Asia’s project cargo shipping sector is holding up reasonbly well, but is feeling the economy’s impact

This year promises to be a major comedown for an Asian breakbulk and project cargo shipping industry that had grown used to double-digit annual growth.

The global recession is forcing delays and cancellations of energy and infrastructure projects from Canada to Australia. China and Southeast Asia appear to be less impacted than other regions because of the sheer volume of projects and investments, but that could change if the global economy worsens.

The prospect of a dramatic drop-off in business has been added to the industry’s ever-present challenges of complex logistics, poor infrastructure, red tape and capacity shortages.

Despite that, Mark Garvey, chief operating officer for Foster Wheeler Power Group Asia is taking a cautiously positive view of the Asian breakbulk and project cargo markets for 2009. He cites a backlog of ongoing project work and a handful of new prospects.

The Shanghai-based company, a subsidiary of engineering, procurement and construction firm Foster Wheeler, has offices and fabrication plants in the Chinese cities of Shanghai and Guangzhou as well as Thailand.

Nearly all of Power Group Asia’s shipments are breakbulk and heavy lift. The company, which provides affiliate support services and undertakes its own projects in mainland China, Taiwan, Vietnam, Thailand, Indonesia and Korea, moves close to 100,000 cubic meters of equipment per year, mostly from China.

New orders for Power Group Asia were down 13 percent in the third quarter of 2008 compared to the average quarter in 2007.

While none of Foster Wheeler’s projects have been canceled, projects are being delayed throughout Asia. It’s unclear whether the delays are because of tighter credit or because companies taking a wait-and-see approach to the economy, Garvey said.

With the economy in the doldrums, a major drop in large projects in the early planning stages or awaiting board approval is likely in China in 2009. While the overall impact of the recession on project activity has been muted, some suppliers – especially smaller ones – are being hurt.

"Some of the supplier base that is dependent on export markets has shrunk quite rapidly," Garvey said. “They have open capacity not seen for a few years."

Mining projects have been hit hard throughout Southeast Asia as global commodity prices plummet, said Mike Armstead, director of expediting and logistics, AsiaPac, at Fluor Engineering & Construction. Project delays and cancellations will almost certainly be worse in Southeast Asia, where governments are dependent on fractured global credit markets and cash-strapped multinational companies for project financing. In China, the government is providing a massive infusion of money to keep energy and infrastructure projects rolling.

Project activity in the Middle East is so robust that even if the economy worsens, it could sustain current levels of sourcing for project-related equipment from China through 2009.

Despite the ongoing activity in the Middle East and various government stimulus plans, a worldwide project slowdown seems inevitable in 2009. "The rush to build new projects has gone out of the marketplace," Armstead said.

Cash-strapped countries throughout Southeast Asia are already starting to delay or cancel infrastructure and energy projects, said John Amos, president of Amos Logistics LLC. "Some have been delayed for up to a year or canceled outright because of the uncertainty of the economy," he said.

The delays and cancellations will ripple through the entire breakbulk-project cargo supply chain, from suppliers, carriers and 3PLs to engineering and construction firms. "There is a snowball effect on the various economies related to projects," Amos said.

The volume of ongoing projects in Asia is likely to be enough to stretch out the downturn for project cargo shipping. By the same token, business could be slow to pick up again when the economy improves.

"Many current projects under construction will continue on the shipping side, and you probably won’t see much of a slowdown through the middle of 2009,” Amos said. “After that, multipurpose vessels with heavy-lift capabilities could be impacted by some of the canceled orders."

If the recession has a silver lining for the breakbulk shipping industry, it’s that the Export-Import Bank of the United States, the World Bank and other global financial institutions are pumping money into loans for developing countries at very low interest rates.

"It’s not a deal-breaker as far as the recession is concerned, but it will be helpful for countries and companies that want to borrow money," Amos said.

Garvey said the dynamics of the breakbulk-project shipping market have been drastically altered since the extent of the global financial crisis started to become apparent four months ago.

Carriers have held the upper hand since the mid-1990s, when a global project boom and subsequent capacity crunch let them raise rates and dictate terms. Shippers were sometimes left dangling; Garvey recalls one case when Foster Wheeler had cargo displaced at the last moment and left at the dock.

That has changed as rates have fallen by as much as 40 percent in some trade lanes. Heavy-lift carriers are now willing to talk about cargoes they had previously snubbed and are offering far more flexibility around scheduling and ports of call.

"What we are seeing now in the marketplace is that carriers have become much more flexible and receptive to meeting the requirements of project cargo shippers," Garvey said.

