Breakbulk Magazine January/February 2015

Breakbulk Outlook 2015 n Banking on Ex-Im n Friending China n India on Fast-Forward

JANUARY/ FEBRUARY 2015

HEADLINE

Could Plummeting Oil Prices Make or Break Industry?

FUEL’S

GOLD

NORTH AMERICA

contents

20 BREAKBULK

OUTLOOK 2015

Oil Prices Jumble Expectations

32 RULES & REGULATIONS

BANKING ON EX-IM BANK

Program’s End Would Harm U.S. Capital Projects Industry

40 MARKET SPOTLIGHT

A FRIEND INDEED Relationships Key in China’s Challenging Business Climate

8 FUEL’S GOLD Could Plummeting Oil Prices Make or Break Industry?

cover story

58 RULES & REGULATIONS

RUSSIAN WINTER

Western Sanctions, Economic Issues Cloud Outlook

62 CARGO LENS

FAST-FORWARD

India’s Fast-track Projects Need Infrastructure to Match

66 TRADE NOTES

DOING BUSINESS IN TURKMENISTAN Promising Market Not Without Obstacles

52 China’s Sea Dragons n 70 Minimize Risk n 72 Shelter from the Storm n 74 Breakbulk Index 79 Path of Change n 82 Falling Prices, Shrinking Chains 4 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

editorial

ETERNAL OPTIMISM

‘M

ay you live in interesting times.”

Robert F. Kennedy, in a 1966 Day of Affirmation Address in Cape Town, South Africa, cited the above expression and its popular presumption as a traditional Chinese curse.

While the saying has grown healthy legs, no evidence exists of its Chinese origin. But certainly ample evidence of the irony embodied in the phrase can be found in the past several months. Anyone forecasting how 2014 could have turned out would have never expected the economic detour that came with the plummeting price of oil.

So it isn’t surprising that the impact of cheap oil has challenged expectations for 2015. After years of Gary Burrows cursing the pumps, it’s hard for a consumer to see a downside to cheaper oil prices. But for the breakbulk and heavy-lift industry, it is a poser, fraught with potential and peril, depending on your business role and area of concentration. It’s enough to have Pollyanna nursing an ulcer.

In our cover story, “Fuel’s Gold,” (page 8), Herman Trabish explores these complexities. In Breakbulk’s annual exercise of prognosticating the coming year (“Breakbulk Outlook 2015,” page 20) industry leaders offer widely divergent insights on cheap oil’s impact. Janet Nodar also touches on the issue in an opinion piece on page 82.

As Trabish notes, Saudi Arabia plays a prominent role, as it has maintained oil production despite rising output from the U.S. and Canada, and reduced demand due to weakening Chinese and European economies. If the Saudi plan is to wagering on falling prices driving the nascent U.S. shale and Canadian tar sands producers out of business, the industry will take that bet.

For the overall oil and gas sector, though, projects are already being cut or 6 BREAKBULK MAGAZINE www.breakbulk.com

curtailed, an issue that executives in our annual outlook fully acknowledged. Yet despite the risk to such a prominent business, their collective vision was towards the potential.

While oil and gas projects may struggle, other energy fields provide potential, including LNG-related business. Falling oil prices are expected to stimulate the world economy, driving downstream potential for project players. Cheaper oil also impacts cost structures, changing previously out-ofreach projects into new opportunities for engineering, procurement and construction contractors. Africa, the Middle East and other developing markets should continue to offer potential, executives say.

Carriers continue to struggle, unfortunately. And while lower bunker prices may be a positive, any potential downturn paired with continued overcapacity pushes hopes of recovery farther out into 2015 or 2016.

Interesting times are the fertile fields where the innovative and resilient sow success. In the cold of winter, the executives who offered their outlooks for 2015 dared to find optimism.

This is not simply a commodity business, where prices fall into line with market variables. For any heavy-lift move, the variables have variables. The broader-picture market forces are never cut-and-dried when considered multimillion- and multibilliondollar projects that stretch over years. The diversity of projects and industries that rely on the heavy-lift, project and breakbulk industry means there’s work there for those willing and able to grow and adapt.

Having recently navigated the recession and countless prior economic and geopolitical issues, breakbulk’s best and brightest will find opportunities to survive and thrive in the most interesting times.

EDITORIAL DIRECTOR Gary G. Burrows / +1 904 535 5460 gburrows@breakbulk.com DESIGNER Catherine Dorrough REPORTERS Lily Casura V.L. Srinivasan

By Burcu Gürses Herman Trabish Eric Johnson Mark Willis

BREAKBULK EDITORIAL BOARD John Amos Amos Logistics

Ed Bastian BBC Chartering

Murray Cooper McDemott International Inc.

Etienne de Vel Fednav Belgium

Dennis Devlin Panalpina

John Hark Bertling Project Logistics

Dennis Mottola Bechtel Corp.

William Moyersoen ArcelorMittal Antwerp Logistics

Albert Pegg Antwerp Port Authority

Dirk Visser Dynamar D.V.

Grant Wattman Agility Project Logistics

MANAGING DIRECTOR Alli McEntyre / +353.21.470.9595 amcentyre@breakbulk.com ACCOUNT MANAGERS Kathleen Pinson / +1.678.954.0552 kpinson@breakbulk.com Manager for West, East & North Africa Kingsley Ekweariri / +1.353.89.952.4754 kekweariri@breakbulk.com

HEADQUARTERS Clifton House Lower Fitzwilliam Street Dublin 2 Ireland To subscribe, email breakbulk@halldata.com, or call from inside the US +1-877-475-4157, or from outside the US +1-847-763-4933 between 8:00 am and 4:30 pm CST. JANUARY-FEBRUARY 2015

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8 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

By Herman Trabish

FUEL’S

GOLD

Could Plummeting Oil Prices Make or Break Industry?

Credit: Shutterstock

D

rivers across the U.S. and around the world are celebrating as oil prices continue to drop. And the rig count, the oil industry’s most predictive statistic, says the price will not soon go back up.

But the oil industry is laying people off and canceling spending at a rate that is raising the specter of a 1980s-like industry-crippling recession. For the already overstressed breakbulk transport sector, this adds new uncertainties.

Breakbulk carriers saw improved regional and sporadic cargo volumes and freight rates in 2014, and falling oil prices have already helped improve returns on voyages contracted for high cost fuel assumptions, according to Intermarine Operating Chairman Andre Grikitis. But the oil price drop is also a signal of a looming falloff in oil industry related cargoes.

The New York Mercantile Exchange and Brent crude oil prices were near US$110 per barrel in July 2014. They fell to below US$50 per barrel in January 2015. Affirming that industry planners do not foresee oil’s price coming back to a level justifying more drilling, rotary drilling rigs in use in the U.S. fell from more than 1,925 in mid-2014 to about 1,750 in January 2015, according to

WTRG Economics. Early in January, the use of the horizontal drilling rigs preferred by U.S. shale oil drillers took its biggest one-week fall since the U.S. shale oil boom began. It was the seventh week in a row horizontal rig use declined, according to Bloomberg.

In another strong indication the price will not soon bounce back, Halliburton, an industry leader in engineering, procurement, and construction, or EPC, laid off 1,000 workers in Europe, Russia, the Middle East, and Africa. Schlumberger, one of the world’s biggest providers of oil field services, will lay off 9,000 workers.

Finally, a Rystad Energy survey of 800 global oil projects valued at US$500 billion awaiting a 2015 green light found that a US$150 billion portion of them are no longer considered economically feasible.

The price drop is widely thought to have been provoked by the Saudi Arabia oil ministry’s decision not to reduce its oil production in the face of increasing output from U.S. shale and Canadian tar sands. In response to the glut and decreased demand from weakening Chinese and European economies, the Saudis would normally be expected to cut back their production and call for proportional output reductions from other members of the Organization of the Petroleum www.breakbulk.com BREAKBULK MAGAZINE 9

cover story

16

1.6

15

1.4

14

1.2

13

1.0

12

0.8

11

0.6

10

0.4

9

0.2

8 7

0.0

6

-0.2

2013 RIGHT AXIS:

2014

crude oil

LEFT AXIS:

2015

natural gas plant liquids

total production

fuel ethanol

ANNUAL CHANGE (MMBB/D)

MILLION BARRELS/DAY

U.S. CRUDE OIL AND LIQUID FUELS PRODUCTION

2016 biodiesel

production forecast

Source: Short-Term Energy Outlook, January 2015

U.S. GASOLINE AND CRUDE OIL PRICES 5.0

DOLLARS PER GALLON

4.5

forecast

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Jan 2011

price difference

Jan 2012

Jan 2013

retail regular gasoline

Jan 2014

Jan 2015

Jan 2016

crude oil

Crude oil price is composite refiner acquisition cost. Retail prices include state and federal taxes.

Source: Short-Term Energy Outlook, January 2015

Exporting Countries, or OPEC. Instead, the Saudis announced in October they would make no such moves. They also announced they expect a US$38.6 billion 2015 budget deficit and made it clear they are prepared to use their US$750 billion in foreign currency reserves to drive U.S. and Canadian producers out of business and take back control of the oil business, according to Forbes.

Subsequently, the U.S. Energy Information Administration, or EIA, projected U.S. production to rise by 600,000 barrels per day to 9.3 million barrels per day in 2015 and by 200,000 barrels per day to 9.5 million barrels per day in 2016.

The EIA numbers were heralded by 10 BREAKBULK MAGAZINE www.breakbulk.com

some as an indication the Saudi strategy will fail. “Anybody who says Saudi Arabia will put the shale producers out of business by continuing their production is naïve,” said CEG Partner Edward Osterwald. “These producers are entrepreneurial. They can switch it on and off. It is a flawed assumption to think these producers are going to behave like a national oil company that is high cost and influenced by politics.”

Others noted the EIA projections were lower than earlier numbers and clearly indicated diminishing output.

“Many oil companies have cut back on their exploration drilling in response to falling crude prices and will concentrate their drilling activities in established areas,” EIA noted.

Impacts are already being announced, according to Bloomberg.

Canada’s Husky Energy said in December it will delay a US$2.8 billion offshore drilling expansion and cut its 2015 exploration and production (E&P) budget by one-third. British Petroleum announced a US$1 billion to US$2 billion cut from its 2015 capital spending budget.

A United Arab Emirates oil minister said OPEC will not alter its strategy.

Challenges Facing Breakbulk

How does all of this impact the breakbulk industry?

For at least two years, an overcapacity in breakbulk vessel tonnage induced by competition from dry bulk and containerized carriers has depressed freight rates, said Susan Oatway, senior consultant of Drewry Shipping Consultants.

“Even heavy-lift project cargo carriers are seeing some of their cargo cannibalized by container lines.”

“We lose on every ton we carry,” Rickmers Holdings Chairman Bertram Rickmers was recently quoted, and “40 percent to 50 percent of project-carrying vessels of 8,000 to 30,000 deadweight tons are in severe financial difficulties (“Marriage Counselor,” NovemberDecember Breakbulk, page 28).”

With the improving economy, Oatway late last year foresaw improved demand, better rates, and reason for optimism about 2015 (“MPV Stand By,” November-December Breakbulk, page 32). But the loss of cargo volume to a depressed oil industry could easily undermine that optimism.

Breakbulk is still plagued by “exuberant ordering” and especially “the ordering of vessels that are retarded in design and inappropriate for our real world trading patterns,” according to Intermarine’s Grikitis. Negative returns create an urgent need for cost cutting. “Vessel maintenance suffers,” he explained. “Personnel recruitment, training, retention deteriorates, and all this results in poorer service capability in an industry that was already lagging.”

In the near term, customers will find space at “very competitive rates” as long as they ignore “the fragile nature of many of the carriers to which they entrust their cargo,” Grikitis observed.

More significant, he believes, is “the JANUARY-FEBRUARY 2015

cover story

lack of bulk and homogenous cargoes.”

Because every segment of the shipping industry is overbuilt and scrambling for business, “breakbulk cargo ends up shipping in containers, never to return as breakbulk cargo. We lose cargo to conventional bulkers, large ro-ro vessels, deck carriers and specialized car carriers.”

It will get worse, but that will lead to it getting better, Grikitis believes. “The growing demands of project and heavylift cargo will not be serviced by cheap space.” Ultimately, competent operators are necessary. “Perhaps 2015 will provide us a combination of vessel and carrier failures, which seems more likely quarter by quarter, as the catalyst for market stability.”

U.S. PETROLEUM PRICE SUMMARY Forecasts show prices bottoming out in 2015 with some recovery in 2016.

2013 2014 2015* 2016*

Crude Oil Prices ($ per barrel) WTI Spot Average 1 $97.91 $93.26 $54.58 $71.00 Brent Spot Average $108.64 $99.02 $57.58 $75.00 Imported Average $98.12 $89.09 $51.26 $67.52 Refiner average acquisition cost $100.46 $91.73 $53.71 $70.05 Retail Prices (including tax, $ per gallon) Regular Gasoline 2 $3.51 $3.36 $2.33 $2.72 Diesel Fuel 3 $3.92 $3.83 $2.85 $3.25 Heating Oil $3.78 $3.71 $2.71 $3.03 Natural Gas ($ per 1,000 cubic feet) $10.30 $11.00 $10.63 $11.00 Electricity (cents per kilowatt hour) 4 $12.12 $12.50 $12.63 $12.86 * Forecast 1 West Texas Intermediate 2 Average regular pump price

3 On-highway retail 4 U.S. residential average.

Source: U.S. Energy Information Administration

Cheap Fuel

“With a significant reduction in the cost of fuel, there will be a reduction in the cost to provide transport,” said Greg Gowans, director of logistics and expediting for CH2M Hill Logistics & Expediting. The maritime market sectors’ overcapacity has made it a buyer’s market for a number of years. Lower fuel prices will ease that on the cost side, he added.

“In many breakbulk trades, which are tramp type services and not operated in liners, there is not an established rate,” Gowans explained. “With no established price, and given the quick fall in pricing for new contracts, the benefit for the next few months will more likely be accrued by the transportation company.

The market won’t drive the price down as quickly as the cost of fuel is falling.”

The price paid by the buyer of the services will go down less quickly, allowing carriers to retain some benefit, Gowans said. “They will get a little bit of a bump in their operating margins for a period of time.”

The first effect of the oil price drop is “the cost of consuming heavy fuels is decreasing and that is a short-term effect the entire industry can enjoy, like any consumer who fuels up a car,” agreed Raymond Fisch, vice president of BBC Chartering.

It will not be as big as the drop in the price of oil, he added, because bunkering is an average calculation and some fuel has already been “bunkered in” at higher prices. Nevertheless, the impact to a carrier like BBC, one of the leading players 12 BREAKBULK MAGAZINE www.breakbulk.com

U.S. PETROLEUM PRODUCTION AND CONSUMPTION Despite falling petroleum prices, U.S. production is forecast to continue to grow.

2013 2014 2015* 2016*

Production (million barrels per day) Crude Oil 7.45 8.67 9.31 9.53 Natural Gas Plant Liquids 2.61 2.96 3.19 3.51 Fuel Ethanol 0.87 0.93 0.94 0.94 Biodiesel 0.09 0.08 0.08 0.08 Consumption (million barrels per day) Motor Gasoline 8.84 8.94 9.00 8.96 Distillate Fuel Oil 3.83 4.00 4.06 4.12 Jet Fuel 1.43 1.47 1.47 1.47 Total Consumption 18.96 19.06 19.32 19.43 *Forecast Source: U.S. Energy Information Administration

in the multipurpose heavy-lift sector, can be enormous.

“BBC has 1.5 million tons of annual carrying capacity. Its fuel expenses are in the multi-hundred millions of dollars per year,” Fisch explained. “The vessels average 10,000 to 11,000 tons and use 15 tons to 30 tons of heavy fuel per day, depending on the vessel and the speed, and BBC operates approximately 140 vessels to 150 vessels.”

“For shippers, this is a long-term reduction in their fuel costs and for anybody in the shipping business, that has to be very good news,” Osterwald said.

Refiners are not complaining either.

“We buy oil in the marketplace,” said Bill Day, Valero Communications vice president. “Low oil prices are good for us and

we have passed those lower prices on to consumers.”

Major expansions in refining, including an estimated US$100 billion in petrochemical and refining projects, will go ahead, Rickmers believes.

Industry sources report 80,722 chemical projects worth an estimated US$13.2 trillion in various stages of planning and development around the globe, according to Dennis Devlin, vice president of sales south and head of business development energy solutions for Panalpina USA. Components for these projects will be breakbulk cargo from China, South Korea, India, Turkey and Europe, he said.

Others have noted continued breakbulk activity coming from the wind industry. A domestic trucking company JANUARY-FEBRUARY 2015

Engineered transports With more responsibilities resting on the shoulders of contractors, managing transport risk is a central factor to ensure operational and economic project success.

BBC Chartering is determined to help by tendering for projects, by engineering tailor-made transports and delivering integrated solutions for any project.

www.bbc-chartering.com

Visit us at Breakbulk Asia May 19-20, 2015 in Shanghai Booth #502

cover story

BBC Chartering does about 70 percent to 80 percent of its work in the oil industry and about half of that is in the production, or upstream, part of the industry. / Credit: BBC Chartering

spokesperson who asked not to be named concurred with this. “Wind transport is about 5 percent of turbine cost at most and fuel is only part of that,” he said.

