New Carrier Realities

Business Slowly Responds Amid Evolving Customer Demand

By Mike King

BREAKBULK ASIA 2019 COVERAGE – Taking place against the backdrop of last year’s Hansa Heavy Lift insolvency, the forward employment prospects of the multipurpose and project carrier fleet was the subject of much debate at Breakbulk Asia in Shanghai.

Delegates heard that the fleet’s fundamentals in terms of supply and demand have improved, albeit only marginally. Yet it was also made clear that the nature of demand is changing, and vessel operators have thus far been slow to recognize these new realities.

Strikingly, two central tenets of the strategic thinking of shipowners over the last decade – that project carriers with high capacity cranage offer the best insulation from the dog-eat-dog world of general cargo, and that securing reliable flows of long-haul tonnage will always be the best means of turning a profit – were openly questioned.

Steve Saxon, partner, McKinsey & Co., said owners were failing to understand how global trade was evolving, arguing that the regionalization of global trade would change the nature of breakbulk shipping markets in the years ahead.

“We do see continued growth [in breakbulk volumes], but slower than it has been in the past because increasing amounts of global trade is going to be within countries, and also regionally.

“Because supply chains are becoming more regional, ton-mile growth will be relatively static – regional trade is going to be growing much faster than long-haul trade.”

As supply chains specialize, movements of out-of-gauge cargoes and manufacturing equipment will grow more quickly than general trade flows. So in terms of future routes for tramper trades, “it’s going to be more short-haul regional than it is long-haul.”

He added: “There will also be a pivot to Asia associated with this growth, both in terms of where growth is happening, and also in terms of where it is controlled. And there will be a pivot to Asia in terms of the customer base and, likely, the ownership of breakbulk shipping companies.”

Shifting trades could directly impact fleet types, Saxon said. “The fact that trades are becoming shorter means we’ll need a different fleet. Smaller vessel sizes could become more popular. As the average length of haul decreases, the value of economies of scale is less strong.

“A set of flexible regional vessels is going to be more important for the agile regional supply chain.”
According to Ning Han, director of Drewry China, Hansa’s insolvency shocked the industry and had prompted a strategic rethink.

“The question that comes to us from operator clients is should we be more specialized, more heavy-lift focused, or have more flexibility like BBC Chartering so we have more vessels to cater to the market?

“I think we need more flexibility. One approach is for specialized carriers to partner with MPV operators so they have both the specialization and the flexibility.”

This, she said, tied in with Saxon’s view on the market’s evolution. “Carriers need to review their trading lanes,” she explained. “Long-haul route demand growth is static. New trading lanes are emerging. Short distance lanes are expanding volumes and operators need to meet this demand.

“They need to review strategy and look for partners so they can borrow expertise or flexibility and then go to the market.”

Han said MPV cargo demand growth this year would be “less than 1 percent and supply growth would roughly be the same,” after demand growth in 2018 proved “slightly higher than supply growth.”

The slight improvement in the supply-demand balance has seen MPV charter rates trend upwards since 2016, but market conditions continue to be “soft,” she said.

“Rate increases have other influence than pure economic ones but our forecast is for slight gradual improvement.”

Ning Han’s analysis of the MPV fleet noted that it was now an average of 17 years old, making it older relative to other shipping sectors. 2011-2012 was the high-water mark for recent newbuilding fleet additions and delivery rates have been in decline ever since.

Over the last decade, fleet additions have primarily focused on vessels of more than 20,000 deadweight tons, as owners sought economies of scale and vessel differentiation via ships offering major heavy-lift capabilities.

The result was that as of December 2018, 45 percent of the total MPV fleet was classed as a project carrier (including premium project carriers). This translated into almost 900 vessels with a lifting capacity in excess of 100 tons, of which 347 had crane capacity of in excess of 250 tons, and 25 had a lift capability of more than 1,000 tons.

“Only 21 ships in the fleet delivered last year, but 30 demolished,” said Ning Han, adding that in 2019 deliveries and demolitions would be slightly higher, but newbuildings would again heavily lean towards project carriers with major lift capacity.

With the MPV sector still under heavy pressure from container ship and bulk carrier operators – MPVs take about 17 percent out of global seaborne dry cargo – adaptability and innovation will be crucial given that market growth is expected to be tepid.

Saxon urged owners and operators to embrace digitalization if they were to hurdle market downturns. “We need to be ahead of the technological trends to make sure we as an industry can efficiently work with our customers,” he added.

Photo: Steve Saxon, partner, McKinsey & Co., speaking at Breakbulk Asia 2019.