Up for the Challenge?

Attempting to frame the apprehension permeating the breakbulk and heavy-lift industry in 2016, several executives diplomatically reached for the word “challenging.” With all that businesses faced in 2015, and the economic and political issues that loom this year, it would be easy enough to hit the snooze button and try again in 2017.

Instead, we were able to prevail upon 12 leaders to apply sober assessments of global prospects and issues affecting the industry; potential growth markets and those facing a downturn; key issues that will mold and shape business; and how it will all affect relationships between the key stakeholders, cargo owners and carriers.

Of course the continued downturn in oil and gas prices continues to fuel tensions leaving a void of projects that EPCs, logistics providers and carriers are scrambling to replace. With a dim outlook for oil and gas, tempered with some positive regional prospects and potential for infrastructure and renewables, prospects will range from flat to depressed through 2016 and possibly into 2017.

Despite such dismal projections, the following outlooks move towards the bright spots and point towards potential opportunities, true to the ingenuity and perseverance of a unique industry. Who’s up for the challenge?

Grant Wattman, President and CEO, Agility; www.agility.com

We are in for a challenging, yet invigorating business and economic climate in 2016. Globally, capital projects will be flat at best; oil and gas and mining will see a continuing decline in activity, with persisting margin compression and working capital challenges. Capital projects, while flat globally, have significant variation depending on markets. The Middle East, Africa and the U.S. offer the most positive news; Europe, India, China and Korea will be sourcing countries for these projects. Look to infrastructure across the globe to be one of the bright spots.

We are in a period of oversupply with oil and about to enter the same with gas. This oversupply of gas will become greater with the introduction of supply from the Australian mega projects, starting this year and continuing through 2017. Major oil and gas companies are seeing an impairment on assets, squeeze on cash flow and some are experiencing a downgrade by credit rating agencies. Combined with declining stock prices, there is increasingly more pressure on any capital available to fund expansion or new facilities, outside of maintenance capital expenditures.

There is some expectation that we are looking to late 2016 for a potential uptick in activity. However, my position is that we will not see this until 2017. A significant number of liquefied natural gas projects will not see the light of day until 2020 or later, with the question being not whether they proceed, but when. Agility Project Logistics is taking a strategic view to those projects aligned with our portfolio and subject matter expertise. In 2016, we see opportunity in petrochemical, power, gas conversion, pipeline and distribution, operating CAPEX and those liquefaction projects that will proceed.

Agility is well positioned with no debt, a strong client base, and exhibited skill sets in emerging markets and remote locations. Agility Project Logistics is focused globally on our portfolio of capital project, oil, gas, mining and marine services. During this period of low activity, we will be investing for the future, refining our solutions approach, adding subject matter experts globally, and expanding our market share by making it easy for clients to engage with our network and consistently delivering on our commitments.

My cautionary note is in the search for the “holy grail” of lowest cost. In the past, those speaking highly of safety, health, quality, security, credibility, capability, and dependability are now silent. Where transparency was king, now the written word is taken as a reflection of stability and companies are looking for the lowest cost and hoping everything works out.

While all sectors of the industry are affected, perhaps most notable are the ocean carriers. Significant portions of multipurpose and heavy-lift vessels are owned by banks or other financial institutions. Pricing to make interest payments, entry of nation state carriers, reduction in maintenance expenditures, and a shift in project markets comes amid increasing environmental, security, health and safety regulations. A lowest cost focus buys increasing operational risk: vessel seizures, aging assets, reliability declining, and maintenance on as-needed basis. Shippers gain the short-term benefit, but what does it look like in 2018? Would you fund new vessel building in a market that will not provide a return? It’s no surprise that financial institutions look at it the same way. Declining capacity, increasing utilization, will be the future.

Among shippers, carriers, service providers and others, look for some to fail, some to acquire, others to stay the course. Not new, nor the first time we have seen similar. The question is how long can it be sustained?

Dennis Devlin, Senior Director / Head of Business Development – North America; Global Projects / Oil & Gas, DB Schenker Inc.; www.dbschenker.com

Someone once said, “the only function of economic forecasting is to make astrology look respectable.” The same can probably be said of people who forecast market prices for crude oil and other commodities. 2015 started off a bit gloomy with weak global economic growth, a weak mining sector due to weak commodity demand, and predictions of the cancellation or delay of major projects, especially those financed by the big oil companies.

