DEVON (UK) : “In 2022, demand growth for multipurpose vessels slowed significantly, while fleet capacity increased,” Susan Oatway says when summarising the breakbulk and project cargo year 2022. As a result of that combination, rates fell from the end of the first quarter. A decline that has continued ever since.
Oatway, research analyst for Project and Breakbulk cargo at JOC, together with Johan-Paul Verschuure, director of the Port and Logistics Team at financial strategic advisory firm Rebel, were commissioned by the Port of Rotterdam to review the sector and give their thoughts on the upcoming months, in a white paper highlighting the risks and opportunities for the sector.
Throughput in Port of Rotterdam up in 2022
In Port of Rotterdam cargo throughput increased in all segments: steel, non-ferrous, forest products and HLPC. The overall growth in 2022 was 10.4 per cent. The increase in imports of steel and non-ferrous metals accounted for most of it.
The sharp rise in energy prices made European industrial production relatively expensive, which increased imports of steel and non-ferrous metals from Asia, among others. Also, high container rates caused more cargo to be shipped as general cargo in the first half of 2022. The total demand over 2022 is estimated to be on par with 2021. “This is in line with the slowing global growth,” the research analyst continues. “However, as we are talking effective demand, the biggest thing was the return of the competing sectors into breakbulk and project cargo. Over 2020/2021 available capacity for containers and bulkers was limited due to the congestion issues. Those parties were not interested in breakbulk cargo, because that is considered to be complex as compared to the handling of containers or bulk cargoes. This increased the demand for multipurpose vessels over this time. However as soon as container rates started to fall, these vessels were once again in the market for breakbulk and project cargo. This led to the fall in rates, although average rates over the whole of 2022 were above average rates for the whole of 2021, by the end of 2022 rates were between 10 and 20% down year on year depending on the sector.”
Conversely, traditional breakbulk cargo, such as steel and project cargo, came close to the 2021 record year in North West Europe, Johan-Paul Verschuure points out. As Director of the Port and Logistics Team at financial strategic advisory firm Rebel, he, too, closely follows market developments, supply chains and shipping structures.
“Although the container part may cloud the figures somewhat, I think there is nothing to complain about. Especially given the growing demand for imported steel and complex projects such as wind farms and other energy transition projects”, Verschuure says.
Biggest drivers of change
The unwinding of the supply chain issues in the container industry led to reduced demand for multipurpose vessels. “Pre-pandemic this segment was in an extended recession as the competition for cargo was driven by the container sector” Oatway knows. “With the rush in demand and then capacity shortage seen over 2021/2022, the container carriers all but left breakbulk & project cargo to its traditional carriers. This has now reverted.”
At the same time the number of multipurpose vessels being demolished over 2022 was at an historic low. “This sector has a very small orderbook. There is little if any outside investment for these vessels and only a handful of owners are building new vessels . However, the few vessels that were delivered over 2022 exceeded the number of vessels being demolished – so the fleet grew (by less than 2%) and this increased the capacity for cargo,” Oatway said in the white paper.
In the mid- to long-term, the fact that the breakbulk sector, especially compared to the container sector, is significantly more prudent will come to the sector’s help, Verschuure believes. “But in the shorter term, the pressure will increase. Also as a result of the large number of empty containers which are being stacked at the moment. These might just make it interesting again to ship breakbulk cargo like e.g. steel coils or bananas in containers again in the near future.”
Even with their extensive experience, both Oatway and Verschuure were surprised by the speed at which charter rates dropped. Oatway: “We always thought that they would decrease as soon as the congestion started to unwind. And there was some expectation that container carriers would manage their capacity better as the supply chain improved. But with rates in that sector in free fall, it was inevitable that multipurpose vessel rates would go too.”
“What surprised me besides that is the sheer volatility across the sector,” Verschuure adds. “Not so much the uncertainty in the market, because that always has existed. What surprised me most is that peaks are extremely high, but throughs can also be gigantically deep. Some breakbulk sectors scored double-digit growth rates in some ports like steel and construction materials, while others recorded double-digit losses. We saw the same thing in 2020 and 2021. And it seems that it may continue to do so for some time, especially given the uncertainty regarding the energy transition and a possible new surge in commodity prices following a longer period of low investments, the need for new supply chains for some commodities and new raw materials needing to be mined.”
