Place Your Bets: Zeaborn Wagers on Breakbulk Revival

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PLACE YOUR BETS Zeaborn Wagers On Breakbulk Revival

BY MALCOLM RAMSAY

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ISSUE 4 / 2016

W

ith the breakbulk sector facing some of the most difficult operating conditions in recent years, the outlook from the majority of operators is pervasively downbeat.

Weak margins, low freight rates and poor productivity have led many firms to initiate cost-saving programs and reduce fleet size. But one company bucking this trend has been German shipper Zeaborn.

Breakbulk talked with Ove Meyer, managing director and co-founder of Zeaborn, to understand some of the drivers the firm sees for the breakbulk sector and how the dynamics in the industry are changing.

“There is certainly a lot of stress in the sector at the moment, but we believe there are definite opportunities and are very much on the lookout for acquisitions,” Meyer said.

“We are keen to not only expand our fleet, but also find technical and commercial management teams that can create opportunities. We are currently working on potential corporate acquisitions and strategic partnerships, but we can’t give details as yet,” he said.

CONTINUED FLEET EXPANSION

Over the last 12 months, management at Zeaborn have pursued a relatively aggressive acquisition and expansion program in the multipurpose shipping sector through direct purchasing of vessels, cooperation agreements and corporate acquisitions.

The firm operates a fleet of 32 multipurpose vessels and two small dry bulk vessels that range in capacity from 7,700 to 22,000 deadweight tons. This fleet includes 31 vessels under commercial management and 11 vessels under technical management.

Recent investments have included: • A 50 percent stake in EMS ConBulk in January 2015.

• Ownership of shipping-related companies of the HC Group.

• A cooperation agreement with Carisbrooke Shipping for commercial management of vessels.

Zeaborn founders Jan-Hendrik Többe and Ove Meyer. / Credit: Zeaborn

• A newbuild program underway in China with six vessels ordered.

“Our target owned fleet is around 30 vessels within the 10,000-to-15,000 deadweight ton category. These will range in capacity from two times 80 tonne lifting gear up to 500 tonne combined lift capability,” Meyer said.

Headquartered in Bremen in the north of Germany, Zeaborn’s acquisitions are entirely financed by the company or via senior bank loan, giving the firm flexibility in its approach.

The six newbuild vessels Zeaborn ordered are committed to Intermarine on a time-charter basis and represent some risk exposure for Zeaborn. However, Meyer is optimistic about the opportunities developing in the market should the Intermarine contract expire.

“We see a need for next generation multipurpose vessels, and have a good exchange of ideas with companies in the industry to get an idea of what will be required,” Meyer said. “Our newbuilds have modified outreach, improved gears and larger hold sizes to help to accommodate the latest module sizes that will be coming.”

OIL RECOVERY

One of Meyer’s reasons for optimism in the face of current depressed market conditions is anticipation of a cyclical return for investment irrespective of oil prices.

With the recent slump in breakbulk demand driven, to a large degree, by the sharp fall in oil prices over the last year, the number of offshore oil and gas projects that are progressing to completion in 2016 has stuttered to a halt.

“The outlook for the sector is historically weak and I see no change in the third or fourth quarter this year.

There is a lack of volume, and in some geographical areas we find cases where freight rates don’t even cover loading and discharge costs. But for the oil and gas sector we expect a recovery in one and a half to two years,” Meyer said.

“This is driven not just by oil prices, but cyclical replacement, which requires reinvestment to be taken. The gas sector is already showing signs of returning to growth and we expect that to grow significantly in the midterm future,” he said.

If this cyclical investment is further boosted by a rise in oil prices from late 2017 onwards Meyer expects this could www.breakbulk.com BREAKBULK MAGAZINE 109

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provide a significant boost for breakbulk demand that may catch competitors without sufficient capacity.

Meyer added that the need to replace aging assets is of significance, not just in driving demand for breakbulk transport, but also in creating opportunities within the existing fleet.

“Shrinking fleet structure will have some effect in the next one to two years with many multipurpose vessels being ready to go out of operations because of age or technical shape,” Meyer said.

‘OVERAGING’ AN OPPORTUNITY

The effect of technical “overaging” due to low maintenance will become a more serious problem for operators and customers. Technical managers on behalf of the single vessel companies across the board have tried to reduce operating expenditure to avoid going into debt default and 110 BREAKBULK MAGAZINE www.breakbulk.com

Distressed assets in this has impacted the market present the maintenance “a major opportuof vessels, Meyer nity,” according to said.

Zeaborn.

With freight rates plummeting, Credit: Zeaborn many technical managers have not only sought to cut component maintenance costs, but also crewing has been reduced to lowest possible levels, which in turn impacts the condition and performance of ships.

While this is seen as a negative for many operators, Meyer views the current market as a buying opportunity reinforced by new requirements from banks and shareholders for transparency and efficiency.

The need for full, modern systems reporting packages and accounting structures, combined with structural legal requirements mean that many

smaller players are now finding operating costs prohibitive. By positioning Zeaborn to deliver transparent and efficient reporting and operating requirements the firm aims to offer new life for these fleets at lower price points.

