Insight: SAL Heavy Lift Day
A big “thank you” to SAL Heavy Lift for inviting me to speak in Hamburg before an engaged group of roughly 70 maritime professionals! At a lovely venue with, of course, a view of the water, we were also given an opportunity to listen to other great speakers who shared their thoughts on shipping.
For those of you just tuning in, SAL (formerly: Schiffahrtskontor Altes Land/SAL) Heavy Lift is a major north German heavylift operator owned by shipping conglomerate Harren & Partner. They operate a fleet of specialized vessels that are able to perform a variety of lifting and transportation project roles. The SAL Heavy Lift Day is hosted by SAL Heavy Lift to celebrate its customers and clients but also to bring in a variety of industry professionals to share their thoughts with the attendees.
A Market Overview
The first duo was from Töpfer Transportation, a Hamburg-based shipbroker. As a “close to the market” agency, it was all about what’s going on in the multi-purpose vessel chartering market. Fleet, market share, cargo and charter rate analysis was capped off by an introduction to the Töpfer’s Index, which was developed in-house on the basis of information relating to ca. 11 multi-purpose F-type vessels (thanks to Christian Hoffmann of SAL Heavy Lift for this additional detail). These were held to be reflective of the multi-purpose vessel market in general.
“Cautiously optimistic,” was the message. The orderbooks are slimming while most of the recent construction originated in China, the presenters argued, meaning that those Chinese built vessels would probably be retiring roughly 5 years earlier than other builds, so in perhaps 15-20 years at most. This would winnow out the currently existing overcapacity in the heavylift market. Also, orderbooks for Chinese yards are down 73% year over year in Q1 2019 – it’s a good time to be a buyer!
An analysis of relative company shares in the heavylift market follows. The “Top Four” heavylift operators control 72% of the deadweight tonnage; these tend to be “P-Type” lifters which are somewhat less flexible and versatile and sometimes cannot perform offshore operations. Indeed, for the most demanding work, equipment like dynamic positioning systems is required. This can be expensive and high-skilled, and not every operator wishes to make the requisite investments.
In terms of cargo volumes, Töpfer’s representatives argued that the cargo mix is critical. Crude steel, they noted, is a good base cargo to fill up most of a ship, while leaving enough capacity for higher paying items. Crude steel volumes are largely stable (“neutral”), however. The same was true of oil.
Perhaps most interestingly, market exits were almost impossible pre-2017. This was due to a lack of buyers. The market segment has only become liquid again from Q2 2017 onward. It’s difficult to make a definitive statement on this aspect, however, due to the players largely being closely held companies.
The market, though, is changing: especially as it relates to finance, Germany isn’t ready to face the global markets. This is both in terms of the flexibility of the institutions as well as the contracting. Further, the stakeholders aren’t in a position to make a compelling case. To illustrate, an anecdote was provided of a shipowner saying he would “never invest his own money in shipping.” Of course, advice was provided to this gentleman to keep that thought private; if he doesn’t believe in the business, why would a bank?
And Now… CO2 and the Great 2020 Equalizer?
Following this great opening act, Wilhelm Borchert’s two representatives stood up to discuss the upcoming IMO 2020 emissions regulations. Tongue in cheek, the topic was: “To scrub or not to scrub?”
As emissions control areas expand, encompassing Chinese ports in 2018 and all Chinese domestic waters in 2019, followed by a global 0.5% global sulphur cap in 2020, the proverbial noose is tightening for heavy fuel oil, heavy sulphur burning vessels. A MARPOL amendment will even make it illegal to carry non-compliant fuel, absent certain carve-outs. Of course, the US, Caribbean and California have been emissions control areas for some time now, so new developments are chiefly of interest to international operators, rather than shipping companies chiefly focused on European, Chinese and American markets.
As alternatives to old-style fuels, marine destillates, LNG and low sulphur fuel oil were mentioned, but each of these have issues vis-à-vis “tried and true” (and cheap!) high-sulphur heavy fuel oil.
Wilhelm Borchert, a strategic consulting firm based in Hamburg, Germany, is projecting a rise in scrubbers being installed and in switches over to LNG fuel. Even so, relative to the global merchant fleet, such LNG refits/installs and scrubber installs are going to represent a tiny fraction. The firm projects that distillates, blended distillates and low sulphur fuel oil will fill the gap before LNG.
However, even in the best-case scenario, energy demand in the transport sector, globally, will only peak by 2040 (vs. roughly 2020 for the OECD, developed economies). In other words, overall demand for fuel in shipping will continue to grow powerfully in the decades to come, reflecting more trade. Noteworthy is that even as the OECD economies cut their energy use in transportation, the growth in Asia, Africa, India and China will more than make up for – and even exceed – that savings.
According to Wilhelm Borchert’s analysis, based on inputs from S&P Global Platts Analytics, bunker prices in the early 2020s may have a spread of $450-$550 per metric ton (thanks to Justin Archard of SAL Heavy Lift for this additional detail). Bunker would cost two or even three times more than now. Note that such a price shock would be a problem for the industry inasmuch as the cost increase isn’t possible to pass along to charterers or cargo interests, as it typically the case today via bunker price clauses.
The picture of massively increasing fuel demand coupled with the political desire to cut CO2 emissions leads to only one solution: much better efficiency. But none of the fuels deployed will be efficient enough to generate the CO2 reductions desired. Instead, even the “low impact/low demand” projection shows CO2 generation above the levels of today and certainly above the political CO2 target.
From the perspective of this author, the major error is expecting CO2 generation to decline without a corresponding financial incentive. This could be either provided by the public sector (subsidies or tax breaks) or by the private sector, e.g. via the development of a cheap, easy alternative fuel which would reward shipowners who switch to it with an improved business scenario for their company.
Failing that, implementation will only be on an “as required” basis and will not progress swiftly. As shown by the anticipated spikes in bunker prices, certainly there is no financial incentive at this time. In fact, using the “compliant fuel option” (i.e. marine distillates, low sulphur fuel oil) is the most expensive. The scrubber is cheapest. In between is using LNG, though this propulsion type is still relatively tricky.
Greed And Bad Contracts
Following all this, I got a chance to speak about counterparty risks and how the myopic focus on getting the absolute lowest price on the part of cargo interests leads to irrational allocation of risks. The idea is that a contract should allocate risks to each party as it can best bear them. This way, the value is maximized, since inefficiencies due to poor risk allocation are eliminated. But when price is all that matters and risks are one-sidedly placed on one party without regard to whether or not that party is best able to bear said risk, the overall net value generated by a transaction is severely reduced.
The talk largely followed the lines of my article in Maritime Executive earlier this year, reproduced here: