BREAKBULK SPECIAL REPORT
Capacity, service, rates, containers among big challenges facing breakbulk industry in Canada
By KATHLYN HORIBE
September 8, 2008
A multitude of challenges is afflicting the breakbulk industry
in Canada to the point, freight forwarders say, that frustration is a palpable daily occurrence. Demand is outpacing capacity, there is a real need for better customer service from carriers and railways, rates have soared and customers are moving their cargo over to containers. To top it all off, relationships that were once the backbone of the industry are now adversarial.
“There aren’t enough vessels in Canada,” said Karen Shanahan, executive vice-president and COO of Gillespie-Munro, a Montreal-based freight forwarding company that arranges the worldwide shipment of breakbulk cargoes such as forestry products. This industry exports more than $40 billion of wood, pulp and paper annually to Europe, China, India and Korea.
“I’ve got 10,000 tonnes of cargo,” she said. “I’m going to all the owners asking if they can take it. No thanks, not interested. Seven years ago, they wanted it so bad. Supply and demand is awful.”
Oversized, heavyweight freight that cannot fit into conventional ocean containers is considered breakbulk or project cargo in the shipping industry.
“Space for breakbulk shipments must be booked weeks in advance,” said Mark Faesecke, national project manager in Toronto for Kuehne + Nagel Ltd., which recently arranged the movement of a reactor from Japan to Alberta.
“Our greatest effort is in finding available space on a limited number of ro/ro vessels,” said Gary Hyde, operations manager of (ABH) Oversize Direct Ltd. Based in Hamilton, the company’s expertise lies in the international transport of large machinery. “Vessel space is at a premium given the increase in demand for export shipping from the U.S. and a contraction in capacity,” he said. “There are fewer project vessels entering the Great Lakes looking for cargo, and the railroads would rather we not ask.”
Oversize Direct organizes the shipping of press, milling and mining machinery, lathes, bulldozers, excavators, fabricated steel, refinery equipment for oil and energy projects, generators and turbines for electrical generation. This type of equipment is used to build dams, roads, electric power plants and wind turbine projects.
The dramatic rise in charter hire to record levels has made it difficult for some cargoes to trade, as their underlying value can’t justify the freight rates required to hire vessels, said James Allan, director of Trealmont-Trade Lane. “This supply/demand dynamic is the result of surging prices for commodities in heavy demand, primarily in Asia, and the dramatic increase in tonne-miles that accompany sources of raw material supply from non-traditional regions such as South America,” he said.
After several years of working together in a strategic alliance, Trealmont Chartering & Logistics recently merged with Trade Lane Solutions, also Vancouver-based, to further enhance the ability of both organizations to serve the logistics needs of its clients in the resource sector.
Project cargo, for the most part, is heading to Western Canada’s oil and gas sector. According to Alberta Employment, Immigration and Industry, the oilsands sector, the province’s major economic driver, has a lifespan of 30 years or more. Production also has increased slightly in Manitoba and Saskatchewan, according to the Canadian Association of Petroleum Producers. In addition, Newfoundland and Labrador is inking agreements with Chevron, Husky Energy, Petro-Canada and Exxon for offshore oil exploration.
To accommodate the expected growth in oilsands supply, approximately 1.1 million barrels per day of pipeline capacity is being added from Western Canada through to the end of 2010, said CAPP in its annual crude oil production, supply, markets and pipelines outlook for 2008. This new pipeline capacity will include expansions into existing markets and extensions into new markets in Eastern Canada and the U.S. and potentially to offshore markets.
With regard to the global outlook, the U.S. Department of Commerce’s Official Export Guide says project cargo is “impervious” to global economic trends because the completion of infrastructure projects underway in Asia and the Middle East are critical to their economies.
However, with no vessel space out of Canada, business is going stateside. “With very limited regular breakbulk service from Canada, Houston is the most viable option,” Mr. Faesecke said. “Due to the high demand for resources, mining and oil and gas development and exploration in Canada will continue, but shipping service must improve.”
“I don’t know which is worse – an abundance of cargo and no ships or no work and carrier salespeople on my doorstep,” Mr. Hyde said.
Project cargo growth
According to Export Development Canada, 2006 and 2007 were “essentially flat years for Canadian export growth” and 2008 is likely to be the same. However, Canadian companies can grow their businesses in developing countries because of ongoing infrastructure projects and the demand for capital goods. Stephen Poloz, EDC’s senior vice-president of corporate affairs and chief economist, also predicts “the U.S. dollar will firm this year against most currencies.”
Glen Aitken, vice-president of sales for Mammoet Canada Eastern Ltd., said, “Our biggest challenge is staying ahead of the market growth in Canada. Over the past several years, our Canadian operations have been growing at a rate of over 25 per cent per year on an exponential basis. It’s a constant challenge to continually acquire sufficient resources to meet this demand, but so far we’ve been quite successful.”
