Outlook 2017: Consolidation May Lift Recovery Prospects

outlook 2017

STAYING ALIVE

Consolidation May Lift Recovery Prospects

8 BREAKBULK MAGAZINE www.breakbulk.com

ISSUE 1 / 2017

I Credit: Shutterstock

t’s a new year, but the same challenges remain: unsustainable freight rates; oil prices that are unsupportive of oil and gas projects; overcapacity in this and competing sectors; and political and economic uncertainty in too many countries for comfort. You would be forgiven for wondering if you are reading the outlook for 2014, 2015 or 2016, rather than one for 2017.

But there has been one important change that could finally lift the breakbulk and project cargo sector out of the doldrums in 2017: the urgently needed consolidation that many predicted finally found its teeth in 2016. We saw births, deaths and marriages as companies came together in new joint ventures aimed at controlling costs, while others

finally raised the white flag and bowed out of the industry once and for all.

Overcapacity has been a bugbear of the industry for many years, and while the consolidation at an owner level will not necessarily fix that particular problem, new regulations promise to draw some of the pus out of that wound.

That more than one of the contributors to this year’s Breakbulk outlook feature spoke of silver livings and pockets of growth adds to the cautious air of optimism. But no one is gushing about recovery – tempered and measured sums up the overall feeling, both adjectives the industry should be using in spades in 2017 if any of that longed-for recovery is to stick.

Edward Osterwald, CEG Europe, p. 10; Dennis Devlin, DB Schenker, p. 10; Roger Strevens, Wallenius Wilhelmsen Logistics, p. 12; Jake Swanson, CB&I, p. 12; Thomas Gimbel, Hansa Heavy Lift, p. 14; Dirk Visser, Dynamar, p. 16; Grant Wattman, Agility, p. 16; Kyriacos Panayides, AAL, p. 18; Marco Poisler, UTC Overseas, p. 22; Mohammad Jaber, Agility Abu Dhabi, p. 22; David Collett, Collett Group, p. 24

www.breakbulk.com BREAKBULK MAGAZINE 9

outlook 2017

A FEW MONTHS AGO, there were reasons for

CHANGE sometimes

those active in the oil and gas business to feel somewhat optimistic, following two years of turbulence triggered by a global surplus intentionally created by Saudi Arabia.

It appeared that investment would finally begin to rise, followed by higher trade volumes in crude oil, LNG and fuel products. A damper has now emerged, however, on such optimism.

As we all know, the international shipping industry – and not just breakbulk – depends on many things.

Perhaps most importantly, it requires trade. Since the end of World War II, increasing economic integration and multilateral agreements have facilitated mechanisms and agreements to enhance commercial exchanges, delivering benefits for all parties involved.

These factors include reductions in tariff barriers, wider customs unions and standardization of technical and environmental regulations.

But it now seems that some of

BY EDWARD the world’s largest economies, OSTERWALD most notably the U.S. and Senior Partner, the UK, are about to radically CEG Europe “reverse course.”

Key members of the new Trump administration have never been friendly to multilateral institutions or trade agreements. Whatever Brexit “strategy” eventually emerges from the British government in London, it will inevitably be anti-migration towards use of workers, skilled or otherwise, that are not UK citizens. This same government is also quite determined to remove the UK from the single market and customs union of the EU – the largest consumer market in the world.

The global distribution industry has billions of dollars of assets and employs thousands of people. It needs to use its influence to oppose policies that could lead both the developed and developing world back into the murky world of protectionism and trade wars, where there are few winners and many losers.

comes slowly. The UK’s surprising (and unfortunate) vote to leave the European Union is sure to drag on.

Upcoming elections in Germany and France may result in changes in government in those countries, but the economic fundamentals in those countries will not change quickly. And despite a change in the U.S. executive branch, change there will also come slowly.

For those of us in the field of breakbulk, heavy-lift and project cargo transport, 2017 will likely be a continuation of 2016, characterized by weak markets all around.

There’s weakness in the oil and gas and commodity markets, with new investments in large-scale oil, gas and mining projects likely to be few and far between, and with decisions on capital spending likely to be deferred. Similarly, low demand will make for continued weakness in the ocean shipping industry, despite some predicted improvements on the breakbulk side.