Conversely, cheap shale gas did drive chemical plant expansion and construction projects in the U.S., as well as liquefied natural gas export terminal projects. More recently, we saw the oil majors cutting their capital budgets for 2016 by about 20 percent to 40 percent as announced in almost daily, depressing press releases in late December. But it bears noting that even with significant cuts to their capital budgets, the big oil companies still have very robust budgets. For example, Thomson Reuters recently reported that global oil and gas investments would fall to US$522 billion in 2016 – US$522 billion still represents quite a lot of work. Similarly, in North America new chemical and other downstream plant projects were announced in 2015, and LNG export projects were approved. Both are a result of the low costs for natural gas. And while North America is still very active for those reasons, there is also substantial work in other global regions, most notably in the Middle East.

2016 started just like 2015 ended, and will continue more or less along the same path. Predictions for global economic growth are far from rosy, but there is some growth as opposed to recession. With weak economic growth, demand for energy and commodities won’t increase quickly. 2015 also brought some good news: The U.S. Congress (finally) reauthorized the Export-Import Bank charter, and funded roadway repairs and construction with the US$305 billion FAST Act signed by President Obama on Dec. 4.

I’m neither an astrologist nor an economist, but I suppose I am an optimist. And I think that 2016 will look a lot like 2015 did: weak. But on the glass-half-full side, there is still a lot of work, and although it is a weak period, that will eventually end. It will be a difficult year for all involved, especially for ship owners, who took delivery of new multipurpose ships in 2015 and have commitments to take delivery for even more new ships in 2016, during a period of weak (and weakening) demand. And everywhere competition will be strong, and there will be downward price pressure. Margins may be weaker. But sooner (one hopes) or later economies will grow faster, commodity prices will rise, capital investments will increase, and the market for project transportation will improve over last year and over 2016.

Gerhard Janssen, Director Global Sales and Marketing, Rickmers-Linie; www.rickmers-linie.com

Industry prospects for 2016 depend on economic development in China, India, Brazil and Russia, and the oil and gas supply situation overall. This coupled with overcapacity in the container and bulk sector means there will be continuous pressure on the multipurpose carrier segment. Looking at potential growth markets, infrastructure projects – such as rail, power generation, desalination, port infrastructure – will progress in some geographical areas, driven by public investment. We also see continuous activity in renewable energy – mainly wind – and infrastructure related to this sector will be executed on a global scale. We are, however, concerned about the economic development in some regions, such as Brazil.

More positively, bunker fuel costs have come down, which certainly helps us in keeping operational costs down at a time when freight rates are low. On the other hand, lower fuel costs negatively affects us as oil and gas projects are postponed or cancelled. Many companies in the sector are hesitating to make any commitments for projects. There is a chance for some positive developments in the oil and gas industry once sanctions on Iran are lifted and the country can start to invest in infrastructure, power and other industries. However, we only expect this to be visible from the third quarter 2016 onwards.

Container carriers, in view of their overcapacity situation, are increasingly trying to canvass cargo from the breakbulk and heavy-lift sector. Roll-on, roll-off and bulk carriers are also trying to take their slice of the cake. This increased competition comes as the multipurpose sector itself is coping with challenges. That said, at least there is no exaggerated newbuilding program at the moment, which is a problem being faced by the container and bulk segments.

While cargo owners and other shippers will certainly take advantage of the overcapacity, we also believe that prudent cargo owners choose carriers with a healthy balance sheet. Shippers want to enjoy excellent terms and conditions, including rates, however they remain concerned about carriers’ ability to perform and the state of their underlying financials.

Jake Swanson, Regional Logistics Manager, Americas, Engineering, Construction and Maintenance, Oil & Gas, CB&I

2016 has the potential of being another tough year. The price of oil and the worldwide economy is still not where we would like it to be. It is not at a level where you see project owners jumping at the chance to do projects. There are some projects that are already on the books and those will move forward, but I think what you will see is that a lot of the prospective project opportunities will move to the right.

As far as markets showing potential, I think that the U.S. Gulf is a growth market. You will see quite a bit of liquefied natural gas work in this region over the next year. Trucking companies and barging operators will stay busy in this region. East Africa also has the potential of being a growth market in 2016-2017, specifically towards the latter part of this year, depending on the developments in Mozambique.