“Trucking companies are unaffected and the wind industry remains busy.”

Domestic rail shippers have not yet been impacted. “It looks like shipping volumes are going to remain fairly stable,” according to Lowell Rothschild, senior counsel for Bracewell & Giuliani.

Production at the wellhead has held steady but is not increasing. “But if prices remain low for some considerable period of time, the increased flexibility offered by rail shipping over pipeline shipping could become less favorable.”

Current contracts cover the short term, Rothschild said. “But a pipeline company will build a line if you agree to use it. When producers start thinking about renewing those contracts, do they start thinking about shipping less by rail and encouraging the construction of a pipeline?”

14 BREAKBULK MAGAZINE www.breakbulk.com

Loss of Carrying Volume

If low oil prices are only temporary, it would benefit BBC Chartering, Fisch said. But his company does about 70 percent to 80 percent of its work in the oil industry and about half of that is in the production, or upstream, part of the industry. If oil prices fall below a certain level and stay there, he explained, a significant portion of BBC’s customers will find it uneconomic to pursue projects. “A large share of the non-standardized cargo business depends on the energy business.”

Upstream activity in the oil industry will slow down, CH2M Hill’s Gowans predicted. “Exploration activity is going to be reduced. That will quickly reduce the amount of freight that gets moved.”

“The falling price of oil is the result of technology. It is a permanent change,” Osterwald insisted. “Maybe a few rigs will shut down, but it is not going to have the effect people think. This is a fundamental shift.”

Some shale producers are producing at a cost that makes it affordable for them to sell at US$40 per barrel, while others are not, Osterwald said. It might be uneconomic in the short term but they will keep producing for other reasons.

Some will keep drilling to avoid losing their leases. Others will make up losses on associated gases and liquids. “The blanket assumption that if the Saudis are going to keep producing then everybody in North America will shut down is just naïve.”

There will eventually be an equilibrium of about US$50 to US$60, he guessed. “But as long as they keep producing from shale, which they will, prices will not go back to US$110 per barrel.”

The only limit on project development is the availability of capital, Osterwald said. He expects activity in the oil and gas industry to increase and shift. For companies in downstream operations, refining margins have increased and capital investment is going into refining systems.

JANUARY-FEBRUARY 2015

cover story

U.S. OIL AND GAS COMPANIES CUT CAPITAL SPENDING List of U.S. exploration and production companies and reductions in their budgets.

COMPANY

2015 CAPITAL EXPENDITURE

2015 VS ESTIMATED 2014 CAPITAL EXPENDITURE

OUTPUT FOR QTR. ENDED SEPT. 30

ConocoPhillips US$13.5 billion Down US$3.2 billion 1.47 million min.

from US$16.7 billion Continental US$2.7 billion for Down US$1.85 billion 182,335 Resources Inc. non-acquisition CAPEX from US$4.6 billion

Marathon US$4.3 billion Midpoint down US$1.5 billion 409,000 net* Oil Corp to US$4.5 billion from US$5.9 billion Apache Corp US$4 billion Down US$1.4 billion 637,000

in North America from US$5.4 billion Oasis US$750 million Midpoint down US$630 million 45,873 Petroleum Inc. to US$850 million from US$1.4 billion

Denbury US$550 million Down US$550 million 73,810 Resources Inc. from US$1.1 billion Laredo US$525 million Down US$475 million 32,970 Petroleum Inc. from US$1 billion

Rosetta US$700 million Midpoint down US$450 million 73,500 Resources Inc. to US$800 million from US$1.2 billion

(with flexibility to spend

up to US$900 million) Sanchez Energy Co. US$850 million Midpoint up US$250 million 38,613

to US$900 million from US$600 million-$650 million Emerald Oil Inc. US$62 million Midpoint down US$178.5 million 3,855

to US$81 million for from US$250 million

drilling and completion Halcon US$750 million Midpoint down US$175 million 43,554 Resources Corp. to US$800 million from US$950 million Swift Energy Co. US$240 million Midpoint down US$145 million 2.99 million1

to US$260 million from US$390 million-$400 million Abraxas US$54 million Down about US$136 million 7,076 Petroleum Corp. from US$188 million-$192 million

Energy XXI $670M to $690M Midpoint down US$135 million 58,600 (Bermuda) Ltd. from US$815 million BOEPD: barrels of oil equivalent per day * Total continuing operations excluding Libya

1 Barrels of oil equivalent Source: Multiple sources including Reuters.

For a shipping sector, with an ongoing 10 percent to 15 percent tonnage overcapacity, even a small loss of shipping volume could hurt, Fisch said. The oil price is providing some relief but “we are observing very closely.”

barrel oil while Southwest was still using US$50-per-barrel oil. It is much easier to make money when you are paying half as much as your competitors for your biggest expense.”

If supply doesn’t shrink much and demand doesn’t grow because of a slowed economy, Rothschild said, “prices will stay low until people start buying Hummers again or until the producers can no longer afford to not make money and cut back on production.”

Few expect demand to stay flat. For every penny the price of gas falls, the savings per year to U.S. consumers is about US$1.5 billion, according to Gluskin-

The Winner: Economic Activity

One of the first things to think about is a hedging strategy through the oil futures market, Bracewell & Giuliani’s Rothschild said. “Southwest Airlines was successful in the late 1990s because it bought lots of low-priced oil for future delivery. When the price shot up, the legacy carriers were buying US$100-per16 BREAKBULK MAGAZINE www.breakbulk.com

RIG PLANS FOR 2015 (AVERAGED) Not disclosed Plans to cut average rig count from about 50 to about 34 by end Q1 with average of 31 rigs for Q1 Not disclosed Reducing to 55-60 rigs in North America from 93 as of Q3 Reducing rig count to 10 by end of January and to 6 by end March. As of Sept. 30, 2014, was running 16 rigs Not disclosed To operate equivalent of about 2.5 horizontal rigs and 1.5 vertical rigs on its Parmian-Garden City acerage in West Texas Plans to operate 1-2 rigs in Eagle Ford and 2-3 horizontal rigs in the Delaware Basin Cut 2015 drilling program to 6.25 from 8 rigs Cut to 2.25 rigs in late Q1 2015 from 3 now Reducing drilling to 6 rigs from 11 originally planned Not disclosed Plans to let go off a rig drilling in Texas’ Eagle Ford and cancels 2015 Permian program Cut to two rigs by December 2015 from 4 now

Sheff’s David Rosenberg. That puts more than US$150 billion into consumers’ pockets. The oil and gas industry only accounts for about 2 percent of gross U.S. economic output, so 98 percent of the economy has lots more money to spend.

The upside is expected to be even bigger in Asia, according to the Wall Street Journal. Lower fuel expenditures will allow governments in India and Indonesia to invest in urgently needed infrastructure and growth projects without fear of inflation. China’s slowing economy will get a crucial bump.

Based largely on anticipated low oil prices through the rest of the year, JANUARY-FEBRUARY 2015

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consultant Capital Economics boosted its forecast of emerging Asia’s gross domestic product growth from 2014’s 4.3 percent to 4.7 percent for 2015. IHS concurred, predicting the oil price impact to be a 0.25 percent to 0.5 percent GDP increase.

Only oil exporting countries like Malaysia, Myanmar, Brunei, and Australia are expected to take a hit.

Solution: Diversification

UTC Overseas moves manifold subassemblies from the Midwest where they were manufactured to the Gulf for export to a new overseas LNG processing facility. / Credit: UTC Overseas

18 BREAKBULK MAGAZINE www.breakbulk.com

While BBC Chartering remains anxious about the business it gets from oil’s upstream, it also has clients in the downstream and carries wind turbines and natural gas equipment, Fisch noted.

“It looks like major oil projects could be postponed and halted,” he said. “But we are also seeing the benefit of the shale gas revolution. Wherever equipment is needed for that, we are involved.”

Oil and gas majors have had their

JANUARY-FEBRUARY 2015

upstream budgets sliced in half and are delaying projects, said Marco Poisler, executive vice president of UTC Overseas. “That is the negative side. But UTC is sort of the mutual fund of project cargo, and we see other industries picking up thanks to the decrease in oil prices. New plants and facilities are looking to North America to take advantage of more reasonable energy costs.”

UTC has clients in mining, heavy equipment, oil and gas, cement, and several other business sectors, Poisler said.

“There are plenty of industries that move breakbulk cargo, and there is a benefit for a company like us that is not dependent just on oil and gas clients.”

Even in the oil and gas sector, he added, “there is always something to move. We might not be moving E&P equipment, but we might be moving refining equipment.

And we are moving it at a much more reasonable fuel surcharge than before.”

Oil and gas project investment is either being diminished or delayed, but volumes in sectors not related to oil and gas are increasing because there is new capital investment, Poisler added. “In an era of lack of profitability for the carriers and lack of stable revenues, the carriers are going to be forced to be more creative in making a successful voyage.”

The message may seem kind of depressing, especially in Houston where there is the memory of the oil price plunge and local depression in the 1980s, Poisler said. But it is a cycle and things turnaround. “From the feedback I am getting from clients, I think oil may turn around by the end of the year.”

“CH2M Hill is not heavily involved in upstream energy so this is not affecting our business,” Gowans said. In the midstream and downstream, he added, the estimated US$265 billion backlog of mega-projects that are fully committed

and funded are continuing and taking advantage of the lower fuel prices.

“That money is already committed and is going to get spent over the next two or three years,” Gowans said. “On the international marine side, I don’t think it will make more goods travel. But in domestic transport, outside of breakbulk, it will make more goods travel. In rail and trucking and air freight, companies will be spending less money on their transportation systems and will therefore have more to spend and invest elsewhere.”

Spending will go less to a few energy companies, but “the U.S. economy overall will be better off with lower oil prices,” Gowans said. “And there are opportunities in transportation infrastructure, fuel storage, and warehousing and factory construction that will start to deploy, based on low cost energy. We will look to shift our activities toward those.” BB

www.breakbulk.com BREAKBULK MAGAZINE 19

breakbulk outlook 2015

Oil Prices Jumble Expectations

BREAKBULK

OUTLOOK

2015

20 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

B

reakbulk magazine has again prevailed upon a disparate group of industry executives to share their expectations and apprehensions for the breakbulk transportation industry in 2015.

While a new year is often a cause for hope, breakbulk and heavy-lift industry executives’ prognoses for 2015 ranged from optimism to expected volatility.

Turning the Ouija board on its side, and shaking the Magic 8 Ball vigorously was the plummeting price of oil starting at mid-year 2014. Its impact reverber-

ates through word of projects shelved or scaled down, particularly in the oil industry, and how fuel prices play into rates.

Rates in turn are yet another variable exacerbating shipping lines’ already precarious bottom line, and their relationship with cargo owners.

Nonetheless, industry executives chart the coming year with potentially new and expanding markets, and anticipate the political and economic issues that will mold and shape them.

Here then are the views of selected industry minds for the coming year.

PANALPINA INC. Dennis Devlin Vice-President, District Head of Sales South District, USA/Country Head of Business Development Energy Solutions, USA www.panalpina.com

may not move forward as fast as anticipated.

Similarly, the global outlook for projects may change, but not significantly, because of the drop in oil prices. Major developments in Africa and Asia will not likely be impacted, although Russia will likely see a slowdown. The Middle East will continue to diversify, taking advantage of low energy costs for chemical and other manufacturing. Projects there will continue. And while U.S. infrastructure spending (roads, bridges, airports, rail networks) is not even close to keeping up with increasing demand, principally for political reasons, other countries including, notably, Gulf Cooperation Council countries and China, continue to invest handsomely in infrastructure, at far higher rates than countries in the West.

While the rate of acceleration in North American and global project investments may slow, the trend is very clearly upward. In the longer term, global spending in projects and infrastructure, including extraction (oil and gas, mining), manufacturing (chemicals, refining, metals), transport, utilities and other infrastructure (roads, bridges, hospitals) is expected to increase to US$9 trillion by 2025, from slightly more than US$3 trillion in 2008, according to PWC and Oxford Economics. That’s a significant increase, and will result in a lot of work, globally, in support of these projects.

Overall, although not necessarily in the very short term, the market looks very promising, as global project spending will increase significantly in the next decade, despite the current drop in oil prices, and the short term potential for some delayed or cancelled projects.

2015 will be an interesting year in the breakbulk and project cargo markets. Six months ago most predictions about 2015 would probably have been different than they are today because of the drop in oil prices. Global economic growth rates continue to weaken the mining sector. And with oil prices having weakened precipitously in a six-month period, some big projects are being delayed or cancelled, especially those being financed by the oil majors or national oil companies.

Conversely, the supply (and thus the costs) of North American shale gas will likely Dennis Devlin continue to drive chemical plant expansion and construction projects there, including much of the planed project work on the U.S. Gulf Coast and agricultural and other chemical plant projects in the interior. Similarly, North American liquefied natural gas export projects may not necessarily be negatively impacted by the weak global oil market, although other factors may cause some delays, and some of the projects

www.breakbulk.com BREAKBULK MAGAZINE 21

breakbulk outlook 2015

INTERMARINE Andre Grikitis Operating Chairman www.intermarine.com From the carriers’ perspective, I would offer the notion that as an industry we are now beyond stagnation and continue on a course of deterioration. A majority of carriers have five-plus years of accumulated losses and have no reason to be optimistic about a near-term rebound. Lower oil prices might provide us a short-term uptick in margins.

However, the Andre Gritkis corresponding slowdown in oil and gas projects will result in volume drop-offs, lower utilization and for many, no margins.

Our sector continues to be plagued by vessels trading below principal – and now interest – repayment levels. This persists because of the unwillingness of financial institutions to mark vessel assets to market and accept impairments to their balance sheets. This is perpetuating capacity trading at what amounts to subsidized levels. While this continues, supply-and-demand factors will never be able to adjust to real world conditions. This has translated into chaotic and desperate pricing scenarios.

From the cargo perspective, this has generally meant predictably low freight rates combined with more than sufficient availability of space – all, theoretically good for industry. But what about future impact? How will carriers be able to recruit, train and retain talent in an industry with such a poor financial record? How will the industry cope with increasing compliance issues in technical, safety, environmental and other legislative matters? Who will fund the building of next-generation vessels that are appropriate for today’s and future markets? As the cargo handling demands of our customer base outstrip our capacity to suitably meet their growing needs, the current benefits of low freight rates will not overcome ser22 BREAKBULK MAGAZINE www.breakbulk.com

vice failures – buyer beware.

Since the project carrier sector is not solely defined by the movement of project cargo, we need a robust improvement in bulk and homogeneous cargoes to survive, then to build and sustain healthy businesses. Some in our sector will continue to be overwhelmed by the need to cut costs in the current environment, some will continue to trade with artificially subsidized fleets, a few will keep bleeding with hope as their best plan, and a very few will manage to plan for the realities of our marketplace and find a way to prosper. The shipping business is about cargo, so will cargo find the “right” home in 2015?

AGILITY Grant Wattman President and CEO www.agility.com I am optimistic on 2015 and confident of our planned growth in emerging markets and North America. With declining oil prices, I anticipate postponement of at least one-third of capital investments that have yet to receive their FID (Final Investment Decision).

In addition, our clients in the oilfield service industry and drilling contractors will be impacted as owners claw back in upstream spending. Smaller owners pressed by reduced cash flow and working capital will be forced to slow down overall spending, ratcheting this sector further. While investment decelerates in liquefied natural gas (LNG) and natural gas liquids (NGL) capture and conversion capital projects, there is still movement in the petrochemical sector and in retrofit of existing power and production facilities to gas.

Mining looks neutral to slightly improving over 2014, with significant challenges in infrastructure cost, access to reserves, environmental, social licensing, energy and water to support the operations. This is causing the industry to modify its business models and extraction methodology.

Who would have thought that U.S. fabrication would come back, or North America projects would be driven by imports in 2015? Well it is! North Ameri-

can capital investment is driving a shift to “import capital equipment.” This requires a significant shift in focus and the capability required to support this change. It also means vessels are coming into U.S. Gulf Coast ports in larger numbers than past years.

With continued entry of vessel new builds, and market forces, stress will not be relieved from the oversupplied tonnage in the project cargo and heavy-lift industry. I am not optimistic for benefits through lower cargo pricing from lower bunker. This will be absorbed as the industry swallows the impact of low sulphur fuel regu- Grant Wattman lations, vessel quality and compliance requirements of clients and government regulators, tonnage out of position in North America and vessel owners looking for a return.

Lower oil prices will be the rule for 2015, with industry cost reductions and investment delays trailing quickly behind. It’s perfect timing for Agility’s increased investment globally in capital projects, oil, gas and our marine services products, and accelerated expansion in emerging markets. This positions Agility strongly as oil prices rebound to a more economic level as we approach 2016.

JUMBO Fred Bedford Member of the Board www.jumbomaritime.nl Overall prospects for the industry have suffered a setback from the severe depression of crude oil prices starting June of last year but accelerating in December. This has caused a frantic reappraisal of both on-shore (downstream) and offshore projects, and created a psychological change of heart for shippers and shipowners.

Both have been looking to gradually increasing demand for capacity at a time JANUARY-FEBRUARY 2015

breakbulk outlook 2015

when the flood of newbuildings coming into the market was slowing to a trickle, and some albeit extremely modest growth in freight rates could be expected by even the most cynical.

