Rebalancing the multipurpose shipping market

Time charter rates peaked in 2022 and have continued to track downwards. While rates vary widely based a vessel’s age, performance, and charter duration, there is a universal consensus that they have fallen. However, promisingly, they have declined at a significantly slower rate than has been seen in other shipping sectors over the same timeframe. Equally, multipurpose rates are still significantly elevated above what was seen pre-covid and during the 10-year market malaise where carriers and operators consolidated or crashed out of the business.

Drewry’s latest Multipurpose Time Charter Index, for instance, forecasts a marginal drop of 0.9 percent over May to reach USD8,989. While this figure represents a 19.16 percent drop since May 2022, it still remains 7.8 percent above the levels seen in May 2021. Likewise, Toepfer’s May assessment identified a “sideways movement” in average time charter rates, dropping by 1.61 percent month-on-month to USD14,360 – a significant drop from the May 2021 figure of USD22,577 but still up on pre-covid levels.

Rising supply

The decline is indicative of a rebalancing in the multipurpose market. Supply has risen; container shipping lines have seen volumes collapse in the wake of the pandemic and the multipurpose ships chartered to move boxes are now back circulating among their traditional operators.

Moreover, with box rates in the doldrums and a wave of new container tonnage hitting the water in Q1 2023, container lines are once again scrambling to fill their ships with cargoes that had been on the decks and in the holds of the multipurpose fleet. What was deemed too costly 12 months ago to disassemble and containerise, or lash on a flatrack, is not now.

Little of this was unforeseen. The multipurpose shipping industry has remained patient and this strategy continues to pay off. At the height of the market when capacity was tight, large portions of highly capable tonnage was fixed on long-term contracts. For instance, United Heavy Lift (UHL) said that at this time last year, 60-70 percent of its fleet was committed to longterm contracts in 2022, 2023 and beyond. Jumbo-SAL-Alliance, which is active in the 700-2,500 tonne lift range, reported similar charters and utilisation.

Projects that had been stalled by the pandemic and came back online are pressing on. Supply lines that emerged as a result of shippers nearshoring activities and diversifying their exposure to any one market continue. Demand for mined commodities is still high and renewable energy continues to attract massive investments. Covid-19 recovery budgets focused on domestic infrastructure as a way to shore up economies are also starting to manifest as cargo on trailers – particularly in North America. And the feather in the cap, the long-awaited return of significant cargo volumes from the oil and gas sector. The demand side of the equation looks strong.

We are continuing our work of integrating and uniting units…but we remain a conglomeratecompany in its core. – Christian Hoffmann, Harren Group

Risky Business

Although the returns can be spectacular, shipping is an inherently risky business – an industry where billionaires invest to become millionaires. The multipurpose/ heavy lift arm is particularly hazardous; not only are the cargoes complex, heavy and valuable but the sector itself is comparatively small – too small to be in control of its own destiny, ultimately.

There are only 3,000 or so multipurpose ships on the water, and the number of ships that can lift in excess of 250 tonnes is a fraction of that figure. This leaves it particularly exposed to changes in other shipping modes, macroeconomic trends (which are increasingly fraught), and industrial investments. It also does not have a bottomless pit of cash to invest in new ships – tonnage that will be needed as environmental measures ramp up and the average age of the global fleet hits 21 years.

The Harren Group has grown over the past few years to encompass SAL Heavy Lift and its alliance with Jumbo Shipping, Intermarine, the rebrand of its renewable energy division to Atheleon, among others. Christian Hoffmann, director group strategy and marketing, reported that all of the group’s business divisions reported positive growth through 2022 and into 2023.

“The divisions have grown both organically and in terms of assets employed or under management… we are continuing our work of integrating and uniting units where it is strategically sound to do so – but remain a conglomerate company in its core,” he explained. Despite a turbulent global economy and negative pressure on rates, Hoffmann is sanguine on the prospects going forwards. “It is no secret that rates have come down significantly since the peak points in Q2-Q3 2022. Obviously, we look cautiously at the market rates, which have been fluctuating between highs and lows – still the general market rates remain somewhat above the low points we faced prior to the covid pandemic.

Spot market return

“It is very hard to predict about the future, and in the short term we may see the rates declining further on the back of high interest rates, recent tumult on financial markets, and declining Chinese exports as general key market drivers affecting negatively. As a result we have seen the spot market returning and it has come in fast.