Facing the oil and gas industryís continued downturn, I think that the industry will be cautious this year and see how things develop. Specifically, we will focus on executing the projects that we have on the books and will be careful about our growth prospects. We will focus on increased training for our staff and even cross-training within the other disciplines within our organization.

Beyond oil and gas, I think the global economy affects our industry greatly. Economic challenges in China, Brazil, Russia, for example, slow down the potential for future investment in projects, which directly affects our industry. For carriers, 2016 will be another tough year for shipping rates. I do not believe that you will see much upward movement in ocean freight rates this year. This is obviously not good news for carriers, as current levels are not healthy.

Paul Runge, Managing Director, Africa Project Access; www.africaprojectaccess.co.za

International financial organizations such as the African Development Bank forecast Africa’s economic growth at between 3.5 percent and 5 percent for 2016. This is despite uncertain global conditions and the strong downturn in both hard and soft commodities, which has led to the freezing of numerous resource-based projects in the region. Against the backdrop of this gloomy scenario, many sub-Saharan African countries continue to register strong project activity in sectors such as power (especially renewables), commercial property and construction, and information and communications technology/communications (notably the growing demand for data). Agricultural industries continue to receive attention from a wide array of funders from donor agencies to specialized equity funds.

Given the subcontinent’s urgent power supply requirements and strong donor support, there will be much emphasis on renewables, from geothermal to solar and from wind to biofuels. However, the really strong theme will be gas-to-power. Vast liquefied natural gas deposits have been uncovered in Mozambique and Tanzania, and “old” established oil countries such as Nigeria are giving increasing attention to the utilization of their previously flared gas resources.

A key market for 2016 will be Ethiopia. Its huge hydropower potential is being realized to such an extent that the country will become a major power exporter to eastern and southern African regions. The 6,000-megawatt Grand Renaissance Hydro Dam Project is being completed. Strong efforts have been made to improve the supporting infrastructure in the form of road and rail network extensions. Major commercial projects including new industrial zones abound in Addis Ababa. Ethiopia could register a 2016 growth rate of close to double digits.

Despite the current political problems in Burundi, East Africa is proving to be a particularly vibrant region with important rail and port infrastructure projects in addition to the strong interconnector power transmission initiatives of the Eastern African Power Pool. The central rail corridor and new ports such as Bagamoyo in Tanzania are attracting attention.

On the west coast, there has been considerable port activity from Saldanha and Walvis in the south through to Douala in the central area and Abidjan and Dakar further north. Saldanha in South Africa, Takoradi in Ghana, and San Pedro in Côte d’Ivoire are examples of new port developments based on the development of oil and gas hubs. Private concession holders such as the Bolloré group are implementing port improvements. The capital-intensive nature of rail is delaying projects in this sector, but there are concrete developments such as those relating to the West Africa Loop Rail Initiative.

Finance and logistics are permeating the current debate on African economic progress during these difficult times. There is a strong need at this important juncture for greater collaboration and an integrated practical approach between the logistics operators, the project implementers and the wide range of funding agencies with the pragmatic support of governments to achieve an adequately enabled environment.

Philip Ovanessians, Vice President of Supply Chain, Logistics, and Inspection, Samsung C&T Corp.; www.samsungcnt.com

While gas and mining sectors are stagnant, power, infrastructure, commercial and mixed-use development continue to be areas of opportunities for us in 2016. Key regions of particular growth are in Southeast Asia, Singapore, Myanmar, Cambodia, and Malaysia. We also see pockets of opportunities in the infrastructure sector in Australia and the Middle East such as Turkey, Bahrain, United Arab Emirates and Qatar.

Despite the continued downturn in the oil and gas industry, our company is, fortunately, very well diversified and positioned in other industries. With regards to the opportunities in infrastructure, we are executing, with our joint venture partners in Australia, a multibillion-dollar infrastructure project in Sydney. As for mining, we just completed a US$5.8 billion iron ore project in Western Australia. We are executing liquefied natural gas projects in Malaysia, Singapore, Thailand, the UK and Bahrain. We are also executing a number of power projects in Algeria, Kazakhstan, Turkey, U.A.E., Saudi Arabia and Qatar. We are also one of the partners on the Riyadh Metro Projects, Qatar Metro, and have been prequalified for opportunities in North America.

