Industry prepares for widespread consolidation

Many delegates visited Breakbulk Americas 2016 on the heels of an announcement by United Heavy Lift (UHL) and Thorco Shipping that the two lines were merging their ships and expertise to set up a new project shipping company, Thorco Projects.

And this was not the only tie-up of the year, after Rickmers- Linie announced that it was taking over Nordana Project & Chartering in June, and Grieg Star confirmed that it is entering into a joint venture with Gearbulk.

Such consolidation was compounded by widespread speculation in the industry that a major player in the heavy lift sector is up for sale.

In the wake of the big shock of the year for the container shipping world - as huge South Korean line Hanjin Shipping filed for bankruptcy - the multipurpose sector is also feeling the effects of low oil prices, ever-decreasing freight rates and tonnage overcapacity.

Rickmers, for example, attributed its drop in revenue for the first half of 2016 to the "persistently strained market situation, expiring high-margin charter contracts, follow-on charters at the prevalent low market rates, lower freight earnings, and a sharper decline in capacity utilisation in the project cargo business".

Rickmers attributed its revenue declines in part to "a sharper decline in capacity utilisation in the project cargo business".

Drastic reform

In its 2016 report, "K" Line said that its heavy lift shipping business - which is conducted by Hamburg headquartered SAL Heavy Lift - is "striving to improve earnings by implementing various cost-cutting measures, in addition to pursuing efficient fleet allocation".

The Japanese company stated that it will begin procuring ships through short- term charter contracts and has commenced a study on "drastic structural reform" at SAL.

Stormy conditions continued in the semi-submersible market as Royal Boskalis Westminster - owner of Dockwise - confirmed that it will take 24 vessels out of service over the next two years, in light of ongoing uncertainties caused by continuing low energy and commodity prices alongside a sharp fall in the volume of work in the market.

Since Breakbulk Americas, we have seen banks pull support for multipurpose ships within the fleets of two Dutch companies - Abis and Flinter. Meanwhile, the flurry of consolidation in the sector continued with news that Carisbrooke Shipping and Nova Marine Carriers are combining their commercial short sea bulk activities, and Hartmann Group had agreed to expand its short sea shipping cooperation with Schulte & Bruns.

So the mood was a solemn one in Houston. With uncertainty surrounding the global economy, commodity prices and the future of shipping as we know it, many in the project logistics sector are understandably concerned.

The shippers' panel at Breakbulk Americas suggested that "the face of the industry is changing". Panellists included moderator Greg Gowans, director of logistics and expediting at CH2M; Bill Keyes, logistics director, Houston and the Americas at Fluor; Pascal Ochquee, global director, international logistics at Haliburton; Greg Sostack, administrator, logistics and services division at Aramco Services Company; and Lee Tipton, corporate logistics specialist at FMC Technologies.

The shippers' panel at Breakbulk Americas suggested that "the face of the industry is changing".

With energy prices at all-time lows, it is not just the shipping and logistics providers that are feeling the squeeze, but also the engineering, procurement and construction companies (EPC) and original equipment manufacturers (OEM).

Consolidation was again at the forefront of discussions as Tipton responded to questions regarding FMC Technologies' upcoming merger with Technip in 2017.

Although she stated that the companies' transition is likely to be relatively streamlined, such mergers will no doubt have an impact on the overall supply chain, including the forwarders and carriers that such shippers choose to employ.

When Alstom closed the sale of its energy activities to General Electric (GE) last year, for example, many European forwarders expressed concerns regarding the different logistics approaches of the two companies and in many cases the loss of decade-long relationships between shipper and forwarder.

Their concerns deepened as GE announced in January that it planned to cut over 6,000 jobs in Europe as part of the Alstom integration.

Job cuts

And job cuts are something the industry expects to see more of across the whole supply chain - which is of course no good for the industry's image and attractiveness to new blood.

The shippers' panel agreed that the prolonged downturn in the project cargo industry is driving talented professionals into other logistics sectors, such as automotive, pharmaceutical and e-commerce. 

As consolidation and the pooling of resources continues on the shipper side - with ABB inking partnership agreements with Fluor and Aibel, and GE agreeing to purchase LM Wind Power in addition to combining its oil and gas business with Baker Hughes - heavy lift shipping lines wait in trepidation to find out which of their counterparts will be the next domino to fall.

Hansa Heavy Lift, which recently sold two of its F-class ships to Spliethoff, is continuing with its strategy of focusing on specialised transport and installation projects, rather than bread-and-butter project shipments, in an attempt to weather the market storm.

With overcapacity and lack of demand in the market, Joerg Roehl, chief commercial officer at Hansa Heavy Lift, explained that "consolidation is good for the market" and the multipurpose sector needs "healthy competition".

Admitting that "the whole world is a tough place" at the moment, Roehl told HLPFI that consolidation and the withdrawal of vessels from the market are paramount in order for the sector to improve.

Susan Oatway stated

This is a sentiment that has been reiterated by Drewry analyst Susan Oatway for the past 12 months.

At the Breakbulk exhibition, however, Oatway stated that she was even more pessimistic than she was six months ago about the outlook for the heavy lift and multipurpose market.

As well as the declining steel and crude oil industries, she cited low demolition levels and competition from other sectors as factors impacting the breakbulk shipping sector.

"We do not think demolition levels are sustainable - the market is at rock bottom," she noted, adding that the multipurpose market share "plummeted" in 2016 and is expected to "plateau at best" in 2017.

Competition

According to Drewry, competition from other shipping sectors is the main reason for the sharp decline in the multipurpose market.

"2016 was a bad year for all sectors and the competing sectors' low market conditions have impacted the multipurpose market even more.

"We were hoping for an upturn towards the end of 2017, but we have pushed this back to 2018 mainly because of the competing sectors. When container rates are almost at zero, it is very difficult for multipurpose operators to compete."

A number of shipping executives at the event suggested that the industry is in real turmoil, and this situation will only be improved through the scrapping of ships, market consolidation and the creation of shipping pools, such as the BHS Pool Weser-Ems created by Briese Schiffahrts and Harren & Partner back in 2014.

Many believe that the situation will only be improved through the creation of shipping pools, such as the BHS Pool Weser-Ems which combines the fleets of BBC Chartering and Combi Lift.

Many specialists that HLPFI spoke to also believe there will be at least one major bankruptcy in the multipurpose sector within the next 12 months.

But where do these challenging conditions on either side of the supply chain leave the project forwarding industry?

Hansa's Roehl expects logistics providers to play less of a role in the supply chain process going forward, while a logistics specialist at a global shipper and OEM suggested that they are already "cutting out the middle man" and dealing directly with the carriers. 

Bright spot

When capital projects boomed around the world and the movement of heavy and oversize cargoes stood out as a bright spot in a depressed global market, many freight forwarders expanded their portfolio to include project logistics services - something that a number of companies believed to be an easy opportunity to earn large sums of money.

However, with the project cargo market falling into increasing difficulty, risk often outweighs the reward and some executives told HLPFI they expect to see smaller players in the forwarding sector fall out of the business, or be swallowed up by larger entities.

With an abundance of uncertainty in the market, one thing that is clear is that the world's project logistics providers will have to adapt in order to navigate these stormy waters.

This article is taken from HLPFI's November/December 2016 edition. See the full magazine here.