“In contrast, we look at an oil and gas market that has picked up pace, which provides an increasing amount of volume that paired with wind – especially offshore –will again take out available cargo space on our vessels. We still expect to see rates stabilising in Q3 2023 – but say this with allthe reservations given the high uncertainties we are looking at macroeconomically.”

UHL, the multipurpose/heavy lift shipping arm of the United Group, finds itself in the fortuitous position of operating a homogenous fleet of state-of-the-art F- 900 Eco lifters. “The fleet currently consists of 17 vessels and two more on order with delivery dates at the end of 2023/beginning of 2024. Unlike container carriers, the multipurpose sector did not engage in an ordering spree, which goes to show that the industry learned from mistakes made in the past,” said Domink Stehle, chief commercial officer.

There are growing signs of sector stabilisation amid solid economic fundamentals… Most importantly, the appetite or trade is improving as the risk of an all-out global recession has diminished. – Kyriacos Panayides, AAL Shipping

Fleet flexibility

The benefit of operating such a fleet is that vessels can be switched out for another, should circumstances require, with comparative ease. This is advantageous for clients and from a cost perspective. “Even though rates came down significantly, they still well exceed pre-covid levels,” added Stehle. “We expect rates to increase again starting towards the end of the year as a result of massive volumes available from the renewable energy industry.” 

Stehle added that 30 percent of the UHL fleet is committed through multi-year contracts of affreightment (CoA), with 70 percent trading in the open market. When compared with our reporting last year, this suggests a decline in long-term freight agreements. “Multipurpose tonnage in Asia is still highly sought after and it is tough to find vessel space on short notice. In Europe the situation is very different with many carriers offering spot positions for little cargo volume. The trade from Asia to Europe and back used to be more balanced. Despite the weak euro currency, the EU is exporting less project cargo than in the years before,” said Stehle.

Kyriacos Panayides, managing director at AAL Shipping, said the current market was expected, a result of falling general cargo volumes and under-performance of the global economy. “This has not been a surprise. Despite no-one being able to predict the next 12 months, there are growing signs of sector stabilisation amid solid economic fundamentals. The IMF’s outlook for the global economy has improved and is now forecast to grow by 2.9 percent in 2023 and by 3.1 percent in 2024. Most importantly, the appetite for trade is improving as the risk of an all-out global recession has diminished.

“Importantly, China has been a sleeping giant over the past 18 months; in 2023 its own economic growth forecast is 5.2 percent, and 4.5 percent for 2024. This is a strong rebound from 2022, when China’s economy under-performed and grew by only 3 percent, and is one of the key drivers behind the raised expectations for the sector.”

Risk management

King Ocean Gulf Alliance (KOGA) Shipping specialises in the Americas trades with smaller multipurpose tonnage chartered on both a long and short-term basis. Fernando Maruri, the carrier’s ceo, stressed the importance of risk management when markets and spirits are high.

“We were able to avoid some of the unpleasant scenarios that are now playing out. More cargo is available but this is from low levels in November-February so while cargo availability is improved, it is not robust. In addition there are many  multipurpose vessels returning from previous container or contract business; the low rates on handysize bulkers allow them to compete into smaller lots often served by multipurpose carriers. Downward rate pressure and increasing spot positions are evident in the short term. The upwardtrending oil and gas markets and longer-term project demands should bring the sector up again, but the timing and intensity is still unclear,” Maruri explained.

Right now, the market is energised, both literally and metaphorically. Pandemic recovery funds and energy disruption arising from Russia’s invasion of Ukraine lit a touchpaper under the renewable energy sector, with governments aiming to take sovereignty of energy supplies and limit exposure to producer nations. However, there has been something of a lull in windenergy shipments during the first half of the year. Hoffmann said that for SAL Heavy Lift, there has been little construction taking place on offshore sites in 2023. “As of mid-2024, this market is expected to pick up significantly with an enormous amount of wind turbine capacity to be erected in the period through to 2026.”

We expect plenty of oil and gas equipment moving to the Middle East Gulf and the US Gulf towards the end of 2023 and in the years to come.– Domink Stehle, UHL

Main driver

“Volume related to renewable energy has been and will be the main driver for our industry,” Stehle added. “Wind power generation is being pushed by every government and the industry is forecasting massive volumes. What is interesting is the fact that we see more and more wind enquiries from the private sector. For example, wind parks adjacent to iron ore mines to offset the mine’s carbon footprint. This is a new development and will further add to the bottleneck of tonnage available to transport the units.”