Further into the near future we expect to be involved in the pharmaceutical industry, as well as, continue to execute capital projects in the technology industry.

As for issues affecting the industry in 2016, from our perspective clients continue to push the envelope to pass down their risk to the construction contractor. For instance, we have seen clients include guarantee clauses in the delivery of equipment and materials. We have also seen clients specify to us which carriers to utilize on projects where we assume the cost and risk. There is a further trend whereby clients want the construction contractor to also assume the role of program management contractor, or PMC, for large mega projects of more than US$1 billion.

As a parting note regarding carrier-cargo owner relations, as in the majority of our projects we assume the cost and the risk, the carrier’s health has a direct impact on whether a project is executed successfully and is profitable.

Dominik Stehle, Regional Vice President – North America, deugro (USA) Inc.

Due to the downturn in the oil and gas industry, 2016 will be a challenging year for the project forwarding and shipping industry, and the effects will be felt throughout the year and well beyond. Oil prices continue to slide, with a major impact on many of our customers and ultimately deugro’s business. Tensions in the Middle East could reverse this trend, although in the short term this would be limited to the price of oil and not necessarily business opportunities.

Over the years, deugro has benefited from the energy construction boom, resulting in growth for our U.S. business unit and the hiring of more than 40 employees in the Houston region alone. While the oil market is focused on finding a bottom for oil prices, deugro is channeling its energy into diversifying the business and breaking into new markets. While the oil and gas industry may be headed for a recession, we see opportunities in the chemical sector as cheap natural gas, which is used to produce derivatives, continues to spur significant investments.

As a dedicated project-forwarding specialist, we are used to inconsistent market conditions, and our business model requires constant re-engineering to stay on top of market developments, emerging trends, and opportunities. A critical analysis of our service portfolio, paired with vision and an instinct for new opportunities, will be needed to maintain our strong position in the field of project forwarding. The ability to adapt quickly and stay in tune with changing market conditions is the key to success when going through tough times.

We stay optimistic as underinvestment in oil and gas projects will hopefully lead to a shortage and a self-correction of the market. While this may not happen in 2016, we hope that the oil and gas market will recover within a reasonable time period, as ultimately both our clients and the entire project forwarding and shipping industry need healthy oil prices to sustain a successful business.

John Hark, Regional Director – North America, Chief Operating Officer – South America, Bertling Logistics Inc.

We believe the short-term outlook for 2016 is challenging. The traditional client base for projects is struggling with low commodity prices, and this is casting a large shadow and doubt over commitments to new projects and investments. In 2015, we experienced a slowdown in new projects and the full impact of this will only likely be felt during 2016 and perhaps beyond. Geographically, we continue to see investment in the Middle East, East Africa and Southeast Asia. Conversely, we continue to see a depressed energy market in Europe, Japan still struggling and Australia coming to grips with lower commodity demand and prices after several years of much investment and activity.

In response to the continued downturn in the oil and gas industry, Bertling is making organizational decisions by reviewing our resource allocation to ensure that we remain a cost leader. We need to continue delivering the best value for our clients, and are turning our focus to increasing our operational performance and efficiency while seeking out new opportunities. Beyond oil and gas, we see some of the greatest issues that will affect our industry in 2016 being possible shipping line consolidations resulting in less choice for shippers, bankruptcies and counterparty risk, and continued pressure on air cargo carriers with the depressed economy. Our industry needs to respond by improving on operational processes and increasing efficiencies to do more with less. We need all stakeholders in our industry to cooperate on innovations, which will take our businesses through the market challenges we face now and into the future.

With so much spare capacity it is difficult now to see how the ocean carriers can push through a rate increase, especially given the current low project activity. However, with lower fuel prices, household budgets are somewhat boosted and this could stimulate demand in other areas such as power generation.

The health of the largest and most efficiently operated carriers is not necessarily in immediate doubt. However, we do expect more consolidation and overcapacity through 2016.

Kyriacos Panayides, Managing Director, AAL

We, representing multipurpose/heavy-lift operators, have already digested the fact that we will have to carry on navigating the “perfect storm” of negative market influences for at least the short term. What we are experiencing today is akin to the worst-case scenario projection of a business plan.