While the price of oil has improved over this time last year, it is still too low to support significant investment.

Changes in supply may help, but ultimately, only strong demand will have a significant impact on the oil price.

The same is true of natural gas, which is oversupplied.

Alternative energy, specifically solar and wind power, are bright spots, and will continue to grow. And globally, and maybe even in the U.S., infrastructure projects will be further bright spots.

Although it would have been far better to have invested in improving the crumbling U.S. infrastructure immediately following

IT NOW SEEMS THAT SOME OF THE WORLD’S LARGEST ECONOMIES, MOST NOTABLY THE U.S. AND THE UK, ARE ABOUT TO RADICALLY ‘REVERSE COURSE.’ 10 BREAKBULK MAGAZINE www.breakbulk.com

BY DENNIS DEVLIN Senior Director/ Head of Business Development – North America, Global Projects/Oil & Gas, DB Schenker

the Bush Recession – when interest rates were low – and the investment would have had a simulative as opposed to an inflationary impact (as it will now have) on the U.S. economy, the need to invest remains.

Although the timing is not perfect, under its new president, the U.S. may finally begin to invest in the outdated infrastructure in our country.

However, the likelihood that this investment will have a major impact on the project cargo market is small. Unlike infrastructure projects in other parts of the world, U.S. investment is likely to focus largely on highways and bridges – it will be very interesting indeed to see if any new bridges are built with Chinese steel in the new U.S. political environment, as was the Bay Bridge in California.

Things are improving, but change won’t happen overnight. And 2017 will see gradual improvement in most of the markets which drive breakbulk, heavy-lift and project cargo transport.

One hopes that by the end of 2017 the forecast for 2018 will appear far rosier.

ISSUE 1 / 2017

outlook 2017

“LIVE HORSE AND YOU’LL GET GRASS” is an Irish expression which means “if you can just manage to survive for long enough, you’ll get the one thing you need to survive.” For many stakeholders in the industry, it sums up current market conditions.

In our reading of the tea leaves, overall breakbulk volumes will continue at relatively subdued levels in 2017. The oil and gas segment is not expected to see much improvement, although the Organization of Petroleum Exporting Countries’ recent agreement to cut production may change that.

In the mining segment, the Purchasing Manager’s Index is above 50, which, coupled with a favorable earnings outlook for the big players, suggests capital expenditure conditions are finally improving there.

Other segments such as power generation equipment and rail rolling stock are expected to continue at

BY ROGER STREVENS more buoyant levels.

Vice President, Global The supply side of the Head of Key Accounts, equation indicates excess Wallenius Wilhelmsen capacity will continue for the Logistics foreseeable future. This is reinforced by the fact that breakbulk cargo can, to varying extents, be carried by four different vessel types (roll-on, roll-off; lift-on, lift-off; container and bulk carrier), each of which is dealing with its own overcapacity issues.

Reducing supply through early retirement of vessels is not an obvious choice either. On the one hand, the low steel rates from vessel recycling make scrapping a particularly unattractive option. But on the other it does have the benefit of being able to avoid costly new regulatory requirements for ballast water treatment systems and sulfur emissions.

For shippers, the demand and supply dynamics are highly favorable and some may even be hoping for further rate cuts. That may happen, but it would be prudent to also keep in mind that there is a point where good rates go bad, meaning that the risk of another Hanjin situation starts to increase as rates decrease.

One response to oversupply and the margin pressure it creates is to achieve savings through increased

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economy of scale, or, in a word, consolidation. Obviously, this is a trend that has already begun, but I believe it has not yet run its course. Large parts of the carrier and forwarder sides of the breakbulk logistics industry are highly fragmented; in short, there’s a lot of scope for further deals.

Risks abound in a consolidation phase, not least of which is that there can be loss of customer focus and hence a failure to meet their everevolving needs. One customer trend of note is the increasing number of original equipment manufacturers that are opting for a time-based, rather than project-based, liner contract.

Many are finding the stable, flexible and industrialized liner option that ro-ro offers fits perfectly with their modern supply chain needs.

