding the market. A booming freight market had suddenly gone onto life support within the blink of an eye.
Just like getting into better physical shape, which normally requires shedding excess weight, eating right, and exercising — in other words, making good choices — our multipurpose/breakbulk sector needed to do the same thing. Shed excess tonnage, curb our appetite for new ships, and put ourselves on a budget.
Markets long for certainty, transparency, order, and stability, but we rarely experience these types of conditions simultaneously. While we were gradually pulling ourselves up from the market crash of 2009, we were hit again in 2014 as the price of oil crashed. Once again, we found ourselves playing defense. Projects were placed on hold and capital investment on the part of energy companies dried up.
Looking at the carrier landscape, we have still not reached a balance in demand vs. capacity. Due to the length of this market downturn, we have seen freight rates plummet by as much as 75 percent in some trade lanes with many owners holding on for dear life. Operators and owners today continue to be challenged by low to negative margins, forcing many to seek alternative strategies for survival. Fleet consolidations continue to be a favored strategy.
Bankruptcies, on the other hand, have not shown to have improved the overall health of the sector. The Korean container carrier Hanjin bankruptcy is a good example. While the company collapsed, its assets, vessels, and containers (mostly chartered tonnage) only got absorbed into an already crowded space by other carriers and owners. The same lessons apply in the multipurpose vessel sector.
At the end of the day, the only real solution is a cooperative effort and support amongst all stakeholders to exercise prudence with existing assets and future investments into the sector.
By all accounts, 2017 was another intense year for our industry with the sector starting off weak. However, we observed a promising development throughout the course of the year. This development occurred in the dry bulk sector, which showed a positive fixture dynamic taking shape. The light is also visible when we look at our forward freight bookings, which have been steadily rising over the past year.
Nevertheless, there are still risks (both economic and geopolitical) that must be navigated. Operating margins in our sector remain under heavy pressure due to rising fuel costs and continued flat freight rates. Rates will soon need to rise in order to offset these rising fuel expenses and other freight handling costs.
Since 2008 the International Maritime Organization (IMO) has implemented a series regulations and benchmarks in order to achieve a reduction in emissions from commercial oceangoing vessels. January 1, 2020 is the IMO deadline to implement a 0.5% sulphur cap on marine fuel. Vessel owners have and are looking at three costly measures for compliance. They can install scrubbers at a $3-5M conversion and installation cost, use expensive low sulphur fuel (currently costing $200 per ton more than conventional bunker fuel), or purchase new vessels fueled by LNG.
For older vessels surpassing 15-20 years of age, owners will be inclined to send these ships to the scrapyard rather than pouring more money into an aging fleet. This will ultimately entice owners to begin investing in more fuel efficient technologies moving forward.
There are no easy solutions here.
In the last month, the chairman of the International Chamber of Shipping told attendees at their annual conference: “Unless a number of serious issues are satisfactorily addressed by governments within the next few months, the smooth flow of maritime trade could be dangerously impeded. It is still far from certain that sufficient quantities of compliant fuels will be available in every port worldwide by January 1, 2020. If such a scenario takes place, freight rates will skyrocket while vessel supply will decline, possibly causing a serious disruption to global trade.”
Is a recovery close at hand?
It seems the market for project logistics and subsequent demand for global shipping solutions is starting to gain some traction. Demand for our shipping services is being driven by new projects and increasing volumes for upgrading, expansion, and replacement investments around the world.
Global demand for energy will remain the driving force. As populations and underdeveloped economies continue to grow, demand will be even greater. It is estimated that by 2040 global energy consumption will rise by one-third, with industrial demand making up half of that increase. Of the fossil fuels, natural gas will experience the largest production growth while coal will continue to decline. The school is still out on nuclear, but it is expected that this type of energy source will grow in Eastern Asia. By 2040 it expected that renewables (solar, wind, biomass) will make up about 25 % of the world energy supply.
We currently are experiencing sound general activity in the market and expect promising opportunities in 2018 and for the foreseeable future. Some positive upside indicators would include a positive fixture dynamic in the dry bulk sector. An ongoing, strong trend for wind power developments, solid demand for steel products, higher mining activity, and a perceptible upswing in oil and gas related activity certainly helps to ensure that cargo volumes rise and keep our fleets busy in the coming year. However, carrier operating margins continue to be under heavy pressure due to significantly increased costs in fueling vessels. We anticipate the only way for this trend to turnaround would be (once again) increased freight rate levels moving forward.
Of course, there is always risk in making predictions, so we may see some projects experience startup delays; however, we are receiving positive feedback when talking to customers. A long awaited U.S. infrastructure program would also be most welcome. Today about one third of project and heavy lift cargo is generated in Asia, followed by European exports. South America also is in the early stages of a recovery.
For the charter market, promising signs are seen for handy size bulkers, box ships, and even the container feeder segment. We’re optimistic that the increased fixture activity in these segments indicates a likely possibility for recovery of freight levels in the project shipping sector. However, there is still a significant amount of risk when it comes to the financial stability of many shipowners.
After years of a stagnant freight market, many owners have succumbed to the pressure of reduced asset value on their vessel investments and continued pressure on operating margins and vessel maintenance. The available pool of capital for new and replacement tonnage has shrunk significantly. Medium term this should have a positive effect toward increased freight rates.
There are some other drivers out there that raise concerns. In addition to the marine fuel sulphur cap, tariffs on U.S. steel and aluminum imports add to apprehensions. Some share the view that the impact of these tariffs on U.S. steel imports will be limited. The 45 million metric tons of steel imported into the U.S. on a yearly basis represents just eight percent of the global steel trade.
Generally speaking, markets over time make their own adjustments as a result of political or economic policy changes. Certainly if you are a U.S. port out there that handles imported steel, you are not going to be too happy at the moment. But one could be assured that some other business or port out there is celebrating or benefiting as a result of the same action. Another take on this is by the director of the British International Freight Association commenting recently on Brexit: “I’m not pronouncing on Brexit until the final picture is clear. I’d liken it to a car journey. When you tell me the destination, I will tell you the route; but until then too much is speculation.”
Never a dull day in shipping!
- Date August 14, 2018
- Tags 2018 July/August