It is not going to happen.

Demand and freight rates will at best flatline, but more likely marginally decrease during 2015 or at least until such Fred Bedford time (probably not before September) when the crude oil price graph bends upwards and shows signs of steadying at or near the $70 level. Whether this price is achieved by a Saudi-led reduction in supply, geopolitical developments or a presently unforeseeable upturn in demand is a bet too far off at this moment.

The two main drivers of the breakbulk/project market are China and the project capital expenditure of oil- and/ or gas-producing countries and international oil companies. The latter have already been under shareholder pressure to cut back on “expensive projects” and return money to them as dividends. The latest news that Qatar Petroleum and Shell have decided not to proceed with their US$6.4 billion Al Karana petrochemical project – the region’s second big energy project to be shelved since oil prices began to plunge last year – is hardly welcome news to the project cargo sector at this time.

Ironically the reduction in fuel costs based upon current crude prices may well stimulate the world economy.

And while this may initially be in the consumer section of society and thus stimulate an upturn in the container market, it should feed through to the project sector in due course, albeit probably not this year.

Unfortunately for the “semi-tramping” regime, which dominates the project transportation market, any savings in fuel costs will tend to pass onto the shippers as long as the current supply/demand balance remains.

The last joker in the deck is what will bankers, or more specifically the 24 BREAKBULK MAGAZINE www.breakbulk.com

battered ship finance sector, do? It has already shrunk its lending activity but maintains a swathe of bad loans on the books. It is debatable whether this is the year that forced sales and foreclosures accelerate, or whether banks rather press for the continued consolidation already visible in the sector. Undoubtedly consolidation and alliances make sense, provided they create carriers with sufficient critical mass to ensure service and viability without creating unbalanced market dominance by virtue of size.

As always, time and the market will tell.

KBR Don Burkett Senior Project Logistics Manager www.kbr.com 2014 was a good year. The engineering, procurement and construction industry is wrapping up some overseas LNG plants and realizing an increase of several U.S. domestic EPC projects.

Looking forward, while the recent decline in oil prices may present challenges to certain near-term upstream project economics, low natural gas prices continue to result in a number of good EPC prospects in LNG, downstream, and chemicals markets. As shale gas production continues to keep prices low, the industry is experiencing more interest in new ammonia, urea and UAN grassroots projects and expansions of existing facilities.

Along with the domestic EPC work, heavy-haul contractors are keeping quite busy in all modes of transport, including rail and barge movements.

The EPC hydrocarbons industry growth is primarily due to the high volume of downstream EPC projects being

executed in North America, as well as downstream and oil and gas services projects globally. 2015 EPC segments are having strong global bookings for downstream and oil and gasrelated projects.

I’m optimistic for the 2015 construction outlook for U.S. downstream and chemicals grassroots and expansion Don Burkett projects, boosting much-needed economic domestic growth. Along with that comes an increase of out-of-gauge and heavy-haul transport demand, from both domestic and international resources.

DREWRY SHIPPING CONSULTANTS Susan Oatway Senior Analyst www.drewry.co.uk As 2014 drew to a close, Drewry suspects most carriers were breathing a sigh of relief and hoping that things can only get better in 2015. We started 2014 with the comment that rates seen in 2013 were untenable and they, coupled with significant operating and capital costs, could only be borne for so long.

However with demand growth almost stagnant over 2014 and continued pressure from other sectors for market share, carriers have accepted these rate levels longer than expected. The market has been at the bottom of this cycle for more than two years now, but there are

“THERE ARE DEFINITE GREEN SHOOTS OF RECOVERY SHOWING FOR THE SPRING.”

— Susan Oatway

JANUARY-FEBRUARY 2015

breakbulk outlook 2015

definite green shoots of recovery showing for the spring.

The demand for breakbulk and project cargo picked up in the latter half of 2014, while some consolidation along with new finance has steadied the supply side of the picture. But can carriers really last much longer on the current low rates? And should they need to?

We are continually questioned about carriers’ financial reliability. And we regularly reply that with demand growing at an estimated 4 percent over the next two years and fleet growth steady the time is right for a market upturn, if we do not want to see this sector squeezed further.

There is undoubtedly room for consolidation of some of the smaller fleets, and there also seems to be more interest in investment in this sector. The project carrier sector Susan Oatway of the fleet has shown significant growth over the last few years and is expected to continue at an annual rate of more than 4 percent to 2017, in contrast with the stagnation of the simple MPV fleet.

However it is also true that multipurpose carriers still have to contend with competition from Handy bulkers and container ships, But as demand grows we believe significant erosion in market share is unlikely. Moreover, with an overall fleet growth of less than 1 percent, this sector is well placed to benefit from the increase in demand from a wide variety of commodities.

BARNHART Jeff Latture Senior Vice President, Sales and Marketing www.barnhartcrane.com We certainly see cause for cautious optimism as we look toward the New Year. There are a number of indices that offer favorable trends in our sectors of the market, which include power gen26 BREAKBULK MAGAZINE www.breakbulk.com

eration, refining, gas production and chemicals. The movement of the U.S. to a net exporter of energy due to natural gas development certainly affords the potential for an improving industrial economy.

The outlook for non-residential construction is steady: construction employment is on the rise, as is the number of commercial construction projects.

Several projects that we have been tracking are moving from the planning stage and are becoming real, viable and permitted projects. We see this across several of the markets that we typically work in, especially in the arenas of power generation and petrochemical, where we are witnessing construction and/or expansion.

The recent energy sector forecast suggests the U.S. will continue to increase exploration and production. The Jeff Latture abundance and availability of natural gas, along with its affordability, is good news. It has spurred additional construction activities, as natural gas becomes an attractive alternative as both a fuel and a feedstock. Also, as the owners of coal-fired plants decide whether to upgrade their facilities or to construct new facilities in order to comply with emission standards set by the Clean Air Act, we will see a continuing demand for project cargoes in the form of components for these plants.

Lower fuel costs have the ability to lower overall transportation costs, at least in the short term. While the positive energy forecast may suggest the opposite, we aren’t going to count on cheaper fuel for the long term. Instead, like many of our colleagues in the cargo-handling business, we are working to increase our efficiencies in order to lower costs.

We remain very deliberate in how we approach our business, concentrating on our systems, equipment and infrastructure across the nation that provides us with a network to move cargo inland and beyond in an incredibly efficient manner.

That, as much as anything else, allows us to be optimistic about the future.

CB&I Jake Swanson Regional Logistics Manager, Americas, Engineering, Construction and Maintenance, Oil & Gas www.CBI.com There is room for optimism. There are quite a lot of projects that are set to take off in 2015, especially in the U.S. Gulf region. The potential is tremendous, with liquefied natural gas and some of the projects that are being considered on a global scale. Most likely, not all of these projects being discussed will move forward to execution phase; however the ones that do will generate quite a lot of movement in the project cargo industry.

The big growth markets that we are seeing in the near future Jake Swanson are with the oil and gas projects in the U.S. Gulf region, specifically the Lake Charles area, where there are about 19 oil and gas projects in the planning process. Many of these U.S. Gulf projects are LNG related.

The other potential growth region that we are seeing is South Africa to East Africa, where there are quite a few projects in the LNG and oil and gas sectors.

As for fuel prices, they tend to fluctuate throughout the life of a project.

Currently, fuel prices are down, which lowers operating costs for transportation providers and helps keep project cargo rates low – all things we like to see as a project shipper. However, the negative impact of low fuel prices is that project owners will be more reluctant to invest in major projects, resulting in delays or cancellation of projects. Somehow a happy medium must be maintained.

There is no doubt that carriers and cargo owners need each other. Carriers need our projects and our cargoes to keep their equipment moving, and we need their equipment to move our material to our project sites. Additionally, project owners work closely with carriers during proposal and front-end engineer and JANUARY-FEBRUARY 2015

breakbulk outlook 2015

design, or FEED, study stages in order to develop critical logistics budgets and plans that ultimately help cargo owners win important projects.

Shipping rates will fluctuate as per market conditions, however it is important that carriers and cargo owners see each other as partners not adversaries.

It has been rough for the project ocean carriers over the last six to seven years. We have seen bankruptcy and consolidation over the last couple of years, and it is possible that we will see more of that in the next year or so. Carriers have become more diligent in their efforts to reduce excess costs and maintain optimum fleet sizes. Hopefully with the projects that we are anticipating for 2015-2017 it will help establish a healthier project cargo market for ocean carriers.

KITA LOGISTICS Emre Eldener General Manager www.kitalogistics.com Growth and positive prospects in the project cargo industry for Turkey and the Middle East highly depends on the political situation in 2015. Demand for energy, transport infrastructure, refined oil and fertilizers are driving the project cargo market in this region.

When we look at Turkey, for example, we see the huge upcoming TANAP pipeline project, the construction of the largest airport in Istanbul, two nuclear power plants, one major refinery, more than five brand new lines of highspeed trains, urban subway projects, nearly 100 hydroelectric Emre Eldener power plants, and a significant number of wind power plants. These will all be active in 2015, and some of them already started in 2014.

We see that there may be increasing project activity in Iraq as the Kurdish part and the Baghdad government came to an agreement on oil resources. We do 28 BREAKBULK MAGAZINE www.breakbulk.com

not expect the Syrian situation to stabilize anytime soon, so we do not expect much activity there. Once there is peace in Syria, the country needs to be rebuilt completely, which will of course create many jobs for the project cargo industry.

Oil prices are going down. If this continues, we anticipate cancellations or delays in some oil exploration projects as well as refineries. While this would affect the project cargo industry in terms of business volumes, reduced fuel prices will also bring more affordable rates for all industries as an added advantage.

Multipurpose project cargo vessels that have been delivered within the last year helped shippers to enjoy more economical rates in 2014. However, due to the upcoming projects globally, including offshore oil projects and wind power plants that are now widely moved globally, we expect the rates to be higher in 2015 than the previous year.

TRADELOSSA Rafael de los Santos General Manager www.tradelossa.com 2015 will be a year of volatility. With oil at levels not seen in years, and forecasted to be at those levels for a long time, we know for sure that changes will occur. Oil drives much of the investments that are made in the industries we serve. We can be sure that major energy projects will be postponed, and others will be put on hold. Alternative industries will make attempts to take the opportunity that low oil prices period will provide. The most flexible companies will take advantage of this new scenario. Others will follow the lead of the major players to hold, and wait.

At a local level each country has its own agenda. In Mexico, 2015 will see midterm elections for the administration, Congress and governors for half of the states. The election’s outcome will surely impact the country’s political and economic dynamics. After a very promising start, the current presidential administration is challenged to materialize the promises made during major energy reforms approved last year by Congress.

Safety is still an issue in certain areas of

the country, and has reached the point that it can no longer be ignored by the government, public and private sector.

2015 will bring a redefined list of priorities. The breakbulk industry will be challenged to adapt where necessary, and maintain our bets where signs of continuity show. As everything in life, we can only rely our set of skills to face the year with an optimistic and thankful attitude.

LARSEN & TOUBRO LTD. G. Kannan Head-Logistics www.larsentoubro.com Overall prospects for project cargo in India are no cause for optimism, as the market is depressed and it will take another 18 to 24 months before seeing any significant revival. The new Indian government is still in the process of making firm decisions and planning for growth that is still many months away. Falling rates is another factor for diminished optimism, and it is time Indian customers face the fact there is a limit to which the rates can be reduced and beyond those limits lines will not viably operate.

Release of the country’s 2015 budget in February will be the most awaited event, where many projects could be relaunched.

Potential growth markets for India, especially for project cargoes, will be steel, infrastructure and, to a limited extent, power.

The rest will not see any significant growth. Circumstances impacting these sectors are capacity reduction, fuel prices and the industry’s distance from ports for easy and economic cargo transport.

Financial burden G. Kannan of players and the long gestation period between decision and actual logistics are other factors impacting growth.

The overall geopolitical situation and supply/demand mismatch will take time to rebalance. Until then the market is likely to be dull.

JANUARY-FEBRUARY 2015

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breakbulk outlook 2015

Oil prices have dropped almost 45 percent in the past three months. While this is good news for a country like India, which is dependent on imported oil, the larger picture is different. In 2006 and 2007 when oil prices shot up, the effect was counter-balanced to a great extent as the Indian rupee appreciated against the U.S. dollar. Due to higher oil projects, more oil-related projects kicked off, which benefited everyone.

However, the situation now is inversed. The reduction in oil price is offset by erosion in value of the rupee.

The Indian government is not passing on the full savings to the public for understandable reasons. The government is using this opportunity to shore up the health of oil marketing companies. Due to lower oil prices, pressure is on oil exporting countries to balance their budget. Lower prices also mean that big oil companies are slowing new

project launches. This will impact global demand and affect international business opportunities. This is the biggest risk for all sectors.

The relationship between cargo owners and the lines and service providers is becoming more complex and blurred. Lines are reluctant to cater to some cargo owners’ requirements like extended credit periods. Rates are being forced down and this does not set well with lines locally with Indian customers.

Due to ongoing projects, we do not see immediate pressure on rates. Due to imbalance in two-way trade, there will temporarily be very low rates on some sectors. However this should not be viewed as a general trend. We expect rates to go up in the second half of 2015.

Container and general breakbulk rates are expected to remain soft and possibly under pressure. Expect many shipowners and shipping lines to rationalize their

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Many shipping lines have either cut or curtailed capacity by bypassing Indian port calls, reducing frequencies, or calling only under inducement. For example, some lines have stopped westbound services from India. Moreover with depressed market scenario and increasing costs, lines are on the verge of cash flow issues. Cargo owners need to exercise caution when selecting shipping lines, especially for critical shipments.

DREXEL LOGISTICS Richard “Dick” Knoll Principal and Owner www.drexel-logistics.com Optimism is the core concept of American business that will not be dissuaded because of what many consider

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a downturn in pricing and therefore income. Falling oil prices have impacted proposed project budgets for principles in every major field, and created a somewhat “conservative” assumption of future business. Public companies driven to maintain shareholder at least initially seem to have taken a more reserved stance with regard to commitments to large capital projects.

While it is true lower fuel prices are an advantage to all forms of transportation, at some point industry will slow down sufficiently to reduce need and therefore it is apparent that some of these transportation entities may find themselves with reduced costs but no freight to haul.

Looking at traditional U.S. industrial growth, physical activities of expansion took a “water seeking its own level” type of concept. Industry expanded when and, more correctly where, it was economically feasible. Industry grew up around coastlines, rivers and with the completion of the transcontinental railroad, along those ever-expanding western rail lines.

Today however, Richard “Dick” Knoll there is a differing need to those traditional avenues of traffic.

Industry has found opportunities in far-reaching and hard-to-access areas, requiring it to “think smarter” to capitalize on these various new found business opportunities.

It is clear U.S. infrastructure today is somewhat lacking at best, but the concept of creating and maintaining corridors to these far-reaching areas, building projects close to or directly on these corridors, is a concept which is being rationalized by industry as a whole.

Corridor project location reduces costs for industry. Motor carriers can move heavier and larger oversized goods on corridors built and maintained to support capital projects. Railroads take time to expand and indeed have their own intrinsic issues when it comes to moving cargo of oversize and overweight

cargoes based on traffic volumes, location and clearance capacity. Projects today may be hundreds of miles from the nearest navigable ocean port or river, or miles from the nearest railroad and the creation of corridors allows industry

to circumvent this physical inability to more cost effectively and easily move capital goods.

2015 must and will be a year of industry optimism and a departure from status quo of “business as usual.” BB

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rules & regulations

EXPORT-IMPORT BANK THROUGH THE YEARS January 1, 1934

FIRST TRANSACTION The first transaction is approved, US$3.8 million to Cuba for purchase of U.S. silver ingots.

February 12, 1934

EXPORT-IMPORT BANK OF WASHINGTON ESTABLISHED The Export-Import Bank of Washington is established to help U.S. companies during the Great Depression. While the goal was to lend to the Soviet Union, such loans never materialized due to the USSR’s unpaid war debts to the U.S. March 9, 1934

SECOND EXPORT-IMPORT BANK OF WASHINGTON ESTABLISHED

By William G. Schubert

BANKING ON

EX-IM BANK Program’s End Would Harm U.S. Capital Projects Industry

T

he U.S. capital projects industry (infrastructure construction projects) is highly specialized, and its economic impact to the U.S. economy is perhaps one of the least understood industry segments by the general public. This is true even in the halls of the U.S. Congress where its future, as well as its contribution to the U.S. economy for more than 80 years, will be debated when the new Congress convenes in January.

Most large-scale capital projects in developing countries require a commitment of financing before the project sponsor can pledge a “Final Investment 32 BREAKBULK MAGAZINE www.breakbulk.com

Decision.” The FID cannot be issued until all sources of financing are identified. The continuing global financial crisis, the European sovereign debt crisis, and Third Basel Accord on capital and liquidity requirements, have all been factors that have led to decreased availability of commercial financing, and an increased percentage of governmentsponsored Export Credit Agency (ECA) “tied” financing.

Indeed, other countries performing similar financing arrangements are ramping up support for their capital project related exports. The procurement of goods and services is typically

The Second Export-Import Bank of Washington is established to lend to Cuba. In July, the lending authority expands to “any part of the world except Russia.”

