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Jan.9, 2017

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www.joc.com THE JOURNAL OF COMMERCE 69 MARITIME 2017 ANNUAL REVIEW & OUTLOOK "L ower for longer" is the phrase being used to describe pricing in the engineering, procurement, and construction industry. Depressed commodity prices have kept EPCs' pricing so low for so long that some customers see "irrational" pricing as nor- mal, Fluor Corp. CEO David Thomas Seaton told analysts recently. The same dynamic is playing out for one of the EPC industry's primary service providers — breakbulk carriers. Rates for multipurpose carriers' ships have been in a prolonged slump that most analysts expect to continue through 2017. Breakbulk carriers share a problem common to other ocean carriers: too many ships for too little demand. Ships ordered during a period of optimism in 2007-2008 entered service after the Great Recession caused demand to plummet. Supply-demand imbalance is most severe for basic breakbulk vessels that lack heavy-lift capacity needed to carry oversize pieces for large construc- tion projects. Better positioned are operators of the 900 or so multipurpose ships that qualify as project carriers, with lifting capacities of more than 100 tons, or premium project carriers, which can lift more than 250 tons. These ships can carry the increasingly heavy cargoes for large construction project in addition to run-of-the-mill breakbulk com- modities such as steel or aluminum. But even project and premium project carriers are feeling the pinch of competition from bulk carriers, which are competing for basic commodities, and container and roll-on, roll-off ships that are cutting rates in aggressive pursuit of project shipments. Container ships are an awkward fit for many project shipments. They generally require specialized lifting capability at ports that are designed for standardized transfer of containers. But container lines' frequent service and low rates are picking off a share of breakbulk volume. Ro-ro carriers have made long-term investments aimed at breakbulk cargo. Their latest generation of ships features large ramps that can accommodate loads of up to 500 tons, and adjustable decks that can handle large cargoes such as windmill blades and construction modules. Some multipurpose vessel operators have strengthened their ability to carry over- size cargoes or have invested in technology such as dynamic positioning, which enables a ship to hold a fixed position during offshore deliveries or installation of structures such as electricity-producing windmills. But ships that lack these kinds of fea- tures have nothing special to sell, and face a difficult operating and pricing environment. Scrapping would help return supply and demand to balance. Susan Oatway, senior analyst at Drewry, has said that because breakbulk carriers can't control demand, they must restrict supply by accelerating the scrapping of older, less-efficient ships. In addition, she said, operators need to return to the tried-and-true practice of securing cargo commitments before order- ing ships, instead of speculative ordering in hope that a sufficient volume of remunera- tive cargo will be available. Breakbulk carriers also could use a recovery of commodity prices, particularly oil and gas. The slump in energy prices has hit multipurpose operators hard by forcing postponement of large oil, gas and pet- rochemical projects that low prices have rendered uneconomic. There are still some bright spots for breakbulk cargoes, notably along the US Gulf Coast, where project carriers are still busy moving cargoes for construction and expansion of multibillion-dollar plants attracted to the region by cheap natural gas. Even the US Gulf, however, has not been immune to project postponements and can- cellations. Engineering, procurement and construction companies say that unless things pick up, they face a downturn in busi- ness after current backlogs are worked off. Another sector still showing strength is wind energy. Despite a trend toward near- shoring, ocean carriers continue to carry shipments for land-based and offshore windmill components that include larger pieces that require specialized vessels. But strength in these markets has been offset by weakness in steel shipments, a reflection of slowing global economic growth, and in other commodities. The supply-demand squeeze on carriers has heightened breakbulk shippers' con- cerns about management of supply chain risks. Hanjin Shipping's bankruptcy set off alarm bells for many breakbulk shippers, and underscored the need to vet the finan- cial conditions of ocean carriers. Bad as the Hanjin debacle was for con- tainer shippers, the arrest of a heavy-lift carrier would be worse for a project shipper with a construction job dependent on delivery of a multimillion-dollar module. This kind of a fiasco would be a career-ender for the logistics manager in charge of such a shipment. Vetting of breakbulk car- riers can be difficult. Most carriers in the sector are pri- vately held, with finances that tend to be opaque and provide little visibility into their operators' financial health. Though much of the financial informa- tion about breakbulk carriers is anecdotal, a couple of recent developments offer an indi- cation of the strains facing the sector. Dutch multipurpose operator Flinter announced in October that its primary lender had declined to extend the carrier's financing. The fol- lowing month, Abis Shipping said its 12 multipurpose carriers would be auctioned off after they completed their scheduled sailings. There could be more such events if breakbulk market trends keep rates low for much longer. JOC Contact Joseph Bonney at joseph.bonney@ihsmarkit.com and follow him on Twitter: @JosephBonney. BY JOSEPH BONNEY BREAKING THE BANK The overcapacity and low rates plaguing breakbulk carriers isn't likely to change soon

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