Merger Misconceptions
By Susan Oatway
Recent talk of mergers and acquisitions in the multipurpose vessel segment has been cited as a potential cure to the sector’s overcapacity ills. But evidence to date suggests that the key beneficiaries are the acquiring companies themselves rather than the industry as a whole.
There has been a lot of talk of consolidation of the multipurpose vessel, or MPV, fleet over the last few months, not least with the recent announcement of a new joint venture between NovaAlgoma and Peter Döhle that will operate 26 vessels (13 MPVs and 13 mini-bulkers).
At the other end of the scale rumors still circulate around Zeamarine, as the company has publicly stated that it aims to have a fleet of 100 vessels in the near future (currently at 75) and it plans to achieve this by further M&A activity and not newbuilding. That last comment is cause for celebration, as there are still too many vessels that are overage, small and/or poorly equipped to compete in the global market.
Consolidation has, for a long time, been held up as the last hope for this industry. Theoretically, fewer owners should be able to share overheads and expenses over larger fleets. They should be more disciplined about ordering newbuildings and provide a united front against strong charterers. Other sectors — for example, container shipping and steel manufacturing — have benefited from some form of consolidation over the years. But does the merger of shipping companies really help reduce supply and therefore aid the recovery of the market?
Fragmented Sector
Drewry’s estimate of the current MPV fleet comprises some 3,188 vessels with an average age of almost 17 years. The sector is highly fragmented; our list of some 20 major ship owner/operators accounts for just 30 percent of the total deadweight available to charterers, although they do represent the younger end of the fleet.
Interestingly, where the vessels are smaller, with less lift capability, the older they are. The fleets that have those characteristics are operated in short-sea trades. This sector has finally started to see an improvement in charter rates after a market trough that has lasted more than five years. However, vessels in this sector are in urgent need of renewal, and it is to be hoped that when owners do start to see a positive bottom line, the old tonnage will be scrapped to make way for the new.For long-haul trades, mergers and joint ventures have not meant fleet consolidation, but they have brought about cost savings for the companies involved and the opportunity to schedule fleets to an advantage. In this there has been a positive market outcome for the operators.
Some industry stakeholders have commented that without consolidation this sector will cease to exist in less than 10 years. Drewry’s view is that this is a little pessimistic. But it is true that only by working together will the smaller fleets be able to compete on the same playing field as the new wave of mega-owners.
Cautiously Optimistic
In the latest edition of Drewry’s Multipurpose Shipping Forecaster report we declare that we remain cautiously optimistic on the outlook for the sector. There are some caveats to this optimism as global general cargo demand is forecast to grow at a rate of just 2 percent per year to 2022, while the multipurpose and heavy-lift fleet is expected to contract at less than 1 percent per year over the same period. Meanwhile, the threat of a trade war continues to loom over the horizon and the competing sectors are not yet secure enough to move from this sector.
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Multipurpose vessels benefit from the growth in demand for breakbulk and project cargo and, while it is clear that both are affected by modal competition and trade tariffs, the latter has seen some renewal in certain sectors.
In BP’s latest energy outlook, global consumption of fuel in 2017 is compared with 2016. Although renewable energy consumption is still a minor part of the global mix, it is growing at a faster rate (almost 17 percent year-on-year) than any of the other fuel types.
Wind energy provided more than half of that renewables growth, which is positive news for the MPV sector. The equipment needed for a wind farm, including the blades and towers, is ideally suited to the MPV fleet. The equipment is large, unwieldy (project) cargo, which needs a vessel that can both lift and stow it correctly. Also the top two manufacturers are based in Europe, while the top regions for growing installed capacity are in Asia — a perfect trade route and a growing market for project carrier tonnage.China reported a 25 percent increase in power generation from renewables in 2017, compared with 2016, to 106.7 million tonnes oil equivalent, which is 22 percent of the global renewable power. Within that global increase, some regions have a much bigger share than others. Asia–Pacific represents some 36 percent of renewable energy consumption (including China alone amounting to 22 percent). The EU is worth 33 percent and North America 23 percent. Asia–Pacific is also the fastest-growing region with 2017 consumption up almost 25 percent on 2016.
Construction Lifting Demand
The other significant factor in our uplift for demand is a region-wide construction boom for Southeast Asia that is expected to last the next 10 years. It is largely fueled by China’s Belt and Road initiative, which will link China to Europe through Central and Southeast Asia. India’s annual construction investment is also expected to increase by about one-third over the next five years to an average US$170 billion per year.
The outlook for the competing sectors, although mixed going into the final quarter of the year, remains positive for the medium term. It is true that the impact of U.S. tariffs is more keenly felt by the container-shipping lines, but here, too, there is still growth forecast, albeit at a slightly weaker rate than previously expected.
There may be trouble ahead, but the green shoots of recovery appear weather-proofed to withstand the volatility expected to the end of 2018. Longer term, owners are more positive post-2020 when the true picture of the various environmental regulations will have become clearer. Maybe we should upgrade our forecast to reasonably optimistic?
Susan Oatway is a consultant, who for more than 13 years has been the principle author of Drewry’s multipurpose and heavy-lift publications and is co-editor of the reefer shipping report.
Image credit: Shutterstock
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