January 1, 1936

EX-IM BANKS CONSOLIDATED The Second Export-Import Bank is liquidated and its loans and commitments transferred to the Export-Import Bank.

January 1, 1938

BURMA ROAD US$22 million is approved for a loan to China to assist in construction of the Burma Road.

June 18, 1938

FIRST DEVELOPMENT LOAN The first development loan of US$5.5 million is loaned to Haiti to improve economic conditions.

JANUARY-FEBRUARY 2015

rules & regulations

January 1, 1940

PAN AMERICAN HIGHWAY CONSTRUCTION Ex-Im Bank’s first financing for the Pan American Highway is approved for road construction in Mexico, El Salvador, Honduras, Nicaragua, Costa Rica and Ecuador.

June 1, 1945 – May 31, 1947

POST WWII AND THE MARSHALL PLAN Ex-Im Bank authorizes more than US$2 billion for post-WWII reconstruction in Europe, Asia and Africa.

Construction of the Pan American Highway, a project financed by the Ex-Im Bank.

“tied” to the particular ECA country. If ECA and commercial financing is not available at sufficient levels and competitive rates, then the planned capital project cannot move forward.

All capital projects require at least one engineering, procurement and construction, or EPC, contractor who is responsible for the procurement of goods and services for the project. The importance of ECA financing has grown to the point where the only EPC contractors eligible to bid on a planned project are those who will “guarantee” a certain level of eligible ECA financing in their bid proposal.

In many parts of the world, a capital project will require 30 percent to 60 percent ECA financing before project sponsors make the final investment decision. In view of these considerations, the ability of the EPC to qualify for ECA financing has become a critical factor in qualifying and winning the bid tender.

EPCs Benefit

The Export Import Bank of the United States (U.S. Ex-Im Bank) is the official export credit agency of the U.S. government. This means that if a U.S.domiciled EPC contractor is to compete internationally for a capital project that requires ECA financing, the contractor must meet U.S. Ex-Im Bank’s eligibility standards; only then will the bank act 34 BREAKBULK MAGAZINE www.breakbulk.com

as a lender/guarantor of last resort. The issue that members of Congress need to be aware of is that the successful EPC contractor will, in the end, determine from which country the goods and services are procured.

To illustrate, in 2012-2013, U.S.domiciled EPC contractors were the successful bidders on five large infrastructure projects on three different continents that accounted for nearly US$77 billion in overall capital expenditures. Participation by the U.S. Ex-Im Bank in these projects resulted in nearly US$16 billion in goods and services procured from the U.S. To put it another way, if a non-U.S. domiciled EPC contractor had been selected for the US$16 billion procurement, then there would have been no meaningful procurement from the U.S. This would have resulted in lost jobs from the U.S.-manufacturer sector and associated U.S. supply chain services.

As to the ongoing debate in Congress about whether to extend the U.S. Ex-Im Bank charter, some members of Congress contend that the program benefits only a small number of American corporations.

Nothing could be further from the truth.

On average, an estimated 150 to 500 U.S. companies are chosen by U.S.-domiciled EPC contractors when bidding on large capital projects. Secondary participation

July 31, 1945

EXPORT-IMPORT BANK ACT OF 1945 The Export-Import Bank Act of 1945 establishes the Ex-Im Bank as an independent agency; lending authority is now US$3.5 billion.

January 1, 1947

FIRST REAUTHORIZATION Export-Import Bank of Washington is reauthorized for the first time and created as a federal corporation and independent agency of the Executive Branch.

February 14, 1959

PRESIDENT EISENHOWER AT EX-IM BANK President Dwight D. Eisenhower visits Ex-Im Bank to celebrate the Bank’s 25th Anniversary.

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rules & regulations

September 1, 1961

EX-IM BANK AND FCIA Ex-Im Bank is given authority to issue exporter insurance. The bank can issue up to US$1 billion to insure U.S. exporters against political and commercial risks.

November 3, 1961

END OF DEVELOPMENT LENDING BY EX-IM BANK USAID is founded. The agency assumes responsibility for the U.S. government’s foreign aid development lending.

January 4, 1962

EX-IM BANK IN GHANA Ex-Im Bank authorizes US$120 million to the Volta Aluminum Co. to build an aluminum smelter in Ghana.

April 23, 1962

TAGUS RIVER BRIDGE Lisbon’s Tagus River Bridge, built with the help of credit from the U.S.

from sub-suppliers, including freight forwarders, packers, ports, trucking, and ocean carriers, can add thousands of U.S. businesses benefiting for each capital project.

Since the 2008 financial crisis, the U.S. Ex-Im Bank has helped more than 1,200 companies in my home state of Texas finance more than US$19 billion in export activities vital not only to my state, but also to the national economy in the energy, technology, and heavy manufacturing sectors.

If the new Congress does not reauthorize the U.S. Ex-Im Bank charter, it would have an immediate economic impact on the U.S. capital projects industry: • Without U.S. Ex-Im Bank’s involvement, project sponsors would disqualify U.S.-domiciled EPC contractors (as well as their underlying goods and service providers) from bid proposals that are in various phases of development. These near-term projects account for about US$50 billion to US$60 billion in capital projects spending that require some level of ECA-guaranteed support.

• Without U.S. Ex-Im Bank taking part in the transaction, U.S.-domiciled EPC’s would have no option but to move their procurement activities to a country with the same type of export credit support from their governments that the U.S. Ex-Im Bank offers — such as 36 BREAKBULK MAGAZINE www.breakbulk.com

China, United Kingdom, France, Italy, Korea or Japan.

• Without U.S. Ex-Im Bank participation, project sponsors would then defer to non-U.S.-domiciled EPC contractors that can guarantee a specified level of ECA support from the respective country. Once the decision is made to use a non-U.S.-domiciled EPC contractor, the opportunities to source goods and services from the U.S. are lost forever for that multibillion-dollar project. Equally significant, U.S. sub-contractors would lose 10 to 15 years’ worth of follow-on contract work after the capital project is completed.

• Without U.S. Ex-Im Bank assistance, the long-term damage to the U.S. economy would be irreversible, since we will eventually lose our nation’s essential industrial base to support American procurement for capital projects.

• Without U.S. Ex-Im Bank, the U.S. national defense capabilities would also be severely impacted because our highly skilled manufacturing base would be directly impacted. To underscore this point (and as I have said on many occasions when I am briefing audiences about U.S. Ex-Im Bank programs) if you can build a mining truck, or a gas turbine generator, or assemble a locomotive in peacetime, you can build a tank or other armament in wartime.

Ex-Im Bank authorizes US$55 million credit to Portugal to build Lisbon’s Tagus River Bridge, the longest suspension bridge in Europe.

March 13, 1968

A NEW NAME The Bank’s name change: “Export-Import Bank of the United States” becomes the official name after passage of P.L. 90-267.

March 1, 1981

EX-IM BANK AND CHINA Ex-Im Bank approves the first transaction to China since 1946.

February 14, 1984

VICE PRESIDENT GEORGE H.W. BUSH AT EX-IM BANK Vice President George H.W. Bush celebrates Ex-Im Bank’s 50th Anniversary.

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rules & regulations

CONGRESSIONAL VOTES FOR THE EX-IM BANK

October 15, 1986

REAUTHORIZATION

HOUSE OF REPRESENTATIVES

President Ronald Reagan signs a six-year extension of Ex-Im Bank’s charter.

January 1, 1988

CITY/STATE PARTNERS PROGRAM 50%

Ex-Im Bank introduced the City/State Partners program.

January 1, 1990

NEWLY INDEPENDENT STATES ‘45 ‘58 ‘74 ‘74 ‘74 ‘78 ‘78 ‘83 ‘86 ‘92 ‘97 ‘97 ‘01 ‘01 ‘02 ‘06 ‘06 ‘06 ‘11 ‘11 ‘11 ‘12

SENATE

Financing options for newly independent countries in Eastern Europe. The Bank opens for the first time since World War II in Poland and Czechoslovakia.

June 30, 1998 – December 31, 1999

FISCAL CRISIS OF 1998-1999

50%

Ex-Im Bank extends financing during the Asian fiscal crisis to support U.S. exporters and the global economy.

September 14, 2001 ‘78

‘86

‘97

‘97

Source: Congressional Research Service

Bipartisan Support

Ever since the first recorded votes in Congress going back to the end of World War II and all the way through 2012, congressional support for U.S. Ex-Im Bank’s charter has been bipartisan.

Indeed, according to the Congressional Research Service, the average “yea” votes in support of U.S. Ex-Im Bank in the House of Representatives during this time period was 74 percent; and, in the U.S. Senate, 82 percent.

The reasons for decades of bipartisan support are plainly evident.

First, the U.S. Ex-Im Bank ECA program incurs no cost to U.S. taxpayers while at the same time it provides vital export financing which, in turn, helps U.S. companies compete internationally on a level playing field. Indeed, the U.S. Ex-Im Bank over the past three years alone has generated about US$3 billion in returns to U.S. taxpayers after payment of overhead costs and setting aside the required “loan loss reserve” in the U.S. Treasury.

Second, the Congressional Budget Office recently testified that the U.S. Ex-Im Bank’s programs would generate budgetary savings of about US$14 billion 38 BREAKBULK MAGAZINE www.breakbulk.com

‘06

‘11

‘11 Yeas

‘11

‘12

No Vote

Nays

under the congressionally mandated Federal Credit Reform Act of 1990 (FCRA) standards. In fact, if U.S. Ex-Im Bank programs were eliminated, the federal deficit would be exponentially increased.

Third, the U.S. capital project industry and its associated supply chain cannot survive as we know it today if Congress unilaterally dissolves the U.S. Ex-Im Bank while the 60-plus foreign countries with ECA’s continue to do “business as usual.”

When its charter William G. expires on June 30, Schubert 2015, the U.S. Ex-Im Bank will cease to exist if Congress fails to act in support of the bank’s programs.

This would render a crushing blow to the U.S. economy and all the jobs that go with it were this to be the outcome. As an industry, we must not let this happen.

William G. Schubert, president of Houston-based International Trade & Transportation Inc., was U.S. Maritime Administrator in 2001-2005.

EX-IM BANK STEPS UP Aircraft insurance waivers in the wake of 9/11.

October 12, 2005

SUPPORTING AMERICAN BUSINESS OWNERS ExIm Bank announced relief provisions for exporters and financial institutions for those affected by hurricanes Katrina and Rita.

January 1, 2011

SMALL BUSINESS IS OUR BUSINESS Global Access is launched.

February 6, 2014

OPEN FOR BUSINESS IN BURMA Ex-Im Bank opens in Burma for the first time since 1988.

Source: Export-Import Bank of the United States.

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market spotlight

A FRIEND INDEED Relationships Key in China’s Challenging Business Climate

By Eric Johnson

T

ens of thousands of people died when an earthquake rocked China’s Sichuan Province in 2008. But millions of survivors were kept warm and fed after Chinese rescue crews called international aircraft cargo specialist Chapman Freeborn to aid in emergency deliveries of tents, blankets and other life-saving supplies.

Not only was the rescue operation a bright chapter for an otherwise tragic story, it gave Chapman Freeborn a ster40 BREAKBULK MAGAZINE www.breakbulk.com

ling chance to prove itself a friend of China, four years after the British-based company opened a China division with a Beijing office.

The company flew critical supplies aboard nearly 30 flights to the Sichuan disaster scene, showing itself willing to work closely with Chinese authorities, and proving itself grateful for the chance to help Chinese people in need.

Not every non-Chinese company in the heavy-lift shipping and logistics business can expect the kind of opportunity to shine in the way that helped solidify Chapman Freeborn’s business in

China. But the Sichuan earthquake experience points to the fact that a foreign company that cooperates closely with authorities – and proves itself a friend – can succeed in China.

Companies in the cargo-moving industry from around the world have done just that. Clear evidence can be found at the annual Breakbulk China trade show in Shanghai, where the floor is crowded every year with representatives of European, North American and Asian heavy-hitters, many of which have well-established bases in China.

And evidence of China’s welcoming JANUARY-FEBRUARY 2015

market spotlight

A Chapman Freeborn crew loads machinery aboard an IL-76 cargo jet.

Credit: Chapman Freeborn

attitude toward overseas companies that want to do business is reflected by the country’s robust foreign direct investment activity. FDI has been slowing in recent years, but it’s still a dynamic contributor to gross domestic product in the world’s second-largest economy. (By some standards, China in 2014 passed the U.S. to become the world’s largest economy.)

Foreign companies investing in non-financial, physical assets and labor in China – which for the logistics and heavy-lift sector includes warehouses, management offices and equipment – have together spent more than US$100 billion every year since 2010, according to China’s Ministry of Commerce. Total FDI in 2013 rose 5.3 percent year-on-year to more than US$117 billion and was likely to decline to around US$114 billion in 2014, based on ministry data for the first 10 months of the year available when this issue of Breakbulk went to press.

Much of the slowdown in FDI has been linked to declining manufacturing plant investments on the mainland by Japanese, American and European companies, the ministry said. Investment from South Korean companies, on the other hand, has increased.

42 BREAKBULK MAGAZINE www.breakbulk.com

‘Difficult Period’

Some of the pullback involves foreign companies that, after surveying the landscape in China, have decided that for now the Chinese business environment is more challenging than worthwhile.

Indeed, a survey in August of U.S. company executives in China conducted by the Beijing office of the American Chamber of Commerce found 60 percent of respondents “feel foreign business is less welcome in China” than in past years “and 49 percent believe foreign firms are being singled out in recent pricing or anti-corruption campaigns.”

“Our members have been and remain enthusiastic supporters of China’s integration into the global economy, but sadly this survey suggests that their positive sentiment is eroding,” said AmCham China Chairman Gregory Gilligan. He added, however, “we still believe that China’s economy will emerge from this difficult period stronger than before.”

The “difficult period” referenced

by Gilligan began after the 2008 global financial crisis. The crisis initially put a damper on global demand for Chinese exports and later contributed to an ongoing slump for real estate sales and

construction. The slump is expected to continue through 2015.

China’s shipbuilding, steel and coalmining sectors have been financially strained in recent years, too. And a government crackdown on corporate and official corruption under way since late 2012 has affected the business climate.

Many foreign shipping and logistics companies have even found it difficult to speak with Western news media about their China operations.

But the China market can be doable – even lucrative – for companies willing to adjust to the environment, whether in search of profits or simply to serve customers transporting cargo to and from the mainland. Many consider China simply too big to ignore. Logistics sector revenues, including those for breakbulk transportation, for all companies operating on the mainland topped US$1.1 trillion in 2013, according to the China Federation of Logistics and Purchasing.

U.S. package shipping giants FedEx and UPS, for example, stepped into China about a decade ago. They were allowed to open air cargo subsidiaries by cooperating with Chinese regulators and, in some cases, partnering with state companies. UPS took advantage of a “friend of China” opportunity in 2008 by serving as a corporate sponsor for the Summer Olympics that year in Beijing.

Today, one of FedEx’s 12 global air hubs is in the southern city of Guangzhou, while UPS operates international air cargo facilities in Zhengzhou and Shenzhen. UPS also offers rail service to Europe from Zhengzhou.

Legal Challenges

China’s legal environment is the backdrop for some of the most daunting challenges confronting international logistics and shipping companies that do business in China. Laws that govern business licensing, foreign-Chinese joint ventures, currency exchange and taxes can be especially complicated. Customs and port-rail-air terminal rules are also China-specific.

To successfully navigate in this legal environment, according to experienced foreign company representatives in China who spoke with Breakbulk, an international company stepping into China does well to hire a mainland Chinese law firm.

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A firm whose lawyers are mainlandtrained with offices in Shanghai, Beijing or another major city will likely understand the latest legal developments as well as the fine print and not-in-print nuances. Law firms based in Hong Kong or Taiwan, on the other hand, are less likely to have as much depth of experience or knowledge of the latest conditions and regulatory adjustments, which can be made by administrative agencies without a public notification.

Moreover, local law firms best know any given locale’s particular legal environment, which can vary from province to province or even city to city in China.

A shipping company that wants to do business or open an office in Beijing, for example, should consult with a Beijingbased law firm. A company set on doing business at the Port of Zhuhai will want to find a firm familiar with that city’s regulations and administrators.

China “is a big country,” said Diana Kang, the Beijing-based China commercial manager for Chapman Freeborn.

“It’s better to talk with local people.”

Chapman Freeborn, which opened its first China office with one staffer in Beijing in 2004, has since added staff and offices in Shanghai as well as Hong Kong. The company’s chartered aircraft serves airports across China, providing cargo-lift services for a variety of customers including oil and gas companies. It’s also in a growing business that provides upscale private jet chartering services across the country. And it’s a company that links China to the world, with some 400 staffers speaking 50 languages in 30 locations worldwide.

Open for Interpretation

Chapman Freeborn learned early in its China years that a foreign company on the mainland must approach the legal and regulatory framework with an open mind. Flexibility is crucial in areas such as business licensing.

For example, Kang said, because Chinese commercial regulations do not have a special classification for aircraft charter brokers, Chapman Freeborn obtained a business license that’s fully legal as an “aviation services consultant.”

A mainland lawyer with a good track record of helping foreign companies get grounded in China will know how to 44 BREAKBULK MAGAZINE www.breakbulk.com

FOREIGN DIRECT INVESTMENT IN CHINA ‘08 ‘13 ‘08 ‘13 ‘08 ‘13

Tax Challenges

‘08

Manufacturing

‘13

Real Estate Other Business Services

‘08

Transportation & Warehousing

‘13 $0

business can be found in the Ministry of Commerce’s booklet Invest in China.