Although the green movement continues apace, the need for fossil fuels remains strong and will do so for years to come. “We do see in parallel [with renewable energy developments] an oil and gas market increasing with a significant number of projects coming on track – some of which are commencing already keeping parts of our fleet well occupied,” said Hoffmann. “So while we may still look at a growing market for energy transition, the security aspect of having access and control over traditional energy sources paves the way for future high demands on project logistics providers.”

For UHL, all eyes are on the end of this year. “Investments in oil and gas have only recently been green-lighted on a broader scale. We expect plenty of oil and gas equipment moving to the Middle East Gulf and the US Gulf towards the end of 2023 and in the years to come,” Stehle explained.

The constellation of two rival industries will, naturally, increase demand for tonnage. Oil and gas cargoes, traditionally, have been the better paying of the two. But, during the years in which large-scale investments were few and far between, renewables took up the slack. Stehle said: “When you compare the two sectors, oil and gas certainly has more money at its disposal but the wind equipment manufacturers are more strategic when it comes to procuring vessel space long term. In the end, supply and demand will determine the rates.”

Solid volumes 

Panayides added: “Renewables cargoes have offered solid volumes for five-to-10 years now and, despite the short-term global economic challenges that every industry sector has faced recently, are forecast to deliver strong cargoes for the medium term at least. The issue for most carriers is that the technological advances being made in this sector, and the growing size of components planned, renders most vessels inadequate to deal with their growing physical size and safety demands and requires specialised and large heavy lift vessels like those we have within our fleet.

“In fact, the profile of the AAL fleet and the focus we have placed on large tonnage vessels is a direct result of close collaboration with manufacturers and stakeholders in the renewables sector – planning and preparing together to move the next generation of these cargoes.

“In terms of the oil and gas sector, this was an industry that took a heavy hit over the past seven years of geopolitical and global financial instability, creating swings in the price of oil – something that is great for speculators but not for infrastructure and project investment. However, from Q2 2022 things started to change and we saw signs of renewed global appetite for capex investment within the sector and a growing number of projects coming online – both new projects and refurbishment of existing sites.

“This was not only driven by the longevity and stabilisation of a strong oil price, but also by markets looking to mitigate their reliance upon fossil fuels from regions that were geo-politically unstable -leaving them open to price fluctuation and supply interruption. This need for major markets to create a more sustainable and dependable supply of fuel will continue to drive oil and gas sector investment upwards.

“For the time being, the two sectors are looking strong for the medium term and will continue to vie for space on our ships. We are encouraging majors in both sectors to work with us even more closely to plan ahead and book space earlier and for longer- term sustainability and security for all stakeholders in the supply chain,” Panayides explained.

Of course, no article would be complete without discussing competition from box and bulk carriers – both of which have established firm footings in the breakbulk market. This is nothing new, and is an unfortunate reality for operators of more simplistic multipurpose tonnage. Container lines themselves have simply got much better at moving larger, oversized loads internationally, improving port infrastructure and aligning liner/feeder services.

Good sign

Improvement in the handysize bulk index is usually a good sign for the multipurpose carriers – when the smallest bulkers are occupied, they are less likely to pick off the low-hanging fruit in the multipurpose sector. But we all know how quickly things can change. 

“All box carriers have already developed breakbulk options and built departments around getting breakbulk on to container ships. I only expect the container carriers to improve their ability to carry breakbulk over time,” KOGA’s Maruri noted – a similar line expounded by most of those spoken with for this report. He also noted the importance of shipping lines investing in project freight forwarding entities, and the potential impact this could have on the business.

“The forwarding business can look easy to carriers, but the reality is that it can be a messy and cash-intensive business with many moving parts, risks and variables. While I expect there will be some hiccups, I think the large carriers now have the resources and focus to be successful. 

“It is important to note that several carriers have been doing it already with some success, and we have also seen forwarders starting carriers with significant success (dship, for instance).”

Forecasts about rates and volumes are, broadly speaking, pretty superfluous. In today’s world, it seems as though anything could happen and a market that has found a degree of stability could be thrown into turmoil. Fair returns for fair work, over a protracted period, will give the entire sector confidence – a prerequisite when costly fleet renewal plans are considered.

This article was first published in HLPFI’s MayJune2023 ships and shipping lines supplement.