On the port side Verschuure believes the challenge is significant to deal with this in a correct, flexible and sustainable way. “This entails risks for all parties in the market and in particular for the breakbulk parties, as they operate on a thin market with a shorter horizon when it comes to investments. How the sector deals with this increased volatility will certainly remain a crucial challenge for the coming years.”
Secondly the energy transition will require a lot more port space to handle and store alternative fuels, but also deal with increased flows of breakbulk and project cargo. For the breakbulk terminals it will likely mean that they have to squeeze more capacity out the same terminal area.
Future bunkering solutions will also be a hurdle for some ports, according to experts. “Especially for multipurpose vessels it is always a big question what the ship of the future is going to look like and what will be put on her,” Oatway states. Multipurpose vessel owners often point at container carriers, but it will mainly be the ports that play a vital role in this, according to Oatway.
As far as sustainability and low carbon bunker fuels are concerned, Verschuure still sees differences between the breakbulk sector and other sectors: “Container liners are mostly driven by the IKEAs and Wallmarts of this world where shippers dealing with end consumers play a more important role. These end consumers seem the most engaged group on the topic of all supply chains actors. As a result, they are much more likely to take action in the energy transition and follow requests from end consumers. In contrast, the breakbulk sector is more driven by industry and commercial interests in their decisions. The link to the end consumer is less strong. On top of that, margins and balance sheets are smaller in the breakbulk sector. That makes investing in propulsion on alternative fuels financially more challenging. The sector will have difficulties to lead the way. However anticipating this financial support to overcome these challenges and reducing uncertainties to the pathway of alternative fuels can assist in transitioning the breakbulk sector in a greener direction.”
Oatway agrees: “Multipurpose vessel carriers are very much adopting a wait & see strategy to see what the container carriers are doing regarding new energy sources and energy transition. Some have gone for dual fuel for their newbuildings – but without the infrastructure it is difficult to see a clear pathway. And the container carriers are the ones with the political and financial power to influence that. Moreover, most of the breakbulk fleet is on a tramp basis, so they cannot easily switch to cleaner fuels. Certainly not if supply uncertainty remains. Thereby, again, what happens at the ports remains decisive.”
Outlook 2023 and 2024
Looking ahead, both Oatway and Verschuure expect that the global market continues to slow, hampered by falling container rates. However, there are areas keeping rates from pre-pandemic levels.
“There is some RoRo spillover for breakbulk, for example High & Heavy cargo for mining, construction and agriculture sector is booming and the demand is in excess of the RoRo fleet capacity. This cargo is being lifted onto bulkers and breakbulk multipurpose vessels. On the other hand we see rates for heavylift capable vessels held up by project cargo. As long as crude oil prices stay above around $70/bbl it is enough to encourage investment and, in spite of the need for the world to move away from this, it Is unlikely to decrease in terms of percentage of energy investment any time soon,” Oatway says.
Overall, the outlook is positive. “We are still noting economic growth, against expectations,” Verschuure adds. “If that growth continues and leads to less negative sentiment and even at some point to confidence, new investments will have a positive impact on the breakbulk sector, for example in mining and infrastructure and the energy transition.”
In addition, he expects that parts of market are more willing to pay higher prices and have longer contracts if there is more reliability in return: “Sometimes things just have to go wrong in order to recognise that everything has a price. With more reliability, resilience increases and breakbulk players are enabled to operate more flexibly or provide a higher service level. Ultimately the entire supply chain benefits.”
“The bottom of the market is still not reached, but it is coming in sight. Congestion is gone, plenty of projects are underway and investment decisions have been made. These are sure to lead to a boost later this year and in 2024,” Oatway concludes. “With the expected recovery of the global economy, later this year and in 2024, the new projects, and the energy transition; there is a lot in the barrel. It is going to be a bit shaky before we get there, but there are definitely opportunities.”