An industry listing to port

Excess capacity, low volumes and mounting debt are causing a split in the heavylift and project cargo shipping sectors, according to operators.

It’s become a familiar riff – larger companies, in deference to bankers rather than shareholders, are out to chase any available volumes, but with fewer resources, having pared costs to a minimum. But, says Philip Adkins, CEO of Fairstar Heavy Transport, it also allows opportunities for smaller companies.

“It still amazes me how old-school this business is,” he says. “The competition are complacent, arrogant and deeply in debt.

“The industry has been asleep. The nice thing about what’s happening at the moment is that it is shaking the trees.”

Fairstar, which operates in the self-propelled semi-submersible ship sector, is close to announcing orders for up to four new ships. It already operates the two youngest vessels in the sector, while the average age of the global fleet, owned by just four companies, is 20 years old.

Adkins admits times have been tough. “The market has changed radically in 18 months. The first reason is obvious: the world has gone to hell.

“But there is significant development. There are 10 converted tankers in the global fleet today, which are creating excess capacity, leading to the commoditisation of certain types of cargo.

“It used to be a small fleet, understood by a small group of people. Prices were driven by the nature of the cargo, but now, as much as 5% can easily be moved by converted tanker, causing the day rate to drop from US$60,000 or $70,000 to $30,000.”

Of the 10 converted tankers in the sector, six are owned by Dockwise and four by Offshore Heavy Transport, formerly known as Ocean HeavyLift.

Adkins says: “The situation has been exacerbated by the fact that Dockwise has had too much debt on its balance sheet, which has created a high fixed cost base, which, when coupled with the reduction in demand, has led to discounting.”

Dockwise has been through difficult times. In 2006, private equity firm 3i invested and debts increased. In the same year, its Mighty Servant 3 sank off the coast of Angola, and only came back into service in August this year.

The company made a net loss of $75.8m in 2007, compared with a profit of $60.7m the year before, attributed to the buyout and reverse acquisition of Sealift. Last year it admitted to “an over-leveraged balance sheet” and, in December, it finalised a $250m capital raise.

“We don’t have a problem with debt,” explains Fons van Lith, public relations manager for Dockwise. “At certain times we have become aware of financial pressures, but we decided to strengthen our balance sheet. The capital raise has given us some more air, and now there is no danger with our debt ratio.”

But he admits the company is dependent on “short lead time” projects, and that rates have come down. But he adds that it hasn’t reached the point at which ships would lay idle.

Adkins is adamant that it’s important not to discount in this sector.

“We move expensive cargo. The inherent nature of this business is high-risk, but you need a return.

“The industry is fundamentally out of kilter; it’s listing heavily to port.”

But he admits that problems for the competition have given Fairstar opportunities. “We have walked away from lower-value cargo. They can fight it out. The really valuable businesses are infrastructure and energy, and there are only a handful of ships that can do this.

Fairstar operates in the self-propelled semi-submersible ship sector. Click on image to enlarge

“We have a strong balance sheet and are able to wait for the right cargo. We also have vessels with capabilities that others don’t have. For long-term projects, the cycle isn’t as extreme. If the oil price goes up, there’ll be a lot to do, and those tankers will be very busy. But it is not sustainable, you are just riding a violent cycle.”

Competition in the sector is expected to increase. According to marine and offshore engineering company Noble Denton, the self-propelled semi-submersible fleet is expected to grow 60% on 2006 levels by 2013, with some 40% of the market operated by new entrants.

The relatively stable heavylift market has also attracted new entrants from other sectors. Project cargo stalwart Rickmers Linie says that not only have volumes dropped and more capacity from newbuilds come onto the market, but other operators are looking enviously at the project cargo market.

“Box and ro-ro carriers are looking at the project and breakbulk market,” says Gerhard Janssen, director of marketing and sales. “That increases competitive pressure on our tiny market segment.” 

Michael Kraefting, head of chartering for Clipper Project, agrees that the market has become confused. “It was like driving at 200kph and being stopped by a brick wall.

“Several carriers are hunting the same cargo and some will undercut – but there is always a rock bottom rate where it doesn’t make sense. In order to keep the ships running, you need to entertain them in other sectors, so project cargo ships are carrying bulk, and you have to accept a lower rate.

“But there is a less superior technical ability in bulk – our ships are expensive vessels with cranes, and they are more expensive to build and operate.”

Niels Stolberg, president and CEO of Beluga Shipping, says: “In our segment, the client wants more than just shipping budget-priced. It is about confidence, trust and good experiences from successful projects in the past.

“For any shipping company that has never had to do anything with this business, it really is impossible to play a major role in this niche segment.”

Stolberg says the super-heavylift market is buoyant. “There is a massive slump in the cargo segment below 200 tonnes of single pieces, the 350/400-tonne segment is becoming more and more stable and the sector above 800-tonnes highly interesting with a lot of money to be earned.

“Modern vessels, with powerful crane capacities, that can safely and flexibly ship super-heavylift modules are not oversupplied in available tonnage, therefore the demand keeps up, the charter rates remain solid and the order situation profitable.”

However, in the lower-tonnage sector, shippers are beginning to change tactics in a bid to get better rates.