Mammoet Canada, based in Cambridge, Ont., specializes in engineered heavy transportation and lifting services and is a division of the Netherlands’ Mammoet BV. With operations across Canada and the U.S., its activities focus on the petrochemical industry, civil projects, power plant facilities, offshore businesses and marine projects.
During the past 10 months, the company added more than 100 cranes to its Canadian fleet, many of them from the acquisition of the major assets of Latta Crane, headquartered in Ayr, Ont.
“Global demand for project cargoes is projected to be strong for the next five to six years, while the demand for moving project cargoes into the Alberta oilsands should continue for the next 15 to 20 years,” said Bruce Hodgson, director of market development for the St. Lawrence Seaway Management Corporation. “Project cargo will, therefore, continue to be a very important segment that will provide opportunities for our strategically located system in the future.”
As an incentive for breakbulk shippers to utilize the Seaway, a new toll structure was implemented at the start of the 2008 season. It provides toll reductions for new cargoes, volume incentives for existing customers, reduced lockage fees and a broadening of the domestic cargo classification.
“This is another step in our ongoing marketing efforts to attract additional breakbulk cargoes into our system,” Mr. Hodgson said. “Our greatest challenge is to make sure we’re cost competitive with our competition. This is a challenge not only for the Seaway, but for all of our stakeholders as well.”
And the Seaway’s efforts are paying dividends. The volume of breakbulk wind turbines transported through the waterway increased by 82 per cent in 2007 over the previous year.
“We’re seeing the volume of traffic for 2008 continue to increase over 2007,” Mr. Hodgson added. “Year-to-date, we’ve handled 114,000 tonnes of new business in the general cargo segment. We’re optimistic this trend will continue. Recently CN increased its clearances from Thunder Bay to the Alberta oilsands (see article on oilsands). This now offers shippers of oversize pieces another routing to Western Canada via Highway H2O.”
Customer service
Despite a dearth of projects in Western Canada and worldwide, the lack of vessel space for over-dimensional equipment is compounded by understaffing at the shipping lines, say several people responsible for moving breakbulk cargo. “No one ever answers the phone as it goes straight to voicemail,” Mr. Hyde said.
“E-mail is also used as a buffer to interact with the customer. It’s easier to deal with an irate e-mail than having a customer challenge you over the phone in real time.”
“There is no service,” Ms. Shanahan claimed. “It’s like going to the Bay and no one’s there. There’s nobody left to talk to. You’ve got staff calling 1-800 numbers trying to talk to someone in Pakistan or China. It’s a nightmare.
“This used to be a business of who you knew and who you worked with,” she continued. “It used to be more of a community. Now it’s who you can get a hold of. Our department heads are on the phone trying to get a rate and they can’t get one. They can wait weeks. You’ve got clients screaming, ‘Why can’t you get me a rate?’”
Mr. Hyde said, “The last two years has seen a movement in attitude from the railways and steamship lines that we, the customer, are there to service them. Their objective is to inflate their bottom lines and if we’re not happy with their service, we’re more than welcome to take our business elsewhere. The relationship is less of a partnership and far more adversarial than I have seen in 35 years in the business.”
“Although e-mail has increased the amount of direct global business communication, there’s a fair amount of person-to-person contact within the breakbulk industry and relationships are still very important,” countered Peter Eisenhardt of BigLift Shipping’s Oakville, Ont., office. BigLift has a fleet of 13 heavy-lift, multipurpose ships, while Amsterdam-based Spliethoff, its parent company, has 60 multipurpose ships.
“The nature of our work has a very strong value-added component, so we bring together various providers, such as rail, road and ocean transport, customs brokerage, insurance companies, export crating, cranes and riggers in the transportation package,” Mr. Hyde said. “Customer service is our main selling point, not price. This is why we’re dependent on ocean and rail carriers to perform and offer solutions, not problems.”
When cargo exceeds 75 tonnes, the only options are rail and water, he added. “The railroads gather such a small percentage of their business from machinery that they don’t want to bear the cost of maintaining the infrastructure,” he said. “If there wasn’t a national interest and a need for project transport in the economy, the railroads would ignore this sector totally.”
“We believe the movement of a dimensional load is a partnership between the customer and the railway,” replied Mike LoVecchio, senior manager of media relations at Canadian Pacific. “Canadian Pacific Logistics Solutions strives for a high level of communication and collaboration with our customers in advance of the movement so that we can efficiently and cost effectively move the load to its destination. The more detailed information provided on the product, the better service and price point we can offer a customer.”
Lead times are typically 60 to 90 days, he added. Information such as cargo dimensions and weight, product use, schematic and photos are requested by CPLS as well as shipment and delivery dates.
“The last three or four years is probably the most frustrating that anybody that’s been in the industry for a long time has ever felt,” said Ms. Shanahan, who’s been in the business for more than 20 years. “It’s not fun anymore. There’s no personal relationship.”