Capt. Marek Orent, president of Chipolbrok America in Houston, said rates for bulk and breakbulk cargoes such as minerals and steel from the U.S. to China have dropped by around 50 percent, while rates for heavy-lift cargoes are holding steady. Chipolbrok is a Shanghai-based Chinese-Polish joint venture that operates 20 triple-decker vessels between the U.S., Europe and the Far East.

The breakbulk shipping market lags at least a year behind the capital projects markets, said David Fox, executive director of procurement at Fluor Corp. As capital project activity slows, shipping rates will start to drop. Decreases will likely be modest because of ongoing project activity throughout Asia, at least through the first part of 2009. "Rates aren’t going to fall off a cliff like they did for containers, but we will see a slower trend downward," Fox said.

A number of heavy-lift and breakbulk carriers are now scrambling for cargo, especially in underserved lanes such as those between Southeast Asia and Australia. "They are being opportunistic, looking for four or five months work to keep their ships busy," Fox said.

So far, there have been no dramatic rate drops on intra-Asia and outbound routes from Asia. Armstead foresees market-driven rate reductions in project and heavy-lift cargo markets, but nothing like the huge rate drops that have hit container shipping. "It probably won’t happen," Armstead said. “The big boys have to protect their revenues."

While the major heavy-lift carriers will probably survive the recession by idling some ships, smaller operators that rely on the spot market will be hard-pressed to do the same, Armstead said.

No matter where rates go in 2009, project cargo shippers can lower transportation costs by working closely with carriers and suppliers, said Ronald G. Porter, vice president of global transportation, logistics, and compliance at Aker Solutions, the global engineering and construction firm.

Porter has started a program at Aker in which carriers were included at the early stages of a design process. By slightly reducing diameters on certain equipment, the company was able to save 20 percent on shipping costs.

Project cargo shippers must also do their due diligence and work closely with carriers on planning and execution."To some extent, rates are in our own hands,” Porter said. "I can negotiate the best rates in the world, but if we don’t plan and execute properly, they go out the window."

While Porter has heard queries from carriers that are expanding the breakbulk and project cargoes they’re willing to move, he cautions shippers to be wary of entrusting their cargo to less-experienced carrier partners.

"I am concerned that some of the carriers and terminals they go to may not have the right equipment," he said.

Some fences will have to be mended if project shippers and their carriers are truly going to be part of the same team. There is a perception among shippers that they have been taken advantage of by carriers through rate increases, last-minute scheduling and a variety of surcharges, Porter said.

Foster Wheeler works to learn from its carrier partners and coach its suppliers about the transportation and logistics aspects of project work. "We propose these projects on a firm price basis so we have to understand the logistics requirements," Garvey said.

In addition to recession fears, project and breakbulk shippers face a host of logistics challenges throughout Southeast Asia.

One example was Foster Wheeler’s installation last May of two 1,375-ton, 7.5-meter-wide ethylene oxide reactors at the site of a new monoethylene glycol plant on Jurong Island in Singapore. The logistics of moving the reactors was considered during the entire process from site selection to design. Obtaining licenses to build and operate a dedicated jetty for offloading the reactors took considerable time and involved numerous discussions with Singapore authorities.

The reactors were loaded onto a barge at a Japanese fabrication yard using a 2,000-ton-capacity floating crane for transfer to a local port at Kobe. From there they were lifted onto Jumbo’s largest heavy-lift ship, the Javelin, for shipment to Singapore. At Singapore, they were transshipped to a local barge and shipped to the new jetty.

Detailed barging and ballasting studies had to be made to maneuver the barge around a coral reef that was only 100 meters from the jetty, and the entire move had to be coordinated with high tides in a 24-hour operation.

Outside of Singapore, whose world-class infrastructure is the best in the region, Southeast Asia poses significant logistics challenges for heavy-lift shippers. Indonesia, with the world’s fourth-largest population, is spread out over 17,500 islands. Mining projects in Indonesia are often in remote locations. Temporary customs offices must be established to clear project cargo. There are few railroads; heavy-lift cargoes are transported by barge and on new-built roads.

BDP International works with a Thai company that operates three mining concessions on Kalimantan, the Indonesian portion of the island of Borneo.

Project cargo shipping there is subject to seasonal conditions. During the dry season, barge transport is constrained by low water levels, and during the rainy season, high water prevents barges from clearing certain bridges. New roads must be built to project sites, often through villages that demand payments.

While some projects have been canceled or delayed, new ones have been announced, including a major aluminum mine. Most Indonesian companies, having survived a major recession in the 1990s, are not highly leveraged. Many of the mining and energy projects are funded by public-private entities from China and Japan with deep pockets and a strong need for the island nation’s abundant natural resources.

"So far, the economy is holding up pretty well," said Aaron Chen, BDP’s managing director of Indonesia. "We haven’t seen massive layoffs or closures, much less so than in India or China."