It stresses that as a communist but probusiness country, “China implements the socialist market economy, whereby the government regulates the economy on the market basis.” The booklet also says “enterprises have full authority of their operation(s) within the limits prescribed by law and are free from government intervention.”

$10

$20

$30

$40

$50

In US$ billions Source: China National Bureau of Statistics

interpret – and apply to local circumstances – the voluminous Company Law of the People’s Republic of China. The 219-section law, in place since 2006, applies to every business, but includes a special section for foreign concerns.

Some wording in the law’s foreigncompany clauses leaves room for interpretations by Chinese authorities.

For example, Article 197 says foreign companies with permission to register a mainland branch must follow all business regulations “and may not injure the social public interests of China. What’s meant by “social public interests” is not spelled out in the law.

More straightforward is Article 194, which says that to open “any branch within the territory of China” a foreign company “must appoint a representative or an agent within the territory of China to take charge of the branch, and shall allocate to the branch corresponding funds for the business activities it is engaged in.”

Many companies play it safe by hiring a Chinese national as the China branch executive. Article 194 also includes a strong warning by noting that a foreign company “shall bear civil liabilities for the business operation of its branches undertaken within the territory of China.”

An introduction to the Company Law and related information about doing

International players also face special tax challenges unique to China. The Chinese government’s 2013 extension of a value-added tax to cover international shipping and logistics providers has had a broad impact on the industry, for example, not only because it’s raised business costs since last year, but also because the law grants local government agencies a degree of flexibility in levying the tax.

So in the early months of the new VAT regime, a tax on a piece of equipment shipped through one Chinese port might have been higher or lower than the tax levied in another port.

Adjusting to the VAT extension was initially “a big challenge” for Chapman Freeborn, Kang said. “In Shanghai and in Beijing, for example, the interpretations of the VAT were different.”

But the company fully cooperated with the tax authorities and thus met the challenge. “Now it’s much better,” she said. “China is still changing.”

The Chinese government’s new leadership that was ushered in after 2012 under President Xi Jinping “has had a great impact, and it’s quite positive” for foreign companies doing business in China, Kang said. “The government is more open.”

Indeed, as the mainland’s legal and regulatory environment changes, the traditional “guanxi” factor – that is, the personal relationships traditionally made among company executives and other decision-makers, built over time and sometimes hours-long dinner parties – is becoming increasingly less important for non-Chinese companies that want to do business on the mainland.

But as Chapman Freeborn, UPS and other global companies have learned, proving oneself a cooperative friend of China can smooth the path to success. BB JANUARY-FEBRUARY 2015

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GPLN has also kept it global when it comes to their annual general meetings and in the past, the conferences took place on 4 different continents of the world. This year the meeting was held at the 5-star Landmark Hotel in Bangkok, Thailand and the record breaking attendance of over 170 GPLN delegates and sponsors was not only the highest in GPLN history, but also speaks itself for the quality of the network and their highly skilled project forwarders.

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Interfracht from Germany was featured prominently, handling four 800-ton reactors (see photo): Following a three-year planning period, Interfracht Germany has successfully completed a challenging project job. Four reactors, each weighing 800 tons, were transported across a distance of 17,500 km from Japan via the Black Sea, followed by a river voyage on the Dnieper River in Ukraine all the way to Mozyr in Belarus. Four special barges, a ten-kilometer heavy duty road, plus the unloading pier were designed and built exclusively for this movement. The 50 x 7.2 x 5.5-meter reactors were loaded in Higashi Harima, Japan, and transported to Kherson, Ukraine by MV Trina of SAL Line. Then the shipment was loaded onto special barges constructed by Marine Digital. The pontoons were towed along the Dnieper River from Kherson to the landing stage.

Due to the unstable political situation in Ukraine, this segment of the haulage in particular was extremely challenging and the location of the goods was inspected and monitored several times per day using the most advanced technology.

Heavy storms in Eastern Europe, which resulted in flooding at the destination site made this shipment even more complicated and a protective dam had to be built around the landing stage. The final road haulage was carried out by using a 64-axle SPMT, to overcome inclines of up to 12 percent.

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market spotlight

Rivers Breathe Life Into Inland Economic Growth

CHINA’S SEA DRAGONS

By Eric Johnson

Heilong

Yellow

Yangtze

Pearl

52 BREAKBULK MAGAZINE www.breakbulk.com

nce upon a time, according to an ancient Chinese legend, four sea dragons took pity on farmers by watering their drought-plagued crops. But in doing so, the dragons angered a rain god, who then jailed the dragons under four mountains. The dragons retaliated by transforming themselves into China’s greatest rivers – the Yangtze, Pearl, Yellow and Heilong (also called the Amur) – to give people water forever.

Today port operators, shipowners and logistics companies are giving a modern twist to that fanciful legend of the origin of China’s rivers. They’re relying on China’s dragon-shaped rivers to spur a new phase of development that’s bringing business and jobs to underdeveloped inland provinces.

Behind this development is a central government push for river navigation and port expansion projects, particularly on the upper reaches of the Yangtze and Pearl rivers. A key goal is to improve living standards for hundreds of millions of people in areas west of China’s wealthy eastern cities, such as Shanghai at the mouth of the Yangtze and Hong Kong near the mouth of the Pearl.

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Efforts since 2006 to boost commercial river shipping complement government tax and land incentives that encourage companies to build new factories inland rather than in the eastern cities at the heart of Chinese manufacturing.

River cities such as Wuhan, Chongqing, Luzhou, Wuzhou and Nanchang are among those targeted for port facilities development under the government’s river initiative, which is part of the broader National Strategy for the Rise of Central China adopted by the State Council in 2006.

Domestic companies are the main beneficiaries of river development.

China’s inland waterways are closed to non-Chinese cargo vessels and shippers.

A foreign-flagged multipurpose vessel hauling heavy machinery, for example must load and unload at a seaport such as

Shanghai. The machinery would have to be transferred to or from a China-flagged river vessel or barge at a Shanghai wharf.

The manufacturing city of Wuhan, straddling the Yangtze about 600 miles upriver from Shanghai, has gotten the most attention under the nationwide port improvement project. The Wuhan metropolitan area is served by four river ports that together are called Wuhan New Port and billed as the country’s largest inland port.

Wuhan’s roll-on, roll-off shipping facilities handle cars and trucks assembled at area factories, where annual output topped 1 million vehicles for the first time in 2014. Dozens of other berths handle breakbulk, dangerous cargo, coal and chemicals. And Wuhan’s container terminals transfer goods made in factories scattered across four inland provinces –

Hubei, Hunan, Henan and Anhui.

By 2015, according to the Hubei Province economic development agency, Wuhan New Port’s total cargo throughput is slated to top 200 million tons, including 2 million TEU containers, up from about 1 million in 2013. The Hubei government has reportedly asked the central government for about US$400 million over the next five years to continue port improvements. Plans call for adding 65 million tons of cargo handling capacity by 2020.

Work on Wuhan port facilities, dredging and streamlining navigation on area waterways – including the Yangtze, smaller rivers nearby and canals – is expected to cost the Hubei government more than US$5.4 billion by 2020, according to the province’s economic development office. Some of these funds

Wuhan is among the cities targeted for port facilities development under the Chinese government’s river initiative. / Credit: Shutterstock 54 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

market spotlight

have been earmarked for beefing up navigation aids.

Efforts to build an electronic navigation mapping system on the Yangtze drew experts from around the world to an October conference of the Changjiang (Yangtze River) Waterway Survey Center in Wuhan. Among them was Zhang Weibin, a marine technology postdoctoral researcher at Finland’s Aalto University, who told Breakbulk that the electronic mapping is the “right way to relieve traffic congestion and reduce unsafe factors. ... I believe application of information technology and marine safety research will definitely contribute to the enhancement of marine traffic safety on the Yangtze.”

In another example of efforts to support inland commercial shipping, a Jiangsu Province city on the Yangtze in November bought what’s been called the world’s largest self-propelled dredging barge – a 101 meter-long mammoth made by Zhenhua Heavy Industries that can hold 7,100 cubic meters of spoil. The dredge is slated to start clearing river channels in 2015.

Major port improvements are also under way hundreds of miles upstream from Wuhan on the banks of the Yangtze at the cities of Chongqing and Luzhou.

These cities are also upstream from the Three Gorges Dam, which is equipped with locks for barges and small ships.

The US$1.6 billion project to expand Chongqing’s Guoyuan Port was aimed at tripling the number of berths to 12 by the end of 2014, and boosting annual throughput to 30 million tons of cargo.

One of the port’s major selling points is its proximity to the head of the Chongqing-Duisberg, Germany, intermodal cargo railway, which opened in spring 2014. The railway is a key route for containers filled with Europe-bound consumer electronics.

The port improvements include channel expansions to improve navigation around Chongqing, according to Teng Hongwei, a Chongqing government transportation department official. Teng recently told local media that river traffic congestion “is becoming increasingly serious,” thus the need for deeper and wider channels.

Chongqing’s goal is to significantly increase the port’s 2014 capacity of 150 million tons and 3.5 million TEUs. Reportedly, the port will be ready to handle 200 million tons and 5 million TEUs by 2017.

Meanwhile, Sichuan Province’s largest port Luzhou, about 100 miles upriver from Chongqing, is getting a makeover to facilitate shipments of goods made in southwestern China and bound for Shanghai and the world.

Other inland ports getting extra attention as part of the inland development push are Nanchang at the confluence of the Jin and Gan rivers in Jiangxi Province, and Wuzhou on the Pearl, about 200 miles upriver from Hong Kong. Each city is a regional logistics hub serving dozens of smaller cities nearby.

Established seaport operators in China are playing a role in the push to develop inland ports. For example, Shanghai’s largest port operator Shang-

hai International Port Group recently agreed to jointly develop Yangtze River container terminals and river-to-sea shipping lines with the Hunan Province government.

Underscoring inland China’s status as a growth area for global logistics, an Asian trade journal recently quoted HapagLloyd CEO Habben Jansen as saying that for his company investing in the Chinese interior “probably cannot be avoided.”

The German shipping liner wants to ramp up investments in logistics facilities for intra-Asia trade and services on the mainland over the next five to 10 years, Jansen told the publication Maritime CEO. Altogether 11 provinces and municipalities, as well as dozens of major cities, stand to benefit from the ongoing initiative to boost local economies in China’s interior. Encouraging companies to build factories in these regions is part of the effort. But much of this development hinges on the effort to expand river ports, shipping and logistics services.

The importance of services on the Yangtze, the country’s biggest river, was the core theme when Chinese Premier Li Keqiang delivered a speech last April in Chongqing. He called the river an “economic belt” that “underpins China’s sustainable economic development,” state media said.

In modern times, Li said, countries with seacoasts have historically started their economic development on the coast and gradually expanded inward along rivers to landlocked areas. That pattern is now at play in China. BB

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JANUARY-FEBRUARY 2015

rules & regulations

RUSSIAN WINTER

Western Sanctions, Economic Issues Cloud Outlook

By Mark Willis

58 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

F

ollowing its unprovoked invasion of Crimea in spring 2014, political and military tensions between Russia and the West have escalated, with the subsequent annexation of the Black Sea peninsula and tacit support offered by Russian President Vladimir Putin to rebel groups in eastern Ukraine, further contributing to the region’s most significant crisis since the end of the Cold War nearly 25 years ago.

The political standoff between former Cold War adversaries has already had severe ramifications for regional trade, with a series of tit-for-tat trade sanctions introduced by the European Union, U.S. and Russia during mid-2014.

Arguably more significant for the Russian economy, however, has been the sudden collapse in global oil prices since summer 2014, falling more than 50 percent to below US$50 dollars per barrel. Falling oil prices have been accompanied by an even more precipitous slump in the value of the ruble versus the U.S. dollar during the same period.

An icebreaker in the White Sea. Credit: Shutterstock

www.breakbulk.com BREAKBULK MAGAZINE 59

rules & regulations

EU, U.S. 2014 SANCTIONS ON RUSSIA U.S.

EUROPEAN UNION

Designates or blocks certain Russian individuals and entities, and an important change in the Office of Foreign Assets Control (OFAC) policy on entities owned by blocked persons.

Limits availability of debt financing for certain Russian financial institutions.

Prohibits provision of goods, services and technology in support of certain activities relating to the exploration or production of oil or gas in Russia, its claimed maritime area, or “extending from its territory.”

Sanctions target individuals and entities through travel bans and asset freezes.

$€

Restricts the supply of certain items to the Russian military or other military end-users in Russia; and for use in oil or gas exploration or production in Russia, including Arctic offshore locations or shale formations.

Restricts licensing policies for export activities involving Russian-made defense articles (including spacecraft) and defense articles intended for end-use in Russia.

“While these sanctions have so far had relatively little impact on actual (economic) output, they have strongly impacted the financial dynamics at a time when the economy is already under great pressure due to suppressed oil prices,” said Steven Eke, senior analyst for Russia and the former Soviet Union, at Control Risks, a consultancy specializing in political and security risk.

Correspondingly, energy-dependent Russia is facing a perfect economic storm at the start of 2015, Steven Eke with independent economists and the country’s central bank forecasting a return to recession with a potential 5 percent drop in GDP and rise in inflation during 2015.

Participants from across the shipping industry confirm that this combination of western sanctions and the what is developing into the country’s most serious economic challenge in more than a decade has already resulted in a slowdown in regional trade flows, and a much more challenging environment for Western firms exporting to and investing in Russia over the last six months.

“The difficulties of doing business in 60 BREAKBULK MAGAZINE www.breakbulk.com

Russia, which were already considerable, have definitely increased during 2014.

We would not foresee them easing to any great extent in 2015,” said Eke. EU and U.S. sanctions have placed new restrictions on trade with Russia, notably clamping down on Western exports of goods and services destined for its all-important oil and gas sector. Other measures include asset freezes and visa bans on a wide range of individuals closely associated with Putin’s administration, as well as David Lorello restricting the access of some state-owned firms to western capital markets.

The list of prohibited export items includes those relating to deepwater oil extraction, arctic drilling, and equipment and services used for shale fracking, the military and dual-use technologies.

David Lorello, partner at Covington, a legal practice whose services include advising clients on a range of international regulatory and commercial matters under both European and U.S. laws, outlined how sanctions have placed new restrictions on Western firms

Measures deal with access to the capital markets for specified financial and defense institutions.

Restrictions on dealing with goods and services related to the oil industry.

Restrictions on dealing with technologies listed on the Common Military List.

Restricts export of dual-use goods and technologies. *Summary as of Sept. 24, 2014.

Source: Compiled by Reed Smith

exporting to Russia.

“They do not target the shipping industry as such, but they can have a significant impact on what can and cannot be exported and imported,” Lorello said.

“If you look at Russia as a whole, the new U.S. and EU restrictions affect a very small percentage of total foreign imports. However, within the individual sectors (subject to restrictions), such as oil and gas, or the military, there are very significant new restrictions and rules that weren’t applicable to Russia or Crimea a year or even six months ago,” he said.

Given the large concentration of sanctions on the oil and gas sector, which represent more than half of total Russian exports, breakbulk and project cargo shippers and transport providers overwhelmingly report a much more difficult operating environment since mid-2014, though a significant slowdown in business has yet to take occur.

LaDonna Blackwell Logan, director of global projects at Lynden International, said a major logistical difficulty arising from the sanctions has been additional rounds of cumbersome bureaucracy and paperwork now required by government customs officials for oil and gas equipment exports.

Lynden International, which provides global freight forwarding and JANUARY-FEBRUARY 2015

specialized logistics solutions, has been advising its clients since summer 2014, “that they should seek legal counsel, even when they are not dealing with a sanctioned company,” said Blackwell Logan.

“We haven’t had issues like this before with Russia, and it’s never affected the oil and gas industry. But ultimately we have no control over the situation, so we can’t change the regulatory environment. We just have to figure out a way with clients and manufacturers to make it work,” she added.

Despite having had some shipments temporarily detained, as of the end of 2014, Lynden International had not had to cancel any contracts, and was also able to obtain a special license from U.S. Customs and Border Protection to carry out an existing order for transit of shale fracking equipment, which is among the main prohibited items.

Covington’s Lorello also outlined how new sanctions and a prohibition on trade with the annexed Crimean peninsula have added an additional layer of bureaucracy on Western shipping firms operating in Russia.

“Logistics companies, as well as their clients, are having to come to terms with new export and import restrictions regarding Russia and the Ukraine, which they have had to build and implement controls for,” he said.

“Subsequently, many of our clients have had detailed interactions with the customs authorities and regulators in the EU member states, which are responsible for administering the trade controls and restrictions, to understand the new rules relating to Russia and Crimea and to work to obtain licenses for restricted transactions, where licenses are available. This has presented a series of new challenges,” he said.

Russia-based shippers have also highlighted that restrictions on Western imports in place since mid-2014 have had a pronounced impact on their ability to deliver EU- and U.S.-manufactured equipment for the domestic oil and gas sector.