Mergers hurting industry
Mergers and acquisitions taking place within the steamship lines and the commodities industries aren’t helping either. “It’s very confusing for everybody,” Ms. Shanahan said. “They shut down (the) Maersk (office) in Montreal, moved it to Toronto and laid off all these people. Hapag-Lloyd’s on the block. Then there are all the mergers between Abitibi and Bowater, Alcan and Rio Tinto, Domtar and Weyerhaeuser.”
Mr. Hyde agrees. “What the project business is disturbed by is instability and change,” he said. He believes the real threat to the pursuit of excellence in the business is the shrinking of the knowledge base through layoffs and retirement.
With restructuring and the early retirement of their most experienced staff, railways are ill-equipped to quote on over-dimensional loads, he claimed, and may take days to produce a quote even after a clearance is given. “For example, we knocked down a large crane in Edmonton and transported it in over 20 truckloads to Hamilton before CN could even produce a rail rate.
“The knowledge divide is increasing between container and breakbulk shipping,” he continued. “Over time, the proliferation of the container business has caused breakbulk transport to become more specialized with a greater demand for service and knowledge, but there appears to be limited opportunities to teach the next generation the art of heavy-haul transport. Customer call centres, generic quotes, transport specific software and frontline personnel that don’t know the configuration of their vessels are not conducive to the movement of breakbulk cargo. We require increased service and knowledge levels in a shipping environment that is headed the other way.”
Good expertise is one of the challenges of the breakbulk industry, said Madeleine Paquin, president and CEO of Logistec Corporation. Its stevedoring division provides cargo-handling services to the marine and industrial sectors. “A lot of the people who know breakbulk cargo well are retiring so the talent pool and expertise in this particular sector is decreasing year by year. We, at our company, are still very much committed to this sector and we have in-house training programs to develop our people.”
Doug Grennan of BigLift’s Oakville office says one of the major challenges for BigLift is an increasing requirement for technical staff. As for inefficient staff, he said, “To the contrary, in my opinion, frontline personnel within the breakbulk and project and heavy-lift sectors are very knowledgeable.”
Equipment availability in Canada also is another issue. “Flat-rack and open-top containers are scarce and must be stripped out at the port of entry,” Mr. Hyde said. “We may have a booking and be promised equipment that is coming into the terminal and yet the containers never arrive.”
Ocean freight rates for breakbulk also have tripled. “My rate was once $30 (per tonne),” Ms. Shanahan said. “Now it’s $75 – take it or leave it. It’s almost a bidding war. This is the best the (vessel) owners have ever seen and the worst the shippers have ever seen.”
Rates have skyrocketed because “a lot of the shippers who could moved their cargo into containers,” she said, “and now the container business has gone through the ceiling in the last year.” Also contributing to the higher rates are the charges added onto the ocean freight rate for security and special U.K. fuel fees, for example.
“It’s the same frustration in travelling as it is in transportation these days,” she said. “The fare might be $60 but by the time all the taxes are added on, your ticket costs $190.”
Future challenges
With regard to the industry’s challenges over the next few years, Mr. Hyde said, “Market conditions should equalize in demand and capacity but it will be a slow process that could take up to two years. Currency fluctuations, changing economies and boom-bust cycles are project cargo’s real enemies.”
Even though a steady stream of carriers will be delivered from shipyards over the next three years and older tonnage scrapped, it’s unlikely the growth in demand will keep pace with the growth in vessel supply, Mr. Allan said.
Ms. Shanahan questions whether these new vessels will actually be able to berth in Montreal. “Are they too big to come over to North America? We don’t know because we don’t know who’s going to own who.”
Unless the economies of China, Vietnam and India continue to be absolute export-fuelled juggernauts, it’s hard to imagine there won’t be at least a protracted pause in the charter market, said Bob Rabnett, director of Trealmont-Trade Lane. If the U.S. economy continues in its current direction, container capacity for export could be reduced as a result of continued declines in imports into North America.
Since the majority of breakbulk vessels are in the small to moderate size, Mr. Allan said, the availability of these vessels could remain tight and rates high, at least relative to larger vessels. Fuel costs are another variable that could present very significant challenges for both the breakbulk and container sectors, as both classes of vessel use more fuel per deadweight tonne than the larger dry bulk vessels.
Breakbulk is definitely a smaller piece of the transport pie, Mr. Hyde said, but its importance can never be undervalued. “We’ll always have a need for heavy industry, power generation and refineries, but we may lose the infrastructure and ability to rebuild these industries in Canada. As shippers and freight intermediaries, we must demand the attention of the railroads and steamship lines for service regardless of the volume of business. We must take every possible step to encourage competition in a business model that is monopolistic in its existence.
“There’s definitely a cycle in this business and carriers should enjoy their new-found prosperity because there’ll come a day when the bottom rail is on the top once again.”