BREAKBULK SPECIAL REPORT
By KATHLYN HORIBE
October 5, 2009
Canada’s GDP may have increased 0.1 per cent in June, the first monthly growth in a year, but repercussions from the global recession are coming to roost in the breakbulk industry after a profitable first half. Exports of goods and services and business investment in machinery and equipment have dropped, though not as much as in the first quarter.
“Initially the recession did not even seem relevant as there was a great deal of activity in relocating plants and machinery,” said Gary Hyde, operations manager of (ABH) Oversize Direct Ltd. “We were busy when market conditions seemed their bleakest. The first half of our fiscal calendar was the strongest in years only to be juxtaposed with negative growth for the final six months. The time lag is now evident with the machinery sector being one of the hardest hit.”
He added, “Oversize Direct is in a strong financial position and ready to pursue opportunities as they arise, but continues to be conservative in the short term.”
Based in Hamilton, the company’s expertise lies in the international transport of large machinery. Oversized, heavyweight freight that can’t fit into conventional ocean containers is considered breakbulk or project cargo in the shipping industry.
Even the industry’s big guns are hurting.
“Throughout the first half of 2009, Kuehne + Nagel in Canada had a relatively steady stream of breakbulk and project shipments to and from Canada,” said Mark Faesecke, national project manager for the global logistics company. “Those orders were placed shortly before the strong economic downturn and obviously not affected by the cancellations, delays or finance issues we saw later on with project orders.”
“Due to the economy, breakbulk cargo has been sliding as projects are stalled and finding opportunities is trying,” said Frank Dunn, a partner in Valport Maritime Services, which offers a full range of docking, stevedoring and land-based services at the Port of Valleyfield in Quebec.
One sector unaffected by current economic conditions is long-term capital investments with government and private participation “that have to happen,” said Guy Tombs, president of Guy Tombs Ltd., a Montreal-based company that specializes in global project and heavy equipment forwarding. “The 12-month or more recession has not impacted this market but a project that can be postponed by an overseas buyer because of letters of credit problems, for example, those kinds of exports from Canada could well have slipped.”
The only way to get through these tough economic times is “to remain positive, upbeat and responsive to market requests,” Mr. Hyde said. “It’s really about coming to work with a smile on your face with the hope that the wagon train will soon be rolling again.”
A greater service level is also required by the client. “The perceived lack of service may result from carrier contraction,” he added, “but the forwarder is nonetheless required to fall on his or her sword. The focus of the organization soon changes from economic growth to maintenance of remaining customers. This is a defensive position that exacerbates the uncertainty of planning for the future.”
Outside of a few environmentally driven jobs, the positivity of the stock market has not been felt in project transport, Mr. Hyde said. “The auto industry has not recovered sufficiently to begin investing in machinery and retooling. Long-term capital spending is in a dramatic negative trend with projects that had millions previously invested idled or put on care and maintenance. Over the course of a year in Ontario, we’ve seen the cancellation of refinery investment in Sarnia, the elimination of future nuclear generation projects and the uncertainty of the steel market, specifically U.S. Steel’s position at Lake Erie.”
In August, the American company locked out the remaining 150 workers at its Lake Erie Works plant in Nanticoke, Ont., formerly owned by Stelco, after contract negotiations hit an impasse. About 800 people had already been laid off.
Moving steel is a primary breakbulk market and one the St. Lawrence Seaway had been targeting with incentives in an attempt to increase volumes. The waterway did gain some traction in 2008, but understandably this year there’s been a slide.
The recession has knocked the Seaway back on its heels, Mr. Dunn said. Valleyfield is located on the Seaway near Montreal.
“We’ve seen a reduction in the volume of project cargoes and steel into our system,” admitted Bruce Hodgson, director, market development, St. Lawrence Seaway Management Corporation, “which has resulted in a reduction in the number of vessels available to handle export from the region.”
“All modes of transportation have had to adapt (to the recession),” Mr. Hyde said, “but my greatest surprise has been the ability of ocean carriers to reduce capacity and service while maintaining rates. I thought this recession would be a buyer’s market but steamship lines have co-operated in stabilizing the market and recycling older surplus ships. Unprofitable routes have been abandoned and innovation is focused on containing operational costs.”
“Spot shipping rates have been much lower, despite having recovered somewhat since their dramatic fall in late 2008,” said Mark Pathy, executive vice-president of Fednav, Canada’s largest shipowning and chartering group. “To the extent that business has been fixed on long-term contracts, rates have remained more stable as our customers, all top-tier companies, have honoured their contractual obligations – just as we have honoured ours over the many years we’ve done business together.”
As for less capacity, Mr. Pathy said, “We’ve reduced the frequency of sailings on certain trade routes and the carrying capacity of ships plying these trades in order to adapt to our customers’ needs. But this has in no way affected the quality of our service or our commitment to continue to meet their needs.”
Highlights: energy and the Arctic
Despite the gloom, project cargo had some high spots this year.
Mr. Faesecke said, “Kuehne + Nagel in Canada organized and executed the transport of several heavy-lift transformers and support equipment from various European origins to a job site in Kitimat, B.C. The project included picking up the cargo from European vendors via trucks and barges, consolidating and storing the cargo at a designated terminal in Rotterdam and shipping the complete lot via charter vessel to Kitimat.”
“The movement of project cargoes through our system into the oilsands has continued this year,” Mr. Hodgson said. “Last year, the Port of Thunder Bay in conjunction with CN Rail increased their clearances for oversize cargoes moving from Thunder Bay to Western Canada. This has opened a new market segment for our system so we expect to see this traffic continue.”