Valentin Bokatyy, CEO at Novo, a Novorossiysk Port Terminal Ltd. firm offering chartering, logistics and liner services for heavy-lift and oversized project cargo, outlined how the more

Cars in the customs control zone at the multipurpose transshipment complex Yug-2 in Ust-Luga port. / Credit: TASS/ZUMA Press/Newscom

challenging operating environment has affected business over the last six months.

“It has been difficult for delivery of equipment for oil companies, and some of our clients have been forced to cancel a number of contracts due to the sanctions. Some Russian oil companies have also been forced to look for some alternative suppliers of equipment, such as from China and Korea,” Bokatyy said.

“Some projects reliant on foreign investment have been frozen until political matters are resolved, or they will look for alternative suppliers who are not subject to the sanctions,” Bokatyy added.

These projects include those involving Russian energy sector firms such as Rosneft and Lukoil, which are subject to sanctions.

“It is also difficult to use some Ukrainian ports, such as the port of Mariupol, which were previously used for transshipment of heavy-lift project cargo, as some ship owners are wary of associated war risk,” he said.

As far as the outlook for 2015 business, sanctions appear likely to continue to restrict the capacity of Western shipping firms to operate in Russia this year, most notably within the oil and gas sector, with little sign the political stale-

mate will thaw over the next year.

Control Risks’ Eke outlined that with the political standoff between the West and Russia appearing unlikely to escalate substantially during the next year, a further expansion in sanctions also appears improbable. However, he added that with the most important U.S.-EU sanctions set to remain in force well into the second half of 2015, the impact of these measures is likely accelerate.

With sanctions to remain focused on the energy and military sectors, an arguably more important issue for wider international trade and shipping firms will remain the challenging headwinds facing the Russian economy.

In particular, the collapse in oil prices and sharp fall in the value of the ruble versus the U.S. dollar may result in a deceleration in Russian demand for foreign direct investment, and the country’s capacity to finance these new projects.

Eke said that more than sanctions, “the more relevant issue here is the downturn in the economy, which means greater concern over Russia’s purchasing power, and the now negative predictions for economic growth. I think a more marked downturn in shipping volumes is more likely in 2015.” BB www.breakbulk.com BREAKBULK MAGAZINE 61

cargo lens

India’s Fast-track Projects Need Infrastructure to Match

FASTFORWARD

By V L Srinivasan

Workers removing billboards at a toll plaza to allow passage a mega reactor on its way to Bharat Petroleum Chemicals Ltd.’s Kochi refinery.

Credit: Resham Singh & Co.

W

ith its political stability returning and economy showing signs of improvement, India’s new government led by Prime Minister Narendra Modi has been in a fast-forward mode, and more than four dozen mega infrastructure projects worth about US$5 billion (INR3 lakh crore) were cleared between July and September 2014.

The government-owned National Thermal Power Co. alone has been implementing 21 power projects – thermal, 62 BREAKBULK MAGAZINE www.breakbulk.com

hydroelectric and wind – in the coming years and another 36 projects are in planning stage. Once commissioned, these projects will generate 53 gigawatts of electricity in the next 10 to 15 years.

Since equipment manufactured within and outside the country needs to be transported to the project sites in time, the big question is whether India has adequate logistics infrastructure in place to move the over-dimensional, or ODC, cargo.

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cargo lens

Two transformers weighing 337 tonnes each on their way from Ballia in Uttar Pradesh to Bhiwadi in Rajasthan for the 2,500-megawatt, high-voltage direct current power transmission project. / Credit: Resham Singh & Co.

In the World Bank’s Logistics Performance index, India has slipped 17 places – from 37th ranked in 2007 to 46th in 2013 and 54th in 2014 – which shows that infrastructure in the logistics sector needs immediate attention, as the unwarranted delays in moving project cargos have resulted in cost escalation in the past.

The World Economic Forum Global Competitiveness Report 2014 ranked India 85th out of 144 countries in terms of infrastructure quality, with “inadequate supply of infrastructure” listed as the most problematic factor in doing business.

Even the National Transport Development Policy Committee submitted a report to the government in February 2014 recommending that overall investment in infrastructure should increase from an expected 7 percent of gross domestic product in the 12th Plan (20122017) to 8.1 percent in the subsequent three plans through 2032.

The public sector investment in logistics infrastructure should rise marginally, from 4 percent of GDP during the 12th Plan to 4.3 percent to 4.5 percent in 64 BREAKBULK MAGAZINE www.breakbulk.com

the next three plans, and private sector investment from 3 percent to 3.7 percent over the same periods, the report said.

“Annual investments in transport should increase from US$45 billion (INR2.2 trillion) in 2011-12 to US$70 billion (INR3.8 trillion) by 2017, and rise further to about US$250 billion (INR14 trillion) in the 15th Plan period (2027-2032). This means an increase in investment from about 2.7 percent of GDP in the 11th Plan to 3.3 percent in the 12th Plan, and further to 3.75 percent in later plan periods,” the report said.

According to a study by McKinsey & Co., inefficiencies in logistics infrastructure costs the Indian economy an extra US$45 billion, or 4.3 percent of the GDP, every year. The study also warns a 150 percent growth in freight traffic demand by 2020 (compared with 2010 levels) will strain India’s infrastructure further.

However, revival of the Indian economy along with the imperative need for infrastructure development is expected to fuel growth and simultaneously create demand for project cargo logistics activity in sectors such as energy projects, heavy engineering and

capital equipment movements, mining and refinery projects.

Though the cost of carriage by coastal shipping is INR 0.25 (0.4 cents) per tonne per kilometer as compared to INR 1.20 (1.9 cents) per tonne by road and INR 0.60 (1 cent) by rail, project cargo movers prefer transportation by rail and road. However, they have to cross hurdles like low-tension and high-tension power lines, weak and narrow bridges, low tunnels, flyovers, tree branches and welcome boards, besides getting clearances from various government agencies.

“The main challenge the project cargo movers face is lack of infrastructure for the safe and speedy movement of ODC and super ODC,” said Girish Pandey, managing director of the Chennai-based Alacrity Projects and Logistics Ltd. Insufficient parking slot and shoulder width for over-dimensional cargo during night halt permits, temporary decorative arches and welcome boards, alleged harassment from Road Transport and Public Works department officials in spite of taking all required permissions, all in an effort to transport cargo impacts the morale of investors, Pandey said.

As an example, Pandey said his company faced many problems while transporting a 420-tonne stator by barge from Mumbai port to Karwar and onward to Raichur by road in the south Indian state of Karnataka for a power project in May 2014.

“The 825-kilometer-long route from the port was one of the most difficult ones, as we had to construct a temporary jetty at Belekeri, dig road under the Konkan railway bridge due to insufficient height clearance, hill-cutting and road-widening while crossing the Yelapur hill section, and also construct a temporary bypass on Krishna River,” Pandey said.

Along with experiencing delays in getting required permits from the government agencies, the company had also faced the ire of local people while transiting certain villages, as the heavy equipment damaged nearby roads, he said.

With the project cargo movement set to pick up in 2015, Pandey believes the present logistics infrastructure – which has improved vastly in the last decade JANUARY-FEBRUARY 2015

– needs to be fine-tuned to overcome obstacles.

“What the government needs to do is to set up a centralized, single-point authority which should accord all relevant permissions needed to move over-dimensional cargo, increase the minimum height of overhead structures to seven meters, and also construct all new bridges, flyovers and road-over bridges to carry heavy cargo so that India can meet the targets set for next decade,” Pandey said.

Challenges Aplenty

In a recent development, the Indian government has responded to a plea made by the Hydraulic Trailer Owners Association of India to provide online approval for movement of cargo weighing up to 169 tonnes of gross vehicle weight (GVW) as per the Indian Motor Vehicle Act. Earlier, permissions were given up to 49 tonnes GVW on a mechanical trailer and, if it was over the prescribed weight, the cargo should be moved on a hydraulic trailer. The GVW includes vehicle’s weight (about 15 tonnes).

Procam Logistics Director Nilesh Kumar Sinha said the challenges facing the industry are three-fold: regulatory, infrastructure, and skill and competence of service providers.

There is no clarity on the guidelines issued by the Indian Ministry for Road Transport and Highways, as they are interpreted differently by each state to suit its convenience. This results in delays in transporting project cargo and in cost escalation of the project.

“The basic road infrastructure has certainly improved in the last 10 years,” Sinha said. But “non-availability of details or database of en route bridge inventory always delay the permission process from concerned authorities.

With a forward-looking approach and the right tools of technology, the government can ensure glitch-free movement of heavy equipment by road by providing such information,” he said.

Much attention is also being given by the government for transporting ODC by inland waterways and coastal shipping, and discussions are taking place to explore the opportunities to utilize costefficient haulage of heavy equipment.

Two ammonia converter reactors, each weighing 300 tonnes, were transported from the factory at Hazira to National Fertilizers project sites in Panipat in Haryana and Bhatinda in Punjab. / Credit: Resham Singh & Co.

“While some progress is on to overcome the first two bottlenecks (regulatory and infrastructure challenges), lack of skills and competence of crew are still posing challenge to us,” Sinha said.

Existing infrastructure is sufficient for present-day requirements, but the Indian government is working proactively to address many concerns raised by the operators. Introducing online approvals for movement of oversized cargo will certainly give thrust to many industries such as energy, defense, infrastructure, railways, oil and gas and steel and cement, Sinha added.

Coastal Shipping

Coastal shipping is viewed as an important and alternate mode of transportation of project cargo, as almost half of Indian states are maritime states with many major and minor ports. Besides avoiding congestion on roads, coastal shipping would save time and reduce greenhouse gas emissions in the country.

Sanjay Sikka, CEO, projects division, of Direct Logistics, noted that most of the economic activities, such as new power projects, opening and expansion

of oil refineries, new fertilizer units and renewable energy plants, are located in remote corners of the country. Because the project cargo has to be moved from the manufacturing sites (sometimes located in other countries) to major ports and then to the end locations, the government should encourage their movement by coastal shipping.

The federal government should sanction all permissions for project cargo movement and not the states, as the latter have their own set of rules for the transport vendors, he said.

“The logistics infrastructure is not yet in place in most parts of the hinterland, and getting permissions from the states is making transportation of overweight cargo as per schedule a costly business,” Sikka said.

Though logistics companies want to move the project cargo by inland waterways, they are discouraged due to lack of facilities, making coastal shipping also a costly proposition. The existing logistics infrastructure was falling short of expectations of cargo movers, and the government should give lot of push to develop the same, he added. BB www.breakbulk.com BREAKBULK MAGAZINE 65

trade notes

Turkish forwarding company Dragon shipped by vessel eight amine absorbers, weighing 566 tonnes each, from Port of Derince in Turkey to Turkmenbashi Port for Hyundai Engineering’s gas processing plant. / Credit: Dragon

DOING BUSINESS IN TURKMENISTAN

By Burcu Gürses

A

s one of the world’s fastestgrowing economies, with huge gas and oil resources, Turkmenistan also holds a wealth of planned and ongoing infrastructure projects in order to meet the demands of its economy and international trade.

Turkmenistan is among the five nations bordering the Caspian shores, with Iran, Kazakhistan, Ozbekistan and Afganistan. Turkmenistan’s natural gas 66 BREAKBULK MAGAZINE www.breakbulk.com

reserves are ranked fourth in the world and second in Eurasia behind Russia, according to the U.S. Energy Information Administration, Its oil reserves in the Caspian are estimated at 12 billion tonnes.

Despite it’s energy resources, Turkmenistan’s government has been slow to implement reforms to attract foreign investment. Nonetheless, power and fertilizer plants, refineries and other enormous projects are going up in the country. According to Turkmenistan’s State Committee of Statistics, the country’s exports totaled US$17.1 billion

Promising Market Not Without Obstacles while imports were estimated at US$12.5 billion in 2013, the most recent year statistics were available.

In 2015, Turkmenistan and Turkey intend to conclude an extensive free trade agreement that will boost bilateral trade, which totaled US$5 billion in 2013. That potential trade is hindered by inland transport challenges, with Iran at the heart. While there are transport options, 90 percent of Turkey’s land transport to Turkmenistan goes through Iran. Each year 43,000 Turkish trucks pass via Iran to Turkmenistan.

For decades Iran has charged a fuel JANUARY-FEBRUARY 2015

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trade notes

TURKMENISTAN QUICK FACTS

GDP (PPP): US$55.16 billion FDI Inflow: $3.2 billion

Inflation (CPI): 4.9%

12.2% growth rate 11.1% 5-year compound annual growth Population: 5.6 million

Exports: US$17.1 billion Imports: US$12.5 billion

Pipelines: Gas, 7,500 kilometers Oil, 1,501 kilometers Railways: 2,980 kilometers

Roadways: 58,592 kilometers 47,577 kilometers paved

Waterways: 1,300 kilometers, Amu Darya and Kara Kum

Unemployment: 60.0%

* Figures are 2013 unless otherwise noted. Source: The World Factbook, U.S. Central Intelligence Agency.

difference fee for Turkish trucks entering Iran, as Iran’s subsidized oil prices were much lower than its neighbors. In November 2013, the International Transporters Association of Turkey, or UND, began protesting Iran’s fuel difference fee for Turkish road transportation companies, and Turkish authorities started to reject this fee. After negotiations between the two neighbors, Iran agreed to stopped asking for the fee from Turkish trucks as of Dec. 1, 2014, but instead started sealing fuel tanks of Turkish trucks at the border gates. The conflict has created long waiting times at the border, stretching the Turkey-Turkmenistan transit to up to 15 days, according to sources familiar with the issue.

“It is not just the fuel difference fee that Turkish truckers suffer from,” said Fatih Sener, UND’s executive committee chairman. “Turkish trucks have long waiting times entering Turkmenistan while Iran-plated trucks have priority when it comes to border crossings in Iran.

As an alternative solution, UND is seeking to use a ferry line between Alat port in Baku, Azerbaijan, and Turkenbashi Port in Turkmenistan.

“What we had requested from Azerbaijani authorities is two ferries operating regularly twice a day for Turkish trucks,” Sener said. “On this route Turkish trucks will be able to enter 68 BREAKBULK MAGAZINE www.breakbulk.com

Turkmenistan in six days,” compared with 15 days with the extended wait times in Iran.

According to Sener a dozen ferries and two roll-on, roll-off ships operate between Baku and Turkmenbashi port.

The ro-ros are capable of hauling 30 to 35 trucks. The Caspian route could carry up to 25,000 trucks a year.

“All these ships belongs to Azerbaijan, and in December Turkmenistan took the delivery of the first ro-ro ship; the second ship will be delivered later,” Sener said. Turkmenistan’s ro-ro ships will be able to carry up to 60 trucks each.

Port Capacity

But in order to meet the growing demand from the Caspian route, stronger port infrastructure is needed, those familiar with the market say.

“Although we are facing different problems while doing business in this country, the main problem is port capacity,” said Yavuz Tas, project manager of Hareket Heavy Lifting and Project Transportation. Hareket has been doing business in Turkmenistan since 2002 and plans to open a local office this year.

“There is only one port, Turkmenbashi, operating in the country. Hareket is performing heavy transportation services, but the port’s capacity is not enough to receive these cargoes. The port needs high-capacity cranes for unloading heavy cargoes,” Tas said.

Turkish company Gap Insaat is building a nearly US$1.5 billion seaport at Turkmenbashi, to be completed by 2017, said Harun Demirci, import and export chief. Gap Insaat has been present in Turkmenistan for 20 years.

The seaport project includes a ro-ro and ro-ro/passenger terminal with capacity for 300,000 passengers and 75,000 trailers per year. Other expansion includes a general cargo terminal with capacity of 4 million tons a year; a dry bulk terminal with 3 million tons of annual capacity; and a container terminal able to handle 400,000 20-foot equivalent units, or TEUs, per year. The complex will also include a polyproylene terminal with annual capacity of

TRANSIT ROUTES TO TURKMENISTAN This map shows the main transit route to Turkmenistan via Iran and the alternative route, which the International Transporters Association of Turkey (UND) prefers, starting from the Sarp border crossing, entering Georgia and Azerbaijan, and reaching Turkmenistan by ferry or ro-ro vessel.

GEORGIA

Ankara TURKEY

Sarp

AZERBAIJAN

Turkmenbashi

Baku

T U R K M E N I S TA N

Gürbulak

Ashgabat

Tehran IRAN

Source: International Transporters Association of Turkey JANUARY-FEBRUARY 2015

120,000 tons and a shipyard able to produce four new ships per year “Turkmenbashi International Seaport project is the milestone for Turkmenistan,” Demirci said. “The port will be a great gateway for Turkmenistan, meeting the handling needs of the country’s export and import traffic.”

Bypasses, Equipment

For cargo moving across Turkmenistan, there are physical obstacles.

“When it comes to project and heavy cargo road transportations, surprisingly everybody thinks that there is no water in Turkmenistan,” said Igor Tuliev, head of oil and gas for Beyik Yupek Yoly, a Turkmenistan logistics and freight forwarding company. “But there are more than 200 bridges, 11 of them are on the waterway. So this means bypasses.”

“We are facing a lot of bypasses and procedures,” said Tas of Hareket. “We also have some issues about the permits.

And Turkmenistan has the road limitation as 10 tons per axle, but as Hareket we are carrying 400-500 tons on the roads.”

Turkmenistan lacks consistent and transparent business legislation, according to U.S. Department of Commerce reports. Laws and regulations are subject to frequent change and contradictory interpretations by various government agencies and officials.

