2023’s Lull a Springboard for 2024’s Boom
By Leif Arne Strømmen
February 24 marked one year since Russia started its aggressive and unacceptable invasion of Ukraine. During those 12 months, we have seen market dynamics changing in a volatile manner. Record high energy prices have fuelled already high inflation after years of pandemic and banks are combating inflation with the highest rates of interest seen in decades.
High inflation is having an impact on many levels of our society and the business environment. This was first seen in the consumer-driven segments, but gradually is also being seen in capital investment with projects being delayed or postponed due to cost increases on materials, manpower and capital.
The Freightos Baltic Index gives a good reflection of how the consumer market has developed over that time, with container rates falling to pre-pandemic levels in a very short period. At the same time, congestion in worldwide ports has also largely disappeared and conditions have returned more or less to normal.
The project logistics market – directly linked as it is to capital investment projects worldwide – has also cooled, comparing 2021 with 2022; however, not by the same magnitude as the container segment. Since August 2022, indices like Toepfer’s and Drewry’s have clearly shown signs of reduced rates in the multipurpose vessel segments.
The wind industry, meanwhile, has been struggling with record high transportation costs, increased rates on raw materials and increased energy prices over the last two years. The largest western wind turbine OEMs accumulated billions in losses over the course of 2022, forcing them to increase pricing for wind turbine equipment by 30-40 percent, which in turn caused project owners and operators to revisit their planned capital investment projects and delay final investment decisions.
This has consequently led to a substantial drop in new orders for 2023, resulting in an interim decline in volumes and prices for the multipurpose/breakbulk fleet. Lately, we have seen major players like Equinor shift their focus and capital from offshore wind to solar due to the cost increases within the offshore wind sector, when compared with solar.
ONWARDS AND UPWARDS
Moving into 2024 and beyond – under the assumption that energy prices and inflation will normalize – it is expected that the market will find its new balance and new normal. We should then expect a substantial uptake in new orders and capital investment projects into both onshore and offshore wind. The energy crisis in Europe will further escalate investments into offshore wind all over Europe, and we will see exponential growth in offshore wind over the next 10 years if the supply chain is able to keep up with all the planned projects.
The wind market will, however, continue to evolve and change, with Chinese OEMs taking a bigger share of the global market due to lower energy prices compared with western OEMs, and the U.S. Inflation Reduction Act which will spur new investments into U.S. wind manufacturing, changing the supply chains for future capex projects in the U.S. market.
In addition to increased investment in renewable energy, capital investment levels are also increasing substantially in the oil & gas sector. As an example, we are seeing record high capital investments into new upstream oil & gas development projects in Norway over the next 3-5 years, with 2023 as an intermediate year before activities and movements really start to pick up in 2024 and the years that follow.
This year will therefore be a good year for OEMs, engineering, procurement and construction companies and project owners to secure capacity for upcoming capital investment projects taking place in 2024 and onwards. The multipurpose and heavy-lift market will most likely be tight from 2024 and beyond due to increased capital investments combined with very limited new-building activity. However, inflation and interest levels must go down.
Leif Arne Strømmen is a partner at Peak Group AS.
TOP PHOTO: Collett & Sons moves blades for South Kyle Wind Farm, Scotland. CREDIT: Collett
