One step at a time

There is light at the end of the tunnel: time charter rates in the multi-purpose vessel segment signal a cautious recovery. The monthly Toepfer Multipurpose Index (TMI) has risen by about 12 per cent since the beginning of the year but remains well below its long-term average. The German shipping company Toepfer Transport calculates the TMI based on a 12,500 TDW MPP/HL “F-Type” vessel from 120 to 180 mt for a 6- to 12-month charter, representing assessments from operators, owners and brokers. Operators with low overheads and without high credit costs will be able to benefit more quickly from a recovery than competitors who have old debts, says Hannes Hollaender, Managing Partner at Toepfer Transport.

As far as the coaster and container feeder segment is concerned, which is by definition dedicated to short-sea tramp shipping, tariffs are generally agreed locally between shippers and ship operators, explains Torsten Westphal, Managing Partner of the German shipbroker and operator ARKON Shipping GmbH & Co. KG. “This is a large and non-transparent market. Since there is no electronic platform to collect large amounts of data, there is no way to gain real insight.” Nevertheless this segment plays a key role in supplying the industry as well as consumers with commodities, accounting for roughly 40 per cent of intra-EU transport volume in tonne-kilometres, carrying about 412m tonnes of cargo annually throughout Europe, most of it bulk cargo.

Slow recovery

While Westphal categorizes multi-purpose vessels based on business logic as either as short-sea or deep-sea, DNV GL takes a more technical approach, subdividing this global fleet of roughly 15,000 ships — from small coasters to high-tech heavy-lift specialists — by size, deadweight and other design features, such as cranes and crane capacity.

The financial and shipping crisis has hit this industry particularly hard. An oversupply of new tonnage, declining demand for transport, and competition from other ship types have put pressure on charter and freight rates for close to ten years. Certain cargoes have virtually disappeared; for example, low crude oil prices have caused a steep drop of orders from the oil and gas industry. Laid-up vessels, bankruptcies, consolidation and forced sale of tonnage by creditor banks were among the consequences.

Apart from the oil price, key global drivers of multi-purpose project (MPP) transport business include the drilling rig count, offshore wind energy, steel production, mining, and the demand for heavy industrial plants. The good news: Drilling activities may resume in the wake of recovering oil prices, and the downstream oil industry is in need of modernization. Refineries need production facilities for the new blended marine fuels. Large offshore wind farms are being built everywhere. All these factors increase demand for sea transport.

For years, bulk carriers, ro-ro and container ships have been competing with MPVs for general and project cargo, such as wind turbine components and steel. This “cannibalism” is likely to decrease somewhat as the competing vessel types approach full capacity utilization. Furthermore, loading and unloading general cargo and project cargo in remote ports is becoming too costly and time-consuming for them. Since September 2017, freight rates in the coaster market have been reasonably stable, says ARKON’s Westphal.

On the other hand, rising oil prices and fuel costs are keeping profits under pressure. Earnings across the MPV sector reached a low point in April 2017 and have only recovered slowly since. Scrapping activity resulting from the oversupply of tonnage peaked from 2014 to 2017, reaching a combined total of roughly 550 ships across all MPV categories by 2017, and 57 in the MPP/ HL category, where ships are much younger. Since older ships will be unable to meet future emission regulations without major retrofits, scrapping is likely to continue at high levels for some time, especially for the smaller multi-purpose and coaster fleets. These ships often reach a higher age because they operate in more benign waters and freshwater and are well-kept, says Westphal.

Few new orders

The order book across all MPP/HL categories is at a record low. Because of poor cargo rates in recent years, many potential newbuilding projects have been postponed. According to Toepfer, the current MPP/HL order book counts 44 vessels for delivery between now and 2020, roughly 5 per cent of the fleet in service.

Second-hand tonnage offered at attractive prices contributed to this situation. In 2017, around 15 per cent of the existing fleet was up for sale; however, this rate has since dropped to 5 per cent, and the decreasing supply of used tonnage is causing prices to rise. “As long as a used ship is a better deal than a newbuild, the order books will hardly fill up significantly,” says market expert Hollaender. “Coasters are the only subsegment where the situation has turned around.”