Bypasses has also been the main issue for Turkish turnkey forwarder Dragon Shipping & Multimodal, said Taylan Sayın, a board member. Dragon has completed nearly 30 bypasses in 10 years of projects in Turkmenistan, including Hyundai Engineering’s gas process plant in South Yoloten Field.

Mele Berkmuradov, general director of Beyik Yupek Yoly, stressed that bypasses and other issues were best overcome by finding a local partner.

“Project and heavy shipment companies should find a reliable local partner in Turkmenistan to work with, so they may find the final costs caused by bypasses, since the bypasses in Turkmenistan are really hard to be foreseen,” Berkmuradov said.

CABA, a Turkish heavy-lifting and project logistics company, located its own company in Turkmenistan, with its own parking area and equipment.

However, Kemal Kunt, project and

CABA provided ship unloading, transportation and installation services for a vacuum column weighed 263 tonnes for the Tore roject in 2014. / Credit CABA

planning manager, said: “Having your Berkmuradov, of Beyik Yupek Yoly, own equipment is not enough in this said: “In terms of equipment, the local country. You should also know the facts market is still developing. Frankly speakof this country. For cargoes with gross ing there is now approximately 100 axles located in Turkmenistan. Because of the weight over 150 tons you should be prepared for bypasses, which increase the lack of equipment in local market, we time of the operation and also the costs.” prefer to import these services from the Having its own companies such as equipment enables Hareket who has their own heavyCABA to provide “Having your own more reliable and lift equipment and equipment is not vechicles.” faster service in Turkmenistan, Beyik Yupek enough in this Kunt said. “We Yoly has carried country. You should out recent projects have located our in Turkmenistan own equipments also know the facts and vehicles such including: Hyundai of this country.” as five units eightAMCO National University; TONE, axle semi trailers, — Kemal Kunt 80-axle hydraulic a gas desulphurizatrailers and 12 trucks.” tion plant; and TORE, in which South Korea’s Hyundai Engineering Co is impleHe pointed out two projects CABA menting a $534 million modernization completed in Turkmenistan: 10 units project at the Turkmenbashi refinery, absorbers each weighed 500 tonnes, and a second involving 9,500 tonnes, or about Turkmenistan’s largest oil refinery.

69,000 cubic meters, of cargos.

Turkmenistan’s booming market will “Within these two projects there were entice new participants to operate in the 198 units of cargos, each weighed 50 tons challenging conditions. Finding local and above,” Kunt said. The cargoes were partners with adequeate knowledge and equipment is key to successfully comhandled at the port with special cranes with capacities to 750 tonnes. pleted project shipments. BB www.breakbulk.com BREAKBULK MAGAZINE 69

insurance

MINIMIZE RISK Being Prepared Key to Limiting Shipping Risk, Costs

By Karen Rzeszutko

S

hipping breakbulk cargo is a costly venture. Depending on the type of cargo being transported, fees incurred for extra resources such as additional longshoremen, cranes, dock space, and pre-shipment surveys can quickly add up. Taking steps to manage overall costs should include an assessment of potential exposures to cargo and what can be done to minimize the risk of loss or damage.

Purchasing cargo insurance is a common method of transferring the risk of financial loss to an insurance company.

However, a large loss may impact future insurance costs, so it is critical that the insurance company aggressively pursues the negligent party when possible.

There are several steps you can take to ensure your financial interests and cargo is protected. Most importantly, arrange for your cargo to be insured. Provide all pertinent details of the voyage, including type of cargo and value of the cargo to your insurance provider and know what to do in the event a loss occurs.

Often, a cargo insurance underwriter may require that a pre-shipment inspection is prepared. If a survey is required, ask that the underwriter recommend survey companies. The surveyor should be a qualified marine cargo surveyor with knowledge of your specific product. Often times the surveyor appointed has knowledge of cargo claims, but not necessarily your specific type of cargo.

Be aware of whether your cargo will be stowed on deck and therefore exposed to the elements such as seawater, rain and changes in temperature. Cargo that is stowed on deck should be protected as

best as possible.

For example, where there is exposed metal, confirm that desiccants are used to protect your cargo from water damage, condensation or atmospheric conditions that could result in rust damage.

Should a claim Karen Rzeszutko occur, it’s important to know the proper course of action to follow and to act promptly. A prudent first step is to immediately notify the underwriter and request that a cargo surveyor be appointed to inspect the damages. Take pictures of all of the cargo (damaged and undamaged), packing, etc., and submit the photos to your insurer at the time the loss is reported.

While the insurance you purchase for your cargo is there to protect you, you will also want to ensure that your insurer does what they can to recoup any money paid out to keep your policy’s loss ratio at a minimum. The loss ratio is defined as the total losses incurred by an insurance company in the form of claims divided by the collected premium to determine a percentage. For example, if a company pays $800 in claims for every $1,500 in collected premiums, then the company has a loss ratio of 53 percent. Money that an insurer collects from a negligent party can reduce your loss ratio by crediting that amount back to the claim. A poor loss ratio can result in higher insurance premiums or even cancellation of your policy.

JANUARY-FEBRUARY 2015

Collecting From Liable Carrier

tation. In order to limit their exposure, How much can one expect to recover carriers may seek to include the followfrom the negligent party? This question ing wording on the bill of lading: has been tested over time by decisions made through the courts, which pave the Carrier shall not be responsible for any way in determining how much a carrier is loss of or damage to the goods stowed on liable to pay in the event of loss or damage. deck from any cause whatsoever including If cargo is stowed on deck without negligence or unseaworthiness of the ship, your knowledge and the bill of lading or Carrier shall not be responsible for any does not treat the cargo as having been loss of or damage to the goods stowed on shipped on deck, the court may find the deck whether or not caused by the perils of carrier liable in full and that their limita- the sea, by the carrier’s negligence or by tion of $500 per package would not apply the unseaworthiness of the ship. as it is a deviation of the contract.

You can also declare a higher value.

Accepting these limiting terms can A carrier is obligated to offer you a effectively waive the insurance comchoice of increasing their liability from pany’s right to subrogate, so it is strongly the standard $500 per package. This is recommended not to accept them. not often done as most cargo is insured If the carrier is found to be grossly under a cargo owner’s own insurance negligent, then the chance of recovering policy. A carrier’s failure to offer you the more than the standard $500-per-packoption to declare a value may be a way to age limitation increases. To be grossly Sheet Harbour Ad 2:Layout 1 8/30/13 7:10 AM Page 1 circumvent their $500-per-package limi- negligent means that the carrier com-

mitted a deliberate act resulting in loss or damage to the cargo.

Minimizing the risk of loss and subsequently managing the high costs of shipping breakbulk cargo can be achieved by incorporating some basic steps into your risk management strategy. It is essential to know your cargo, purchase insurance to transfer the risk of loss and discuss the risk in full with your insurance provider. Should a loss occur, follow all necessary steps to file a claim and maintain the insurance company’s right to subrogation against the responsible carrier. Ensure that subrogation activities are pursued. Being prepared in advance is the key to minimizing risks and costs associated with shipping breakbulk cargo. BB Karen Rzeszutko is assistant vice president professional liability claims for Roanoke Insurance Group Inc.

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www.breakbulk.com BREAKBULK MAGAZINE 71

opinion

In this December photo, a Kurdish fighter in Kirkuk sits in a vehicle heading to the front line against the Islamic State. / Credit: Chen Xu Xinhua News Agency/Newscom

SHELTER FROM THE STORM Managing Risk in Northern Iraq-Kurdistan

F

Paul Beat

or the last decade Kurdistan has been sheltered from the turbulent political and security environment across the rest of the region, allowing companies – primarily the oil sector and associated industries – to operate relatively normally and profitably.

The protracted and devastating war in neighboring Syria, and the takeover of large areas of northern and central Iraq by Islamic State (IS) jihadists during the first part of 2014, caused concerns to business in Kurdistan. That is until mid-year when a sudden advance by IS militants saw local military forces, known as Peshmerga, retreat from positions around Mosul, and IS take territory as close as 30 kilometers from the

72 BREAKBULK MAGAZINE www.breakbulk.com

By Paul Beat

regional capital Erbil.

The offensive has been a major wakeup call for foreign companies operating in Kurdistan with the IS offensive interrupting oil operations of local and international companies, following the precautionary, temporary evacuations of staff and families.

The clear reality of operating anywhere in the region is that the security situation has never been benign, and that robust risk management is critical to sustainable operations.

With the effective counter to the IS advances

by Kurdish forces supported by U.S. airstrikes, relative normality has returned to Kurdistan.

Many employees of smaller foreign companies have returned to Erbil and commerce is being JANUARY-FEBRUARY 2015

In this December 2014 photo, blue flags mark the front line with the Islamic State in an operation command of Kurdish fighters in Kirkuk. / Credit: Chen Xu Xinhua News Agency/Newscom

conducted, although the city is quieter than before the offensive. Many businesses are limiting the movements of their foreign staff as the harsh reality of the underlying instability in the region hits home. Notwithstanding the positive messages coming from the Kurdistan administration at various conferences around the world, it will take some time for foreign confidence in Iraqi Kurdistan to be rebuilt.

There is little doubt Kurdistan is suffering from an economic crisis bought about by the offensive and the perception of a very challenging business environment. Events during the second half of 2014 have exposed the fragility of the perceived security bubble in Kurdistan, and the extent to which it remains vulnerable to developments in neighboring countries and provinces. The challenges facing Kurdistan as a result of the ongoing security crisis in Iraq show that for foreign companies, concerns about terrorism, security and stability in the region are unlikely to fade in the coming years.

But Kurdistan remains resilient and has ambitious targets around oil production over the next couple of years. With the threat of IS unlikely to abate in the medium term, critical to this economic recovery is the importance of geography

(open plains conducive to airstrikes and the separation from IS strongholds such as Fallujah in Iraq and Raqqah in Syria) and relatively coherent Kurdish forces providing insulation and protection from conventional IS attacks in comparison to Arab Iraq.

But beyond the conventional security threat, other risks pose significant business challenges, not least of which is the continued budget dispute with Baghdad and the ongoing shortage of refined fuel, the impact of which is widespread and includes increased logistics costs from Turkey coming into Kurdistan.

Easy access to northern Iraqi areas such as Mosul and Kirkuk from the relatively safe Kurdish region was once an aspect of the Kurdistan’s appeal.

But now, the viability of these borders has led to considerable concern. A huge influx of refugees into Kurdistan from IS-controlled land, and the likely increased IS frustration due to its inability to achieve territorial gains against organized Kurdish forces supported by airstrikes, will probably lead IS to resort to terrorist attacks on key Kurdistan targets. To date, Erbil, Dohuk and Suleimaniyeh have not experienced anywhere near the level of violence seen in neighboring provinces such as Nineveh

(Mosul) or Tamim (Kirkuk).

That said, the effectiveness of security forces has likely prevented many attacks in Kurdish cities – where they are much less overstretched than along the borders with Mosul or Kirkuk. Additional foreign aid and training pledged to the Peshmerga will probably boost these capabilities. In turn, this reduces the likelihood that Erbil and other Kurdish cities would become the site of regular terrorist bombings.

So in this respect, although the shortterm security situation is disconcerting, looking to the next five years of this struggle the story is much more positive, with Kurdistan remaining at a security advantage over the rest of Iraq, while IS continues to struggle on all its fronts in the face of increasingly better trained and supported Iraqi forces, airstrikes and counter-insurgency operations.

When we consider calculating security risk for foreign investment it is clear that Kurdistan has the significant advantage over Iraq. The only problem – and this could challenge smaller companies in Kurdistan – is the risk of IS infiltrating and suicide bombing the main Kurdistan cities. But if this would eventuality occur, as it has done in the past, it would not be on anything like the same scale as in Arab Iraq and would not disrupt international oil companies’ operations.

For companies considering investing or continuing to operate in KurdistanNorthern Iraq, robust security risk management will be a critical concern.

Success in this most challenging of markets will require steady nerves, a clear strategy and a granular appreciation of the plethora of security-related business risks. Prior planning in the form of risk workshops will usually provide clarity.

Companies must have robust security plans and procedures in place, managed by security professionals. Crisis management and response plans need to be regularly reviewed and exercised and evacuation procedures in place at all times.

Governance risk will undoubtedly be considerable during these turbulent times.

Corruption is pervasive due to factors including inadequate law enforcement. BB Paul Beat is CEO of Brecon Group, a specialist risk management consultancy focusing on the Middle East and Africa. www.breakbulk.com BREAKBULK MAGAZINE 73

INDEX

B

reakbulk cargo is an eclectic mix, encompassing forest products, steel, pressure vessels, windmill blades, rolling stock and out-of-gauge items.

With this in mind, BREAKBULK INDEX data ranges from steel production to details of planned capital projects.

The global nature of today’s breakbulk and heavy-lift sectors requires transportation professionals to be on top of economic trends worldwide, which calls for inclusion of focused macro-economic data on prices and events that affect EPCs, the breakbulk community and the multipurpose fleet.

FOREST PRODUCTS: PULP INDEX

EUROPEAN FREIGHT FORWARDING INDEX

EUROPE

The index, based on European forwarders’ actual and expected freight volumes, remains below 50 although August marked an increase. Values below 50 on the zeroto-100 scale indicate a decline.

2011

Actual

Pulp prices cost, insurance and freight to main European ports were normalized to 100 in January 2000 and are based on average euro prices of northern and southern bleached softwood and eucalyptus kraft and northern bleached hardwood kraft pulp weighted by production volume.

125

Forecast

J F

M

FORWARDING INDEX

FORWARDING INDEX

100

A M J

S O

75

N

2012

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2012

D J

2013

2014

NORTH AMERICA

F A

Delivered pulp prices were normalized to 100 in January 2000 and are based on average US$ prices of northern and southern bleached softwood kraft, bleached eucalyptus kraft, and northern bleached hardwood kraft pulp weighted by production volume.

M

175

M

J J A

150

S O N

125

2013

D J F

100

M A M J

75

J

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2012

A

2013

2014

ASIA

S O D

Pulp prices cost, insurance and freight to main East and Southeast Asian ports were normalized to 100 in January 2003 and are based on average US$ prices of northern, southern and Russian bleached softwood, radiata, eucalyptus and mixed tropical hardwood pulp weighted by production volume.

J

175

2014

N

F

M A

150

M J J

125

A S O

100

N

2015

D J

75

F 0

10

20

30

40

50

60

70

80

Source: Danske Market Equities, www.danskebank.dk

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2012

2013

2014

Source: RISI, www.risi.com

www.breakbulk.com BREAKBULK MAGAZINE 75

FOREST PRODUCTS

J A

CORRUPTION

bb index

$

CORRUPTION PERCEPTIONS INDEX 2014 Transparency International ranks the perceived levels of public sector corruption in 175 countries/territories around the world. More than two-thirds of the countries score below 50.

COUNTRY/ RANK TERRITORY SCORE

COUNTRY/ RANK TERRITORY SCORE

COUNTRY/ RANK TERRITORY SCORE

COUNTRY/ RANK TERRITORY SCORE

1 Denmark 2 New Zealand 3 Finland 4 Sweden 5 Norway 5 Switzerland 7 Singapore 8 Netherlands 9 Luxembourg 10 Canada 11 Australia 12 Germany 12 Iceland 14 United Kingdom 15 Belgium 15 Japan 17 Barbados 17 Hong Kong 17 Ireland 17 United States 21 Chile 21 Uruguay 23 Austria 24 Bahamas 25 U.A.E. 26 Estonia 26 France 26 Qatar 29 St. Vincent

& the Grenadines 30 Bhutan 31 Botswana 31 Cyprus 31 Portugal 31 Puerto Rico 35 Poland 35 Taiwan 37 Israel 37 Spain 39 Dominica 39 Lithuania 39 Slovenia 42 Cape Verde 43 Korea (South) 43 Latvia 43 Malta 43 Seychelles 47 Costa Rica 47 Hungary 47 Mauritius 50 Georgia 50 Malaysia

50 Samoa 53 Czech Republic 54 Slovakia 55 Bahrain 55 Jordan 55 Lesotho 55 Namibia 55 Rwanda 55 Saudi Arabia 61 Croatia 61 Ghana 63 Cuba 64 Oman 64 The FYR of Macedonia 64 Turkey 67 Kuwait 67 South Africa 69 Brazil 69 Bulgaria 69 Greece 69 Italy 69 Romania 69 Senegal 69 Swaziland 76 Montenegro 76 Sao Tome & Principe 78 Serbia 79 Tunisia 80 Benin 80 Bosnia & Herzegovina 80 El Salvador 80 Mongolia 80 Morocco 85 Burkina Faso 85 India 85 Jamaica 85 Peru 85 Philippines 85 Sri Lanka 85 Thailand 85 Trinidad & Tobago

85 Zambia 94 Armenia 94 Colombia 94 Egypt 94 Gabon 94 Liberia 94 Panama 100 Algeria 100 China 100 Suriname 103 Bolivia 103 Mexico 103 Moldova 103 Niger 107 Argentina 107 Djibouti 107 Indonesia 110 Albania 110 Ecuador 110 Ethiopia 110 Kosovo 110 Malawi 115 Côte d´Ivoire 115 Dominican Republic 115 Guatemala 115 Mali 119 Belarus 119 Mozambique 119 Sierra Leone 119 Tanzania 119 Vietnam 124 Guyana 124 Mauritania 126 Azerbaijan 126 Gambia 126 Honduras 126 Kazakhstan 126 Nepal 126 Pakistan 126 Togo 133 Madagascar 133 Nicaragua

133 Timor-Leste 136 Cameroon 136 Iran 136 Kyrgyzstan 136 Lebanon 136 Nigeria 136 Russia 142 Comoros 142 Uganda 142 Ukraine 145 Bangladesh 145 Guinea 145 Kenya 145 Laos 145 Papua New Guinea 150 Central African Rep. 150 Paraguay 152 Congo Republic 152 Tajikistan 154 Chad 154 Dem. Rep. of

the Congo 156 Cambodia 156 Myanmar 156 Zimbabwe 159 Burundi 159 Syria 161 Angola 161 Guinea-Bissau 161 Haiti 161 Venezuela 161 Yemen 166 Eritrea 166 Libya 166 Uzbekistan 169 Turkmenistan 170 Iraq 171 South Sudan 172 Afghanistan 173 Sudan 174 Korea (North) 174 Somalia

92 91 89 87 86 86 84 83 82 81 80 79 79 78 76 76 74 74 74 74 73 73 72 71 70 69 69 69 67 65 63 63 63 63 61 61 60 60 58 58 58 57 55 55 55 55 54 54 54 52 52

52 51 50 49 49 49 49 49 49 48 48 46 45 45 45 44 44 43 43 43 43 43 43 43 42 42 41 40 39 39 39 39 39 38 38 38 38 38 38 38 38

38 37 37 37 37 37 37 36 36 36 35 35 35 35 34 34 34 33 33 33 33 33 32 32 32 32 31 31 31 31 31 30 30 29 29 29 29 29 29 29 28 28

28 27 27 27 27 27 27 26 26 26 25 25 25 25 25 24 24 23 23 22 22 21 21 21 20 20 19 19 19 19 19 18 18 18 17 16 15 12 11 8 8

Source: Corruption Perceptions Index 2014, Transparency International, www.transparency.org/cpi.