Finally, one last area to keep an eye on in 2017 is the digital developments at the industry’s periphery. The concept of digital disruption has been touted for quite some time now, but has had limited impact so far. It is tempting to view its proponents as creating new dot-com bubbles.

However, a more measured approach is advisable. To quote Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”

This industry is not inherently immune to digital disruption. As Gates continued: “Don’t let yourself be lulled into inaction.”

BY JAKE SWANSON Global Logistics Director, CB&I

HOPEFULLY, the biggest trend that we will see in 2017 will be the steady increase of the price of oil. Unfortunately, on the negative side, we will see the continual struggle of ocean carriers, which may lead to more bankruptcy reports and the exit of a few more carriers from the industry.

I believe the issues that the carriers are facing will force shippers to take a hard look at their carrier base and ensure that they are working with the right players.

This means improved vetting processes, open discussions between shippers and carriers and strong partnerships.

The role of technology will continue to increase, with shippers, freight forwarders and carriers paying more attention to improved transportation management, material management and supply chain systems. Additionally, there has been an increase in the number of online tools that are available to help shippers find carriers quickly and transparently.

However, technology alone will not move the industry to the next level in 2017; financial and employee investment is required to propel the industry forward.

ISSUE 1 / 2017

outlook 2017

BY THOMAS GIMBEL Chartering Director, Hansa Heavy Lift

THE GENERAL market outlook is still slowly recovering from a period of overcapacity. Difficult market conditions for the project and super-heavy-lift markets remain, and low oil prices are not helping the situation. We believe ongoing consolidation will be needed to help the market to recover.

That said, we see a lot of potential in the offshore transport and installation market, and we believe the decommissioning market will grow over the next few years as well as the market for renewables.

Hansa Heavy Lift is moving away from commodity and standard project trans-

portation, and increasing our investments in transport and installation in the subsea oil and gas markets as well as in the offshore windfarm sector. We are operating two offshore construction vessels, and we see a lot of potential in the decommissioning market over the next few years.

Customers often ask for a single-source solution and we can offer the combination of transportation and installation due to our dynamic positioning DP3 offshore construction vessels and our P2-1400 types which ensure a high degree of flexibility as well as complete end-to-end heavy-lift solutions, which is of a growing demand in this industry.

Infrastructure developments, including floating units, are also important in driving demand for heavylift vessels from the Europe, Middle East and Africa, or EMEA, region to developing countries.

The EMEA region is very important to us, as even though production is predominantly moving into regions like Asia-Pacific and India, most engineering, procurement and construction companies still act out of

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THE OPERATIONS MARKET WILL REMAIN BUOYANT OVER THE NEXT COUPLE OF YEARS. WE SEE OIL AND GAS OPERATORS ENTERING THE RENEWABLES MARKET, WHICH IS CERTAINLY A SHIFT FROM THE TRADITIONAL MODEL.

Europe, and as such the nexus of commercial control on projects and transportation is expected to remain in Europe.

There are a number of significant projects and expansions slated for 2017 that could signal little improvements by the end of 2017 or the beginning of 2018 for the industry. However, many of these projects are still subject to finance or final approval, and weak commodity prices means some investors and decision makers still feel cautious, so we will have to wait and see.

There was a steep drop in investment in 2016 and very little activity going forward for new projects. However, the operations market will remain buoyant over the next couple of years. We see oil and gas operators entering the renewables market, which is certainly a shift from the traditional model.

That said, the market environment is still difficult with an unhealthy freight rate level, postponed projects due to weak oil prices, and the overcapacity of tonnage.

The freight rate level needs to recover and this will occur only when the market is no longer oversupplied. However, carriers need to resist the temptation to pursue the purchase of newbuilds once again, when any recovery starts to naturally occur.

Ongoing consolidation is also necessary to overcome these challenges and support a recovery of the market. Already last year, we saw a number of new partnerships, as well as mergers and acquisitions. We see a positive development in such collaborations, as it reduces the players in the market and at the same time adds dynamic to an otherwise rigid industry.