The pie of the MPP/heavy-lift cargo has significantly reduced, driven by low commodity prices which have led to cancellations and postponements of new projects in the oil and gas and mining sectors. We also see that a proportion of remaining cargo volumes are being taken away from us by bulk carriers, such as steel and other light MPP cargo – even windmill components. Additionally, roll-on, roll-off carriers have taken some of the machinery cargoes and we now see container lines investing in modified hardware to accommodate MPP cargo.

Living in an extremely aggressive competitive environment leads to freight rates becoming unsustainable to cover the comparatively expensive MPP infrastructure and the cost of the vessels against cheaper bulk carrier operations and lower cost vessel maintenance and operations. We’ve set in place a flexible business model and infrastructure to promptly cope with such adverse market conditions. This gives us the ability to shift our business focus from one industry sector to another, or from one market to another, to best exploit business opportunities as they arise and limit our exposure to underperforming geographical markets and industry sectors. At the same time, we’ve opened dialogues and formed different cooperations with various stakeholders. We’ve used this model to cope with the new era and to improve our performance and margins, against a backdrop of very challenging market conditions.

Our strategy will continue to seek out and research new global business markets, but always from a local perspective and by harnessing and using local expertise, intelligence and language. This helps us to get closer to our customers and understand their drivers, not as incoming outsiders, but as long-term local partners.

Although we remain cautious about the short term, we see opportunity in a growing number of worldwide wind energy projects coming online in China, South Korea and across Europe into the Americas, driven by demand and favorable legislation. In addition, the lifting of sanctions on Iran will help to kick-start new petrochemical, oil and gas and valuable infrastructure projects. Finally, itís also only a matter of time before some of the larger proposed oil and gas projects come back on line, as global demand grows.

Svend Andersen, CEO, BBC Chartering; www.bbc-chartering.com

In 2015, commodity markets lost over all segments, trading on average 11 percent lower for precious metals, 19 percent lower for grains, 24 percent lower for industrial metals, and 41 percent lower for energy commodities, according to S&P Goldman Sachs commodity index (S&P GSCI). This kept the pressure on the project market, which additionally has to deal with an abundance of shipping capacity on the supply side.

With a lack of global trends to commercialize the demand side, we see a project shipping market in transition. In the midst of a volatile dynamic, we currently record good activity out of the Far East and within Southeast Asia attributable to the petrochemical sector and to an increase of cargo volumes especially for wind, gas and other energy related projects. We see much of this being driven by the ongoing global energy diversification trend, although this only partly offsets the missing volumes the market has to accept from the slump in oil and gas driven project activity. A highly short-term and fast-moving market requires us to react swiftly, and we think that all these factors together forebode another suspenseful year for project shipping in 2016.

As a project carrier and market leading operator, we are bound to offer our services on the back of the available market capacity. However, as the market has to further digest a capacity surplus, we are putting our efforts in ensuring highest levels of service delivery for cargo customers and attaining adequate income on vessels through their above-average utilization. We continue to receive good support and feedback from our customers and business partners, which also translates to a good share of our marketable capacity being booked for 2016 already.

In 2016, BBC Chartering will further focus on promoting our “apac service” (“apac” stands for “any port, any cargo”) as the market-leading service vehicle to consolidate and match cargo and vessel owner demands. The “apac service” idea centers on BBC Chartering operating the world’s first and only global high performance service platform for general, breakbulk, heavy-lift and project cargo transportation. Above all, we strive to live up to what our customers value, and we believe that delivering quality, reliability, flexibility, professionalism and integrity stays important for the health of the industry in general and will hold sway also in 2016.

Mohammad Jaber, Chief Operating Officer, Regional Director – Project Logistics, Middle East & Africa, Agility (Abu Dhabi) PJSC; www.agilitylogistics.com

Despite the global economic landscape being overshadowed by ongoing sluggishness in China and Europe the outlook is still positive thanks to signs of recovery, signified by the rise in interest rates by the American Federal Reserve for the first time in seven years. Coupled this with the potential of emerging markets from Indonesia to Malaysia, the United Arab Emirates and Saudi Arabia, alongside Africa; many of these fast-growing economies represent significant opportunities for the industry.

