Cargoes Show No Loyalty To Multipurpose Sector

BREAKBULK NOVEMBER-DECEMBER COVER STORY

RELATED NEWS: Low Rates Leave A Bitter Taste

By Carly Fields

You don’t have to look very far to find evidence of container lines hemorrhaging cash; sales of red ink to the box-ferrying brethren have rocketed this year. And next year looks set to smash the upset of 2015. Add canceled sailings, laying up of ships amid continued deliveries, and threats of consolidation and you have an industry grasping at straws.

Why should breakbulk, heavy-lift and project cargo specialists care about any of this? So what if container lines are hurting; they’ve had the good times, now they need to roll with the bad. But ignore these portends at your peril: as box trades deteriorate, container lines are desperately seeking alternative sources of revenue, mainly to appease anguished shareholders.

While the likes of lower volume container carriers such as Taiwan’s Wan Hai or Turkey’s Arkas don’t pose much of a threat, the project cargo whims of the top container movers matter.

“There is no doubt that the cyclical nature of ‘boom and bust’ is continuing in the container shipping industry,” said Dean Davison, principal consultant at Ocean Shipping Consultants, a company of Royal HaskoningDHV. “There are greater numbers of larger ships entering trades that are already overtonnaged and with demand not matching the bigger capacity ships in service the economies of scale are not being gained – leading to poor profit margins and losses.

“As a result I expect all container shipping lines to look more intensely at any and all possibilities that will help fill ships with cargo. I would expect this to include edging into geographic locations and ports that are more traditionally served by multipurpose ships.”

Davison pointed out that many container lines also have capabilities for handling out-of-gauge and project cargoes. Some have specialist divisions to promote and attract these cargoes. Maersk Line heads the pack, but Hapag-Lloyd, Mitsui O.S.K. Lines, UASC and Zim, to name a few, all offer out-of-gauge cargo handling.

“It is a logical move because these operators have the ships, expertise and networks in place and demand exists for out-of-gauge and project cargoes to move globally,” Davison said. “I expect these areas to see much greater development and marketing from those lines primarily associated with containers with the objective of bringing much-needed revenues.”

The container lines’ struggles are well documented. A revised profit outlook from Maersk in the third quarter of 2015 honed in on the crisis in the key Asia-Europe liner trade, which accounts for about 40 percent of the line’s cargo volumes. Shortly after making the announcement, it emerged that one of its flagship 18,270-TEU Triple-E container ships would be heading for lay-up.

A number of sailings in the first quarter of 2016 on the North Europe-to-Mediterranean trade have already been “blanked,” or canceled, in an attempt to shore up freight rates by removing some of the surplus capacity. But this is only a stopgap, say analysts; capacity needs to be permanently removed to make any real dent in the downward slide.

Shipping consultant Drewry expects 12 container ship deliveries in 2016, 22 in 2017, 22 in 2018 and five in 2019, the majority of which are destined for the sagging Asia-Europe trade. And more orders are rumored.

Then there’s the consolidation. China’s main carriers COSCO and China Container Shipping Lines are expected to join forces; the rumor mill is working overtime on a potential partnership between South Korea’s Hyundai Merchant Marine and Hanjin Shipping; and NOL’s APL confirmed it was in merger talks with CMA CGM and Maersk in mid-November.

Carrying the Specials

While a near household name for its container shipping activities, Maersk is certainly less known for its so-called Special Cargo division. It deems special cargo as those that cannot be transported in conventional container sizes, but can still be transported on container ships.

Its unique selling point is that it already has access to an established and far-reaching trade network through Maersk Line’s container services. Port facilities are the deciding factor about whether a special cargo can be carried, although there is also a 300-ton weight restriction to consider. Maersk sees special cargo as a strategic investment, and one that makes sense from a risk diversity point of view.

Nikolaj Forsberg, global head of special cargo at Maersk Line, explained to Breakbulk that the line sees a pending switch from MPVs to container ships for project cargoes as a “third wave of conversion.”

The first, more than 30 years ago, saw the conversion from specialized dry bulk ships to dry containers; the second, some 15 years ago, led to a conversion from specialized reefer vessels to reefer containers. The third, in Forsberg’s view, will convert special cargoes from specialized breakbulk vessels to standardized equipment, such as open tops and flat racks.

This third wave will see above-average market growth, expected Forsberg, as this conversion takes hold. “So even in the current slow growth environment we see short and mid-term, the conversion will boost the growth within the sector,” Forsberg said. “We are unable to quantify how much, but we forecast that we will outperform the normal market developments.” Cargoes can range from oversized vehicles to larger deliveries for infrastructure projects.

Some breakbulk carriers contacted by Breakbulk were concerned, others less so. But all were keeping a weather eye on developments.

Rickmers-Linie CEO Ulrich Ulrichs believes the MPV and heavy-lift sectors have to watch container lines, especially at base ports. While they are not necessarily flexible enough to call at some outports or to compete for certain types of cargoes, their sheer size and the choices they are able to offer make them serious competition. “We can’t ignore them; some of our pricing is already dictated by how they price,” he said.

Kyriacos Panayides, managing director of Singapore-based AAL, said that container lines are a threat for certain types of commodities, but not for wider project cargoes.

