Global economy brightens prospects for multipurpose carriers

Global economy brightens prospects for multipurpose carriers

Port of Los Angeles.

Port of Los Angeles. Photo credit: Shutterstock.com.

The mirage is starting to look real. After years of forecasts of imminent recovery in depressed breakbulk and project markets, there are growing signs the market finally is close to shaking its doldrums.

“I am a little more optimistic than I was last year,” said Susan Oatway, breakbulk specialist at Drewry, who spoke during a recent JOC webcast. “The fundamentals are definitely there.”

She cited broad improvement in the global economy that is boosting demand, a slowdown in vessel orders that is keeping capacity growth in check, and the possibility that container and bulk carriers will see improvement in their core markets that discourages them from competing for project and breakbulk shipments.

This kind of optimism has been voiced before, but now it is being shared by companies involved in oil and gas, petrochemical, mining, and infrastructure projects, and by economists forecasting global improvement that will drive increases in cargo volume by late 2018 or early 2019.

Operators of multipurpose and project carriers and their customers have endured a multiyear slump. Soft commodity prices have forced companies to cancel or delay projects, and to cut back on maintenance that generates shipments of machinery and equipment.

Now, global economic growth is gaining momentum. The global economy is on track toward 3.5 percent growth in 2018 and 2019, Nariman Behravesh, chief economist at IHS Markit, told the JOC’s 18th Annual TPM Conference in Long Beach on March 5.

Furthermore, IHS Markit expects world trade volumes to grow 5 percent this year, up from 2.5 percent in recent years, as growth accelerates in emerging and developed countries alike. “It’s not quite the boom rates of the 1990s, but it’s certainly better,” Behravesh said.

Crude oil prices appear to have stabilized at about $60 per barrel, a level that has encouraged renewed investment in exploration and production. Petrochemical manufacturing is booming in regions including the United States — where companies are taking advantage of low-cost natural gas feedstocks from fracking — and the Middle East. Mining is coming out of an extended downturn that led companies to slash maintenance and replacement budgets. Prospects for infrastructure development have brightened in the United States and other regions.

“Today, we are in a good space,” Jean-Sébastien Jacques, CEO of Rio Tinto, told analysts in February as the mining giant announced a 90 percent year-over-year jump in quarterly profit. “Mining, at the end of the day, is a GDP-driven industry.”

Fluor CEO sees ‘multi-industry upturn’

David Seaton, CEO at Fluor, said the engineering, procurement, and construction company anticipates final investment decisions during the next year in sectors including energy and chemicals, mining and metals, and infrastructure. “We’re on the front end of a multi-industry upturn,” he said.

Translating that upturn into profitability will remain challenging for multipurpose and project carriers. A big reason, Oatway said, is competition from bulk carriers for breakbulk commodities such as steel and lumber and from container lines for project cargo and commodities. “As always, it’s the competing fleets that overtly affect this sector,” she said.

Roll-on, roll-off (ro-ro) carriers also have become solidly established in market sectors that historically have been the preserve of multipurpose and project carriers. The latest generation of ro-ro carriers features adjustable high-capacity decks, large doors, and ramps with capacities of up to 500 tons.

Although ro-ro carriers are in the market to stay, Oatway said recovery in bulk and container markets could lead these carriers to focus on their core markets instead of competing with multipurpose and project carriers. That theory, however, assumes recovery of demand, rates, and profitability in bulk and container sectors, which continue to struggle.

And some container lines say they are in the breakbulk and project market for the long haul. “I was told in no uncertain terms by one container line recently that they have no intention of backing off from that cargo,” Oatway said.

Drewry estimates that at the end of 2017, there were approximately 3,210 multipurpose project carriers, or premium project carriers, with total capacity of 29.5 million deadweight tons and average age of 16 years. Project carriers are defined as vessels with lifting capacities of 100 to 250 tons. Premium project carriers have lifting capacities of more than 250 tons.

The composition of the global multipurpose and project fleet is changing. Simple multipurpose vessels average 20 years in age and are gradually being scrapped. New investment is concentrated in larger ships with heavy-lift gear. Drewry expects the project carrier fleet to expand by almost 3 percent a year through 2019, while similar multipurpose vessels decline at a similar rate.

There was a slight uptick last year in scrapping, to about 500,000 deadweight tonnage. “We expect this trend to continue and rise slightly in the medium term,” Oatway said. She said more vessel demolition is needed. “There are still a huge number of overaged simple multipurpose vessels,” she said.

A year or two ago, there were forecasts that impending International Maritime Organization rules on emissions and ballast water storage would sharply reduce the supply of older ships.

Oatway said it now looks as if these changes will be more gradual, as vessel owners try to extend ships’ lives.

Consolidation of the fragmented multipurpose and project sector also has increased during the last few years, without much impact on capacity. “Consolidation doesn’t necessarily affect supply,” Oatway noted. “What often happens when two companies merge is they get an injection of cash and go out and order new ships.”

And when supply and demand eventually come into balance, vessel operators often find it hard to resist adding capacity. Shipping companies tend to have short memories, Oatway said, making for “a really cyclical market.”

Contact Joseph Bonney at joseph.bonney@ihsmarkit.com and follow him on Twitter: @josephbonney.