Of course, this logic ignores the aspect of sustainability with regard to the changing regulatory landscape. While the sulphur cap can be met by current machinery burning blended fuels, newbuilds operating in future NO_X areas will require selective catalytic reduction or exhaust gas after-treatment equipment. Investing in new ships would allow owners to take advantage of advanced energy-saving technologies and innovative ship designs which expand operational flexibility. In the coaster segment, Torsten Westphal points out, the growing pressure to upgrade the fleet contrasts with a severe lack of financing resources. Before the financial crisis, ships were a popular form of investment and many new ships were ordered at premium prices. This has changed dramatically.

Future perspectives

More than ever investment decisions require a very thorough study of market conditions, and expert advice, Hollaender stresses. Many owners planning to build smaller tonnage have traditionally turned to European yards because of quality concerns, whereas heavy-lifters and MPPs are built in Asia to take advantage of significant cost advantages. “Quality has made big strides at Chinese yards,” Hollaender emphasizes. “With proper oversight, high-quality design and constant assistance by class, high quality expectations can be met.” Innovation is strong in Asia, he adds. In the long term, however, the eastern Asian cost benefits may shrink as production costs climb. “European yards, with their high level of organization and structure and their outstanding logistics, are going to persist, particularly for specialized ships and cruise vessels,” the expert is sure. Smart rationalization measures have enabled some European yards to continue building coasters profitably.

Most of the larger MPVs will rely on the same sources of income as in the past, says Hollaender. Taking advantage of advanced technology and deep market knowledge to streamline operations and improve flexibility and competitiveness is key. Demand for coastal transport is benefitting from growing markets for goods such as biomass, wind turbines and innovative industrial equipment, for example for additive manufacturing, says ARKON Shipping’s Torsten Westphal. Furthermore, the offshore wind industry and ports around the world will need heavy-lift transport to build state-of-the-art infrastructure, a trend that is expected to continue for some time.

Advanced ship designs can without doubt expand the range of services an owner or operator can offer, provide better cargo optimization options, and improve the operational bottom line. State-of-the-art technology, such as sensor-based equipment monitoring or automated hold washing systems, could help owners and operators save cash. Weather-routing can improve operational flexibility.

Financing alternatives

An increasing demand, a shrinking legacy fleet, better rates and reduced pressure from other ship types are likely to create a better environment for the multi-purpose industry. But owners of smaller tonnage are hard-pressed to finance the next generation of ships. To develop new and creative ways of raising investment capital, owners need specialized expertise. Financial engineering is the new buzzword: some emerging financing models involve instruments such as crowdfunding, retail investment models and even hedge funds, says Hollaender. The finance industry must help owners facing equity rates as high as 50 to 60 per cent to handle the security challenge. Presenting a compelling business model is crucial for owners, he emphasizes. Governments should help the industry build a new, eco-friendly fleet by sponsoring investments in appropriate technology, a notion Torsten Westphal fully supports. But, speaking for the short-sea business, Westphal cautions: “Equity capital should not come from ‘grey market’ investors – after all, the associated ‘soft costs’ can usually not be offset by operational earnings.”

Support from DNV GL

Owners, brokers, operators and class must work together to develop concepts that help the dry and break bulk segment regain strength, the two experts agree. “What the industry needs is comprehensive, well-informed advice. Class is there to tackle the primarily technical aspects and act as a facilitator and communicator. We are happy to work together with DNV GL to help owners and operators understand the challenges and the market, and make the right decisions,” says Hollaender. Westphal adds: “Class can help the shipping sector reap the benefits of the digital revolution so shipowners can earn enough to order new ships again.”

With 1,400 MPVs classed and a tonnage market share of approximately 21 per cent, DNV GL is the leading classification society for this segment. Backed by many years of experience with this ship type as well as comprehensive internal research, DNV GL experts provide a wide range of services to assist customers in facing current and future challenges. “Our top priorities are to support our customers’ efforts to increase efficiency, profitability and sustainability,” says Jost Bergmann, Business Director MPV at DNV GL.

From analysing a customer’s fleet and operation profiles to elaborating suggestions for implementing new regulations, optimizing the operational efficiency of ships, planning newbuilds, mitigating risks and enhancing business operations, there are many ways in which DNV GL can contribute to the business success of multi-purpose ship owners. The “Ready” approach developed by DNV GL for investments in new MPVs aims to protect the value of a vessel over time. “The goal is to design and build ships bearing in mind potential future modifications,” says Bergmann. “This may include alternative fuels, retrofitting battery packs, cranes and direct positioning (DP) systems, or accommodating additional staff on board. Prudent planning can enable a ship to remain adaptable to changing requirements over its entire lifetime.”