“There is not much that traditional container lines can do to compete with the quality of engineering, hardware, or ship profile that already exists within our sector,” he said.

Other multipurpose carriers shared the same lack of concern. Joerg Roehl, chief commercial officer of Germany’s Hansa Heavy Lift, said that the container lines’ lack of flexibility would be their biggest barrier to entry.

“We don’t believe that container carriers can outperform or be competition to MPV/tramp organizations. They can’t deviate from their normal liner services and routes, they can’t deviate from their general port calls, and they have the added requirement of needing to use feeder vessels.”

But while Maersk concedes that cargo destined for heavy-lift or ro-ro sectors is not wholly appropriate for conversion to containerized ships, cargo destined for MPVs is certainly in its sights.

And the competition for multipurpose cargoes takes other forms as well. Heavy-lift is getting lighter, ro-ros are getting more agile, and bulk carriers are getting increasingly desperate as they to try to counter their own ship supply glut.

New Entrants

If all that wasn’t enough to contend with, an influx of new carriers to the breakbulk and project cargo business is a further cause for concern.

In February 2015, United Heavy Ship sprang onto the scene, offering tonnage through Akron’s heavy-lift fleet. Then in October, deugro Group launched a new line, d.ship, with a range of multipurpose breakbulk, heavy-lift, and bulk vessels with capacities ranging from 5,000 to 50,000 deadweight tons, and combined crane capacities of up to 500 tons. At the launch, deugro and d.ship were keen to stress their independence: d.ship will develop its own business as a global ocean carrier, while the deugro Group will continue to focus on the traditional project forwarding business model, including chartering with other ocean carriers.

The launch of d.ship filled a gap, according to Chairman Thomas C. Press. Traditionally a freight forwarder covered A to Z, with shipping just a part of that service. Now, those roles have been separated out. Maersk and NYK are carriers with logistics arms; d.ship has simply flipped the model.

Timing is everything, of course, and the depressed market conditions offer opportunities for those willing and able to take them. Low freight rates and access to tonnage make it easier and significantly cheaper to get a new carrier off the ground.

But are they serious competition to established operators? No, say multipurpose and heavy-lift operators, with one important caveat: as long as the newcomers don’t order new ships.

“Some say that new multipurpose and heavy-lift market entrants are a challenge, but from our point of view, their ships are already in the market – so even with a change of name and livery, they are still the same ships. What they are not doing, thankfully, is to put pressure on the market with added capacity,” said AAL’s Panayides.

Maersk’s Forsberg described start-ups as “interesting,” rather than concerning. “We are a very asset-heavy industry and the entry barrier is quite high,” he said. “It takes a lot of capital to compete with our assets. I don’t see any startup buying the tonnage that we have floating on the seas right now.”

“On new carriers, we’ve talked to quite a few that have been recently established and we understand the reasons,” said Rickmers-Linie’s Ulrichs. “We’ll have to see what happens, but I’m not overly concerned. If we compete with the same ship under this name, or that name it doesn’t matter as the ships are the same. Of course, here and there, there might be competition, but overall there is already plenty of competition in the world and many different carriers.”

But if those newcomers dare to order ships the outlook changes. A flat MPV fleet offers a good chance of recovery in the short term; newbuilds upset that very delicate balance. A recent outlook from Drewry Shipping Consultants saw net growth of just 1 percent per annum for the multipurpose fleet over the next few years (See “A Little Lift,” page 20). But the aging profile of the existing fleet provides a driver for fleet renewal and a ship-ordering spree in the not-too-distant future.

Scrapping in this sector reached a record low in 2015, with demolition of nearly 500,000 dwt of multipurpose and project carrier vessels expected, an amount that Drewry’s multipurpose specialist Susan Oatway described as “unprecedented and unsustainable.” Lower oil prices allow older vessels to continue to operate at a profit. This coupled with low steel prices – reducing the recycling value – has kept older ships afloat longer than expected.

Diversification drive

Some general and project cargo carriers have looked to diversification to protect their balance sheets, with limited success.

Denmark’s Thorco Shipping was public in its drive to be more aggressive in the heavy-lift sector. However, even with established roots, branching out into other parallels wasn’t successful. The carrier’s decision to take super heavy ships into its fleet in 2014 ended up being a costly mistake. These were returned to the owners after it became clear that Thorco could not make a profit in this specialized sector. Other ships were also returned to reduce its asset liability. The owner has since refocused on its core general and project cargo base, where it is championing the combination of short contracts and a large, varied and, importantly, flexible fleet. Thorco slashed its fleet by as much as one-third in 2015.

Others have put their faith in partnerships and pools to make the most of economies of scale without the risks of an asset-heavy organization. AAL’s partnership with Peter Döhle on tramp and project shipping services and Rickmers-Linie’s Nordana and Swire associations are cases in point here.

But while thinking smart to better use resources has so far kept the wolf from the door in the multipurpose and heavy-lift sector, is the worst yet to come?

Maersk’s Forsberg warned the sector to not be blind to potential disrupters on the horizon: the easyJet, Hotels.com, or Uber of multipurpose shipping could be just around the corner.

“We are not blind to the fact that this could happen,” he said. “Is there a way in which new entrants can operate a lot more cheaply than us? We have learned from history that new things will happen so we are also ready to take on new competition when it comes.”

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