ISSUE 1 / 2017

outlook 2017

I SINCERELY REGRET not being able to

2016 HAS BEEN a transition year. Agil-

give Breakbulk readers much consolation on the state and direct prospects of the multipurpose, project and heavy-lift shipping segment.

Since around 2010, the breakbulk, project and heavy-lift markets have been characterized by a somewhat seasonal pattern. When there was an, albeit limited, upturn towards the end of 2015, optimism abounded at the start of 2016. However, this quickly became muted by poorer-than-expected results by the half-year mark, and the market limped on until the end of the year.

The real slump kicked in with suspensions and cost-cutting of major projects. On top of that was ever-increasing capacity and price competition from the dry bulk and container segments, as well as a rising market presence from pure car and truck carriers. The latter will not be so quick to leave the breakbulk sector, as their ships have been outfitted with additional reinforceBY DIRK VISSER ments and higher Senior Shipping decks to accomConsultant, Dynamar modate heavy-lift cargoes.

2016 was, in short, simply dreadful with respect to rates, although cargo offerings were not so bad in every niche, save for the oil and gas segment.

Hence, and ignoring the effect on their bunker bills, all eyes are on an ongoing recovery of oil prices: at about US$80 a barrel a deluge of investments in new projects is expected.

However, if that happens, these will not appear overnight, except for those projects that were postponed at a late stage in the process.

And while there are signs that the worst is over in the container and bulk segments, it will be a slow recovery. Heavy overcapacities will take time to eliminate, and in the meantime they will continue to compete for breakbulk cargoes to fill space.

A true recovery will require ongoing consolidation – continuing the trend of 2016 – additional scrapping, financially strong backers, stomach, patience and a healthy optimism to withstand another three meager years.

Ultimately, the future will be bright for the breakbulk/multipurpose survivors.

ity Project Logistics outlook for this year is positive over 2016, with oil prices moving either side of $50, significant cost being carved out of international oil companies’ balance sheets, improved productivity in non-revenue producing areas and new technology reducing cost of upstream operations. We have the U.S. election behind us, with apparent optimism, commodity prices relatively stable in range bound trading and U.S. consumer strength building.

However, anticipate inflation inching up, validating improvement, but needs to be watched, and there is certainly geopolitical uncertainty. Expect a slow roll into 2017 with opportunities surfacing in the first half and real work hitting the ground in the latter part of the year.

Many in the industry have gone through consolidation, bankruptcy, selling assets, pulling back from certain market segment and downsizing personnel. Agility has weathered the industry downturn well, balancing our team globally and repositioning strong talent where we see our growth.

But, the health and sustainability of the carrier and service provider sectors is a reality. We will see increased cost from providers and declination in quality. This will impact overall performance, schedules and in some sectors, lead to a weakening in health, safety and compliance.

Professional, skilled and trade labor is the next big hurdle. There will be a shortage because reductions have been deep; many do not want to return to this business sector because of its cyclical nature and aging resource pool. This will impact availability and cost, which will trickle down to project schedules, funding for these projects and operational efficiency and quality.

Added to which, we are truly a global economy facing geopolitical uncertainty in every hemisphere. There is a strange dichotomy in that emerging markets, which have typically been where this risk has been considered highest, are now over-

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BY GRANT WATTMAN President and CEO, Agility

shadowed by perhaps more volatile uncertainty.

We have, and continue, to work through events that have disrupted our industry and fundamentally changed it going forward. To quote Essa Al Saleh, our CEO: “What has earned us money in the past 10 years is not how we will earn money in the next 10 years.”

Whether you are an international oil company, engineering contractor or servicing these market segments, you are a part of this supplier ecosystem. Failure to recognize this will, and has, impacted exploration, capital projects, production and fabrication supply chains. Agility is confident in its strategy as part of this value network to deliver success. This requires an organization with strong balance sheet and values, that is agile with an entrepreneurial spirit. How will you respond to disruptors in the industry?

PROFESSIONAL, SKILLED AND TRADE LABOR IS THE NEXT BIG HURDLE. THERE WILL BE A SHORTAGE BECAUSE REDUCTIONS HAVE BEEN DEEP.” ISSUE 1 / 2017