Carriers, EPCs See Smoother Sailing Ahead

By Gary Burrows

There’s growing, though guarded, confidence among engineering, procurement and construction companies and the heavy-lift, multipurpose ocean carriers that serve them that the market is returning to stable, sustainable rates after three years of disaster.

Carrier and EPC representatives at a Breakbulk Americas panel spoke about navigating through this return to stability and the obstacles they face, including the International Maritime Organization’s 2020 sulfur regulations.

“We believe it’s the start of something that should lead us to better times,” said David Lloreda Calero, chartering manager/special projects, BBC Chartering. Evidence can be seen in stabilization in shipping demand, absence of fleet renewal programs, healthy main shipping markets, which also mean less competition from container and bulk carriers, potential fleet impacts from IMO 2020, and consolidation.

“A few years back, the 10 biggest heavy-lift companies in the world had 770 ships,” Calero said. “Now these same 10 companies we’re talking about 530 ships. So there has already been a reduction in tonnage and we believe with the 2020 regulations, that reduction will be even more dramatic.”

Of course, the return of oil prices north of US$80 a barrel is sweetening the pot.

“The project cycle is kicking back in again,” said Justin Archard, corporate director – commercial, of SAL Heavy Lift. “There’s confidence in the world, a little more optimism. Oil, I checked this morning, is about US$85. Investment decisions were taken at a much lower level; now they’re at much more healthy levels.”

Turning that confidence into sustainable rates remains a necessary goal for carriers.

Calero said that, while rates have improved, carriers need rates to increase “20 percent to 30 percent to be a healthy shipping market.” BBC anticipates that an important tool to reaching sustainable rates will be bunker surcharges.

“Bunker is probably the biggest cost for carriers right now. We believe as a company that bunker surcharges will be a key instrument to try to drive rates where we should have them.”Achieving Equilibrium

Given the precarious nature of supply and demand, what can carriers and EPCs do to maintain harmony?

“The supply side, the demand side, we’re talking all the time, trying to navigate our way together,” Archard said. “But we can’t manage the macro environment. That’s the biggest influencer. In 2015 the world went off a cliff.

“What we can do is anticipate the cycle. There has always been a cycle,” he reminded, referencing the huge downturn in 1997 and 1998.

Andrew Young, logistics manager, Bechtel Oil Gas & Chemicals, referenced a Drewry presentation (see related story, page 44) and a graph that reflected supply and demand. “It shows from 2015 to 2016 the cargo fell off a cliff, but tonnage went up,” he said. With the decline in tonnage and cargo rebounding, Drewry forecasts achieving an equilibrium by late 2019.

“We see in FEED (front-end engineering design) and pre-FEED there’s a lot of work that we’re getting involved in,” he said, noting mining, energy and civil infrastructure projects in addition to oil and gas. He said some projects will go live in the first half of 2019. “There’s going to be a lot of business going into 2020,” he added.

“I think we’re a little bit slower to react on the oil and gas side,” said Phillip Brown, global chartering manager, Fluor. “We are doing a lot of proposals, but what we’ve seen most recently is a pickup in infrastructure, mining and metals work in South America and some in Australia and Asia.”

Brown said he doesn’t anticipate the flow of shipments until late 2019 and into the early 2020s.

“When we ask for firm rates for 2020-2022, we understand that there’s going to be market fluctuations, there are going to be changes in market, changes in law,” he said.

Both EPCs said the rising market will impact their procurement strategies.

“Incoterms will remain the same for the most part; I don’t think pushing the transportation risk back onto our material provider is the right answer,” Brown said. “As far as strategies for marine transportation specifically, I think we’ll be looking at more and more consolidation, so we can do bigger lots of cargo at a time to get economies of scale.” He said this may include full charters for larger shipments of steel or bulk pipe.Consolidation Over?

According to moderator Dominik Stehle, formerly executive vice president at the deugro Group and recently-named chief commercial officer of Zeamarine, “90 percent of the heavy-lift fleet is controlled by three or four companies.” Does that mean the cycle of consolidation has played out?

“There are more consolidations to come,” Archard said. “It’s driven by necessity.”

He said it’s more a case of reducing the pool of available owners than limiting tonnage. “There’s the opportunity to take tonnage into a fleet and not necessarily make a difference to the owner side. Or there’s the opportunity to actually take the fleet ownership into an active market. That from an owner’s side is where we see the most opportunity now.”

Eliminating tonnage is a concern for Young. “Rates are one thing, but from the EPC it’s service … It’s making sure we’ve got carriers that can offer us service. We work in a dynamic industry. If we don’t deliver critical heavy-lift projects, we don’t do projects.”

That requires a “strong, flexible carrier base,” he added. “Give us that flexibility and it will give us some healthy competition to try to keep rates where they should be and not letting them run away.”

For Brown, it’s not just a matter of service and availability, but “quality of the actual work. This even flows down to liner terms: the quality of stevedores, the quality of the terminals the carriers work, all of these things have a knock-on effect for us.”

Photo: Port of Long Beach

WANT MORE LIKE THIS?

Subscribe to Breakbulk Magazine. Published six times a year, the magazine includes insight and analysis on the biggest issues facing the project cargo and breakbulk industry, profiles and commentary from leading shippers, event previews and lots more. Digital is free - just sign up! The print subscription is $48 a year, which includes shipping worldwide. You might also like our weekly Newswire - try it out, it's always free.