“In terms of acquisitions and management, these new requirements have helped strengthen Zeaborn’s position,” Meyer said, adding that a wide skills base across the multipurpose sector has helped to differentiate the firm.

FAVORABLE GREEN WINDS

While other industries have benefited from a shift to renewable investment in recent years, a convergence of factors have limited performance in the breakbulk sector. Although volumes for wind projects, and offshore in particular, have risen sharply, many multipurpose shippers have seen traditional breakbulk cargoes – such as turbine blades, nacelles and other large ISSUE 4 / 2016

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ZEABORN IN NUMBERS Zeaborn splits its multipurpose activities according to six verticals.

8%

vehicles

13%

mining and civil engineering

17%

bulk metals

30%

general heavy-lift

21%

green energy

19%

oil and gas

components – being shipped by bulk, container or roll-on, roll-off ships instead.

“In the offshore wind sector the trend towards larger and larger turbine sizes is a real positive for the multipurpose sector. Whereas container and bulk operators have managed to take some business recently, the larger turbine sizes will prove impossible to lift and carry without a multipurpose vessel, and this will help to drive up demand,” Meyer said.

Zeaborn splits its multipurpose activities according to six verticals of which general heavy-lift accounts for the largest share at about 30 percent. The remaining verticals are green energy

112 BREAKBULK MAGAZINE www.breakbulk.com

which accounts for around 21 percent, oil and gas at about 19 percent, mining and civil engineering at 13 percent, bulk metals at 17 percent and vehicles account for the remaining 8 percent of demand.

“Of these, we see green energy and general heavy-lift showing the greatest potential for recovery and in the longer term oil and gas as well,” he said.

FACING FINANCIAL CUTS

As multipurpose volumes slowly pick up over the medium-term, Zeaborn sees demand for vessels improving, but the current global asset base still faces a number of challenges in order to realize potential.

Given the current underutilization of multipurpose ships many vessels that have next to no operational value at present are nonetheless sitting on balance ledgers at unrealistic valuations, according to Zeaborn.

“On the asset side the number of distressed assets in the market at present is a major opportunity. Many of these are on paper at above-market value and will require serious restructuring or insolvency. But banks are reaching their limit to take the haircut necessary at the moment,” Meyer said.

The resistance of banks to avoid taking a hit on their asset portfolios is something Meyer expects to change over the next three years as vessels enter the later stage of their lifecycle.

“It will be interesting to see what happens in the next three years as many banks need to have a change of mentality if they want to realize any return from these assets. The average age of multipurpose vessels on the seas is already 15 years and if these underutilized ships are not divested in the next three years they will be essentially worthless.”

With several years of difficult operating conditions predicted, Zeaborn is well aware of the high-risk nature of the market, but sees great opportunities for

ISSUE 4 / 2016

those companies that can manage their costs efficiently.

“It is about finding the right balance in risks and the flexibility in the business model between time charter and own-risk as well as having the right technical management and skills to adapt,” Meyer said.

The fact that many of Zeaborn’s competitors are underperforming will make it easier for firms like Zeaborn to acquire the fleet they need, he added.

With growth in component size for large-scale energy and infrastructure projects helping to shift demand back towards dedicated multipurpose shipping Zeaborn does not expect the need for responsive fleets to diminish.

“With all the talk of recession and unprofitability, people can forget that the world economy as a whole is growing and world demand is growing and that creates opportunities for operators that are positioned to take advantage,” Meyer said.

Based in the UK, Malcolm Ramsay has a background in business analysis and technology writing, with an emphasis on transportation and ports.

SHIFTING GLOBAL DYNAMICS ALTER OPTIONS While the slowdown in breakbulk demand has been felt widely throughout the globe, the changing market forces between geographical regions has had unforeseen effects on multipurpose rates, offering both risks and opportunities.

Zeaborn sees Asia as the only stable market at the moment, but even there, prospects are changing.

“Whereas we used to see traffic to and from Asia worldwide, we have recently seen a huge change. The major trade is now from Asia to the U.S. Gulf, but this creates huge problems for the return leg,” Zeaborn’s Ove Meyer said.

“One of the big issues for the sector at the moment is that in many cases vessels are stranded there with no onward contract, or have to be returned to Asia under ballast, cutting into costs.”

Past routes that took vessels from China via the Gulf to South America and then on to Australia before returning to China are now harder to find, resulting in a higher breakeven point for cargo carriers.

With hub operations in Venezuela drastically curtailed and low demand

for onward journeys from the U.S. Gulf, Zeaborn expects new routes will have to emerge as Latin America stagnates.

“We see Brazilian import still weak, and while there is some sign of growth in wind energy in South America, we don’t expect any significant uptick across the region at the moment,” Meyer said.

Africa and Australia, both of which were until recently powerhouses for energy infrastructure growth, have also suffered in recent months due to the collapse in oil prices. But in these regions Zeaborn sees potential for a return to growth in the longer term.

“There is big potential for Africa and Australia if the oil prices recover, but a lot also depends on efforts in the oil and gas industry to increase efficiency,” Meyer said.

“Production costs have already been significantly reduced and the big question at the moment is whether players see sense in replacing aging facilities that are still producing. If those reinvestments to build new facilities take place that will be a huge driver for breakbulk operators.” BB

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