Agility’s own strategy, which is focused on these emerging economies, will see continued investment and commitment to Asia, Middle East and Africa to meet the needs of the growing consumer class. From contract logistics to the expansion of our domestic footprint in these markets, Agility is well poised to benefit from projected growth in these economies. To take one example, Africa Agility is building a series of distribution parks offering power, security and connectivity to enable business, with the first opening in Ghana in the first quarter of 2016.

Gulf Cooperation Council countries and Iraq look poised for a healthy 2016, with investments in capital projects (oil and gas, energy and petrochemicals) still ongoing despite the drop in oil price. The growth of interregional trade across the region will also boost the economies of local markets due to enhanced fabrication capabilities, though ship owners will likely face challenges and aggressive price competition due to the pressure of engineering, procurement and construction companies, or EPCs, on cost and ship availability. In the markets of Kuwait, U.A.E., Oman and Saudi Arabia specifically, EPC awards will keep our logistics market busy in the coming few years.

Africa will be a major area of focus for Agility in 2016 as the first of our world-class distribution parks open. With the continent home to 10 of the fastest growing emerging economies across the globe, Agility’s early entry into the market makes it a reliable and trusted business partner for both multinationals looking to expand in the continent and regional players that are in the stages of expansion to meet the needs of the growing consumer class.

While we cannot control external factors such as oil prices or economic trends, in response, Agility has been and will continue to be looking at innovating wherever possible to stay ahead of the competition. Within the Middle East-Africa region, one of our responses has been to develop new products and new tactics to enhance our capabilities and strengths in the region. Modules transport is an example of our core focuses, which is coming under increasing demand owing to its cost effectiveness for EPCs. Our creative and attractive solutions offer EPCs a strong platform for collaboration between ship owners, heavy-lift carriers and other industry players.

Agriculture and food security programs are also proving to be a healthy source of growth and revenue for us at Agility, demonstrating significant demand for governments and we expect this trend to continue into the future. Conflict and political instability in the region will remain the primary area of concern for the industry in 2016. This in turn will have a significant impact on insurance costs and increase services costs due to the continued risks involved, ultimately adversely affecting the end user.

While oil prices have seen a global downturn, cargo owners are requesting a lowering of rates, which in reality exceeds the real value of the drop in oil prices. Furthermore, the increase in modules fabrication reduces the number of voyages significantly and also shifts the volumes to special vessels and barges instead of general cargo vessels; modularized 500,000 freight tons of cargo can move in 12-15 voyages of barges, instead of around 40 to 50 vessel charters fully, or partially in the case of a stick build scenario.

Phillip Brown, Product Director – Logistics – Fluor Supply Chain Solutions, Fluor

Fluor sees that the global economy continues to be sluggish and commodity prices remain depressed. Lower commodity prices have impacted our clients’ cash flow and therefore their ability to fund projects at the same pace. There are still several major projects scheduled to move forward in 2016, but the low price of oil and market uncertainty will likely delay some of these projects.

Our clients are focused on their per-unit costs, such as dollars per barrel. They are cautious about deploying their capital through new projects – only projects with a lower capital spend and high rate of return are moving forward in this environment. We do expect clients to move forward with these types of projects, especially those that are replacing depleting or deteriorating assets. For example, oil and gas customers need to add production to replace their declining production base, as well as to meet the new regulatory demands. We see a number of projects moving forward globally in the downstream and petrochemical markets.

In response to the oil and gas industry downturn, our clients are asking for innovative project solutions, certain performance and accountability from their contractors to deliver the capital efficiency they need for projects to move forward. This environment creates opportunities for Fluor to add value by engaging with our clients as a strategic partner and delivering this capital efficiency to them at a time when they need it most.

Our focus on capital efficiency and cost and schedule certainty is resonating with clients and is a true differentiator for Fluor. Our ability to offer integrated solutions to our clients enables them to move forward on projects that would otherwise be uneconomic.

In its relationship with carriers, Fluor is focused on delivering capital efficiency and schedule certainty to our clients. These requirements flow down to Fluor’s contractors, which means that we rely on the strategic relationships that we have with our carriers to guarantee the success of our projects. With the current low cost of bunkers, ocean freight rates have been artificially deflated over the past year. It’s important for us to keep in mind the effect of low bunker prices on the overall freight rates and not under-budget for future shipments when the bunker prices may rise again. We also check the pulse of the market through our strategic carrier partners to ensure that we do not potentially overload any one carrier on any particular trade lane.