Mr. Tombs said, “We’ve been busy but ironically getting through the year is a major highlight when so many forecasters were predicting doom and gloom and five years of depression like the 1930s. That’s not happened. We’re just forging on and continuing as a business and adjusting to different types of risks.”
“While many saw decreases in the double digits, Valport and the Port of Valleyfield have been able to hold their own,” Mr. Dunn said. “We’ve opened new offices that will allow project cargo customers the ability to parachute managers in to organize their cargo and stage projects for the next shipping opportunity.”
In addition, the company opened a new 4,500-square-metre food-grade climate-controlled warehouse, demolished its former offices and paved that area to create a new 4,000-square-metre lay-down site next to the dock. To increase its winter storage area, it also built a new addition to one of the older warehouses.
The port is also expanding in other areas. A steel fabricator erected a new building as well as an addition. “This fabricator is representative of the expansion of the facilities and services, such as millwrighting and steel fabrication, which Valport can tap into if the need arises,” Mr. Dunn said. Other tenants are growing their operations as well.
There’s also optimism in the industry due to energy projects and new markets in the Arctic.
“In view of the upcoming mining, hydro power and oil and gas projects in Canada,” Mr. Faesecke said, “we expect to see an increase in breakbulk vessels calling Canadian ports as of next year. Like in the past, the Port of Houston will remain the gateway for cargo to and from the Alberta oilsands region.”
Mr. Hodgson said, “As the economy recovers, the project cargo and breakbulk market should respond quite quickly as there’s pent up demand.”
“As a forwarding agent and shipbroker,” Mr. Tombs said, “we’re interested in taking on new challenges with added complexity. A company like ours packages door-to-door transport. We’re interested in jobs that others might decline because they’re just a little bit tricky. That’s what we work on: very difficult large moves.”
For Valport, north of the 66th parallel is offering new opportunities. “The Arctic has opened up in ways not imagined two decades ago with expansion throughout the Eastern Arctic, summer navigation through the Northwest Passage and now we’re learning of opportunities in Greenland,” Mr. Dunn said. “With Valport’s overall expansion, value-added services and the wonderful clients we already host, we’re well positioned and expanding our capabilities to offer more staging of project cargo, particularly in the Arctic.”
Another exciting venture for Valport is short-sea shipping because of Montreal’s Highway 30 project. “Something that’s actually starting to get some traction and we certainly hope it takes off is short-sea shipping,” Mr. Dunn said. “We’re very excited to be a staging area for the Highway 30 project. This allows Valport the opportunity to shine in an area that has encountered more stops than starts.”
The completion of Highway 30, a decades long delayed project, would serve as a beltway around metropolitan Montreal on the south shore of the St. Lawrence River. The new roadway would provide an alternative route for through traffic and reduce congestion on the city’s highways.
“We’re managing equipment staging right now and moving soon into steel supply for Highway 30,” Mr. Dunn added. “We’ve seen some short-sea cargo moving upbound to Upper Lakes ports and hopefully customers will see the efficiency and environmental benefits of moving breakbulk upbound.”
Rebounding from the downturn
However, challenges will abound once the recession dissipates.
“As many projects within Canada were ‘put on ice’ due to the economic downturn,” Mr. Faesecke said, “we expect to see a gap from the time procurement starts up again to the time cargo will actually move to the jobsites. Many jobs will have to be re-quoted in order to adjust the pricing and service available. It remains to be seen if the recovery in Canada’s project market will be a rapid one or if it will take a longer period of time.”
A lengthy stagnation of the economy can result in added challenges, Mr. Hyde said.
“As time progresses, it will take longer to restart the economy with a potential for inflation and uncertain fuel costs. The challenges in this industry are borne out of uncertainty and the current practice is to reduce debt and build a better equity position. The growth in the breakbulk business will be slow and, if not, chaos will rule supreme. There won’t be enough ships, terminal space, trucks and heavy-duty railcars to handle a small increase in production.”
Regarding the Seaway, Mr. Hodgson said, “Projections for the breakbulk market are mixed. Some carriers remain somewhat bullish, while others are more cautious. Our challenge continues to be to respond to the needs of this market, while continuing to reduce the costs of our system.”
However, attracting vessels into the Seaway is a challenge as some vessels require a change of fittings. To make access simpler, a new mooring system is being developed. “We’re into phase three of the product development of our hands-free mooring system,” he said, “which will allow vessels to transit our waterway without modified Seaway fittings. This will reduce costs for our customers and give them more flexibility in the allocation of their fleets.”
As always for the freight forwarder, supplier performance and the credit worthiness of clients are challenges, said Mr. Tombs, whose company deals with all modes of transportation. “Cost control is another challenge and fewer ships. Some of the lines may not want to let their rates fall as they have in the general freight market.”
Mr. Hyde has a number of other concerns. “The speed limiter legislation in Ontario and Quebec could restrict competition and reduce our options in carrier selection.” A speed limiter, which will be capped at 105 kilometres an hour, is a built-in microchip that presets a truck’s top speed.
Similarly, the border remains a deterrent to efficient trade. “While we pay lip service to free trade for all, the bureaucracy of the border is limiting access to markets,” Mr. Hyde added. “The credentials that truckers must present in order to enter international ports limits the pool of talent. The breakbulk industry is losing economies of scale given the creation of an elite class requirement in over-dimensional truck transportation and the reduction in shipping capacity.”
As for the future of the breakbulk industry, he said, “The volume of the project business is in decline and unless new investment in machinery and manufacturing infrastructure begins there will continue to be a contraction in breakbulk activity.”
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