76 BREAKBULK MAGAZINE www.breakbulk.com

JANUARY-FEBRUARY 2015

ECONOMY, ASIA-PACIFIC ECONOMY, ASIA-PACIFIC

GDP FORECAST Economists largely forecast GDP growth among Asia-Pacific countries to be consistent with 2014 results.

8% 2013 6%

2014 2015* 2016*

4%

2%

$

JA PA N

HO NG KO NG

AU ST RA LIA

TH AIL AN D

ZE AL AN D

TA IW AN

SIN GA PO RE

NE W

*Forecast

SO UT HK OR EA

MA LA YS IA

IND ON ES IA

IND IA

PH ILIP PIN ES

CH INA

0%

INFLATION FORECAST Inflation rates are expected to reduce across the Asia-Pacific region in 2015, except for projected increases in Indonesia and Malaysia.

10% 2013

8%

2014 2015*

6%

2016*

4%

2%

TA IW AN

JA PA N

SO UT HK OR EA

ZE AL AN D

SIN GA PO RE

TH AIL AN D

CH INA

AU ST RA LIA

MA LA YS IA

PH ILIP PIN ES

NE W

*Forecast

HO NG KO NG

IND ON ES IA

IND IA

0%

CURRENT ACCOUNT FORECAST Current account balances are the difference between a given nation’s imported and exported goods, services and transfers and are an indicator of foreign trade trends. $300 $250

2013 2014

$200

2015* 2016*

$150 $100 $50 $0

AU ST RA LIA

IND IA

IND ON ES IA

ZE AL AN D NE W

TH AIL AN D

HO NG KO NG

PH ILIP PIN ES

MA LA YS IA

JA PA N

SIN GA PO RE

TA IW AN

SO UT HK OR EA

CH INA

-$50

*Forecast, in US$billions Source: Consensus Economics, www.consensuseconomics.com

www.breakbulk.com BREAKBULK MAGAZINE 77

bb index

PIRACY

PIRACY NIGERIAN MARITIME SECURITY INCIDENTS

SOUTHEAST ASIA MARITIME SECURITY INCIDENTS

Attacks in Nigerian water have fallen dramatically since a November high. Efforts to combat piracy off the Horn of Africa have been largely successful; there hasn’t been an incident since April.

What a difference a year makes. In January 2014, there was one attack in South East Asia, a robbery. In January 2015 there were 15, including two hijackings.

Total Failed Attacks Hijackings Attempts Theft Robbery

October ‘13 9 November 5 December 3 January ‘14 5 February 7 March 10 April 4 May 5 June 6 July 3 August 7 September 5 October 9 November 13 December 9 January ‘15 3

4 2 1 3 3 5 0 1 5 1 3 1 6 5 2 2

5 0 0 1 0 0 2 0 0 2 0 0 3 0 1 4 0 1 3 0 1 1 0 2 1 0 0 2 0 0 3 0 1 1 0 3 3 0 0 7 1 0 5 1 1 1 0 0

Note: “Failed” includes attempted robberies/thefts as well as hijackings. “Hijackings” include kidnappings from vessels.

Total Failed Attacks Attempts Hijackings Theft Robbery

October ‘13 19 November 13 December 13 January ‘14 1 February 7 March 9 April 12 May 18 June 15 July 14 August 14 September 8 October 26 November 20 December 16 January ‘15 15

9 4 3 0 1 2 1 11 2 5 6 2 7 9 7 6

1 0 0 0 0 2 4 1 3 2 1 3 4 0 1 2

4 5 6 3 9 1 0 1 0 6 1 4 5 2 2 4 4 6 1 6 4 3 2 1 8 7 5 6 3 5 3 4

Note: “Failed” category is for attempted robberies/thefts, not hijackings.

Source: Risk Intelligence, www.riskintelligence.eu

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78 BBeurope_print.indd BREAKBULK MAGAZINE www.breakbulk.com 2

JANUARY-FEBRUARY 2015 2/16/2015 12:20:50 PM

profile

PATH OF CHANGE

Emmett’s Career, Shipping’s Evolution Entwined

E

dward M. Emmett jokes that he’s managed significant accomplishments in international shipping and logistics, all without ever moving a pound of freight in his life.

“It’s an interesting path I’ve followed,” admits Emmett, who has been Harris County Judge in Texas since 2007.

Emmett was appointed by President George H.W. Bush in 1989 to the Interstate Commerce Commission — now the Surface Transportation Board — for three years. Emmett served as president and chief operating officer of the National Industrial Transportation League for more than 10 years.

He’s been a member of the Texas House of Representatives, worked as a transportation consultant in private industry, and in addition to being county judge, heads up Harris County’s Office of Homeland Security and Emergency Management, a role, he says, “that took on special significance when Hurricane Ike” struck the Gulf Coast Edward Emmett in 2005.

Although his title is “judge,” Emmett has no law degree, but does have a deep background in transportation issues.

He was named one of the “Top 20 Logistics Professionals” by the Logistics Forum in 2003, and Transportation Clubs International named him its “Transportation Person of the Year” in 2005.

“In any other part of the country, I’d be called a ‘county executive,’ ” he said.

Harris County itself is enormous. The third-largest county in the U.S., more densely populated than 24 U.S. states. It’s also home to the Port of Houston, an important player on the international shipping scene.

Emmett “has been a valuable and public leader when it comes to the Port of Houston because he has this deep transportation background, not just in rail but also in shipping. He knows the full package,” says Ned Holmes, former Texas transportation commissioner and chairman emeritus of the Port of Houston Commission.

Emmett’s career path might have taken a few turns, but a consistent theme has been in-depth knowledge of the industry and an almost uncanny sense of its future.

“My staff’s gotten tired of this analogy, but for years I’ve talked about how the freight system is really the circulatory system of the economy,” he said. “If you go to your doctor, they always check your circulatory system, because if your circulation slows down, your health is going to go bad. The same is true of an economy. You have to make sure that the circulatory system — mainly, the freight network — functions efficiently.”

by Lily Casura

Background

“My background is in truck deregulation,” Emmett said in an interview. With the ICC in his 30s, his focus was on the railroads as well as trucking.

“One of the major issues that I had been working on in Texas — to give you an idea of how absurd it was at the time — was that UPS could not deliver point-to-point within the state of Texas, because the Texas Railroad Commission regulated it, and said you had to operate on fixed routes on a fixed schedule,” he explained. “Well, UPS doesn’t go to your house every Tuesday. A lot of businesses came to me and others and complained, because what was happening was that it was cheaper to ship — if you wanted to ship from Houston to Dallas — you would ship from Houston to Shreveport, La., and then back to Dallas. And that way it was an interstate move instead of an intrastate.

www.breakbulk.com BREAKBULK MAGAZINE 79

profile

Edward Emmett on a recent tour of the Houston Ship Channel near the Port of Houston.

Credit: Port of Houston Authority

“So, I carried legislation to try to change that, in Texas — and we got much of it done.”

Fortunately for industry, Emmett and the other ICC commissioners were able to push through true deregulation that took the state regulatory agencies out of the picture and created a more efficient trucking industry. “I think that’s been one of the

80 BREAKBULK MAGAZINE www.breakbulk.com

boons to the economy. Then we tried to do the same for ocean shipping,” he said.

To accomplish that, he moved from the ICC to the NIT League.

“In 1994, the National Industrial Transportation League board said, ‘you know what? You’ve managed to deregulate trucking nationally; we’d like you to deregulate ocean shipping.’ Because at

that time, the United States was perhaps the only country — there may have been a few more, but it was by far the only one that mattered — where you had a filed rate doctrine, where you had to file your rates with the Federal Maritime Commission.

“In my typical fashion, I knew what a ship looked like; other than that, I didn’t know anything about maritime law. And so I gave a speech to the maritime bar in Washington, D.C., and said basically, ‘We’re going to deregulate all this … and maybe even do away with the Federal Maritime Commission,’ and that got everybody’s attention.”

Four years later, the result was the Ocean Shipping Reform Act. Effective May 1, 1999, OSRA modified the Shipping Act of 1984, effectively deregulating ocean shipping and making it more market-driven.

“And the world of ocean shipping changed,” he said.

‘Transportation Wonk’

Emmett believes he’s seen as a “transportation wonk,” with freight transportation being “where I spend the bulk of my thought process.”

In this role, Emmett is a strong proponent for shipping within the Texas Gulf Coast. “I give 10-12 speeches a week to various groups; and in nearly every

JANUARY-FEBRUARY 2015

one I manage to work in a reference to the Texas Gulf Coast, not just Houston, but the (whole) area we live in: Houston, Freeport, Galveston, even Beaumont and Port Arthur,” he said.

In his talks, Emmett points out that more and more traffic is being routed across the Atlantic.

“If you just realize that five or six of the 10 most populous cities in the world are going to be on or near the Indian Subcontinent. I think India is going to be the next China,” he said. “And that traffic is going to come through the Suez Canal to North America.”

And as more trade moves across the Atlantic, Emmett stresses “there needs to be a gateway not to North America but of North America.” And he sees the Gulf as perfectly positioned to play that role.

“All you have to do is look at a map or at a globe, and particularly if you understand that Mexico is part of North America,” he said. “Roughly one-third of the overseas imports into Mexico come through the Port of Houston.”

Creating that gateway requires people to focus on freight, he said. “Most people when you talk about transportation improvements, they think ‘commute.’ Texas right now is in the middle of an economic miracle, but that 1 13-11-14 is going toAviso come1-3_13NOV.pdf to a grinding halt if we

C

M

Y

CM

don’t build the infrastructure to allow freight to move (efficiently) into and out of ports. They’ll go somewhere else. And we need to get as much of that freight onto trains as we can, because that will help to remove the highway congestion.

Emmett says he will ask audiences at speeches questions, like what’s the largest U.K. container port. “They want to say, ‘London,’ or something like that.

Of course it’s Felixstowe, which is built out in the middle of nowhere — because it has the infrastructure to move the freight into and out of that port.

“One of the things that I find energizing is to talk to people and explain the logic of freight transportation, and also the fact that it has no conscience, if you will. (A company like) Wal-Mart is going to put their distribution center in the most efficient place possible,” he said.

“Trying to stay on top of those efficiency measures is exciting. And being able to look ahead and say, ‘you know what?

Nobody thinks about India, but India is going to have great potential. In the 1950s and ’60s even, it was ‘Japan.’ And then recently, it’s been ‘China.’ Well, if you’re not in China now, you’re too late,” he said.

He looks back to a time when railroads weren’t interested in the prospects of intermodal transportation because 18:19 they failed to see the profit in it.

“So those things all change,” he said.

“One of the things I do all the time is try and make sure people understand the need to constantly change and be as efficient as we can in moving freight.

Looking back on a career that’s seen a revolution in the shipping industry, Emmett insists big changes are still to come.

“I’ll give you an example,” he said.

“When they asked me to look at the Panama Canal and its impact on Texas, I said, ‘You’ve probably got the wrong guy, because I don’t really think it’s going to be that big a deal.’ And so I had to explain to people how a ship will bypass LA-Long Beach coming from China, and come through the canal, and exit at a port East of Houston. It’s basically an 11-day trip. That’s poor utilization. If you’re the shipowner, you’re not going to want to tie up your ship for that long; and railroads are very happy to follow and forward that freight from the West Coast, keeping it more in-country.”

Does Emmett see changes in the types of cargo being shipped?

“Yes, but I can’t tell you what it is. The one thing that I’ve learned about it is, if I knew those answers (in advance), I’d be getting rich,” he said with a laugh. “So yes, I know that it’s going to change; I just don’t know what it’s going to be.” BB

FLEXIBILITY in responses for your NEEDS Routes To-From: Northern Europe/mediterranean – South America West Coast.

Brazil – USA and Gulf.

East Coast South America – West Coast South America

MY

CY

CMY

K

ASIA Diego Santana diego.santana@ccni.cl +852 (2) 161 3377 AMERICAS USA Andrew Lapicola alapicola@agunsausa.com +1 (11) 969 03 0636

EUROPE Nicolas Marticorena marticorena@ccni.es +34 (913) 990 087

Peru Alex Franco afranco@ccniperu.com.pe + 51 (1) 626 0700

Chile Andres Michael andres.michael@ccni.cl +56 (2) 2339 1348

Brazil Juan Marcelo Oyarzun juan.oyarzun@ccni.cl +55 (11) 969 03 0636

www.breakbulk.com BREAKBULK MAGAZINE 81

opinion

FALLING PRICES, SHRINKING CHAINS

A

By Janet Nodar

“Even as evermore-massive container ships ply the oceans, the world’s most important supply chains are actually either contracting or not changing.”

fter four years of hovering near $105 per barrel, the price of oil began sliding in mid-2014, recently nearing US$50. The implications are mixed for the project cargo world, especially when global trade may be slowing as well, according to the World Bank.

Lower oil prices raise the risk factor for unconventional or difficult-to-get-at energy projects such as oil in far-off African hinterlands or buried deep under the Brazilian presalt. These multibillion-dollar projects entice when oil prices are high – the “magic number” I’ve heard ranges from $90 to $100 per barrel – and of course the price will rise again someday. But for now, many projects have been canceled or delayed.

The ensuing loss or delay of the lucrative project cargo related to these projects is particularly painful for the project carrier niche. Bunkers may cost less as oil prices fall, but rates continue in the doldrums and overcapacity, cargo loss, unforgiving banks and fierce competition from the bulk and container sectors appears to have some carriers hanging on by their fingernails.

Not that project cargo isn’t moving; it is.

In the U.S., for example, low energy prices have boosted a multibillion-dollar manufacturing, refining and refurbishing boom nobody dreamed of just a couple of years ago.

However, something more than falling energy prices and vessel overcapacity may also be affecting the transportation industry. The growth of global trade appears to be slowing overall. It increased an average of 3.4 percent per year from 2012 -2014, a significantly slower pace than the pre-boom average of 7 percent, according to a recent World Bank report.

This is in spite of slowly recovering GDPs; world trade is not responding to increasing GDPs with its previous elasticity. There are several possible explanations, and a likely candidate may be a long-term structural change.

82 BREAKBULK MAGAZINE www.breakbulk.com

During the 1990s, supply chains began stretching around the world as shipping times and costs shrank and trade rules and information technology simplified. Now, domestic inputs are rising and foreign inputs are falling in China, determined to grow past the middle-income trap, and these appear to be stabilizing in the U.S. In other words, the report suggests that, even as ever-moremassive container ships ply the oceans, the world’s most important supply chains are actually either contracting or not changing.

That may signal even fiercer competition to come for all cargo: little letup in sight for our carriers, in other words. BB

JANUARY-FEBRUARY 2015

Experience the progress.

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Rosenstand & KyllebĂŚk

She is all yours New vessels are enhancing our fleet. The state of the art M/V Wedellsborg has arrived and is now flying the Nordana flag. With the introduction of these new vessels you can rely on larger and faster vessels, running an even more precise schedule, to support and benefit your business.

Our new vessels are equipped for self-sufficient operation, they have 30% larger capacity, and they are spe-

cifically designed for the challenging demands of today. With this investment in our fleet, Nordana is ready to cover your individual transportation needs, both now and for many years to come.

For more information about our new vessels, and Nordana in general, visit www.nordana.com.

Together we bring your business ahead.

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