ENERGY CARGOES RULE THE WAVES

Support for project cargo work from the wider energy sector – fossil or not – is borne out by business for multipurpose carriers.

Christophe Grammare, managing director for AAL Shipping, confirmed to Breakbulk: “We’ve seen good support from the energy sector and not necessarily renewables – it’s from any type of energy.”

For Australia – a key market for AAL – Grammare described renewable energy as the “big one”. Australian mining projects have not been as active as previously, and oil and gas project work is steady, but not soaring. Instead, AAL is seeing more work associated with the upkeep of equipment, which works well with the carrier’s regular liner service in Australia.

Europe is a different beast, however. “Europe is a very quiet, depressed market in general. We’re maintaining our core service –essentially one ship per month sailing from Europe and the Middle East Gulf and India and then another ship a month from Europe to Far East. This is our core business so we’re going to keep that as it is,” Grammare said.

Last year, AAL was pulling more ships towards Europe to serve increased opportunities, but that has not been the case this year. Instead, Grammare said AAL’s Far East ships were being rerouted to the U.S. and Australia. He also noted an increase in breakbulk trade from the Middle East Gulf to India and Southeast Asia. Steel was another cargo champion in 2022, but that hasn’t been carried through to 2023. “The steel cargo was very strong last year, but it slowed down a bit in the beginning of this year with the steel prices changing and the market slowing down a bit,” Grammare said. “That’s opened up more space for us to take project cargo.”

Christophe Grammare.

Credit: AAL

60 percent of companies reported that their project portfolio capital spend will be higher this year, while only 15 percent reported lower capex levels.

Supply Chain Conditions

Reported lead times for major equipment are nearly 27 percent longer on average compared with the pre-pandemic period, while lead times specifically for electrical and instrumentation equipment are 67 percent longer relative to the same period. Transformers and other electrical components are particularly problematic categories of equipment. In response, teams have been forced to move procurement earlier in the project lifecycle, to pay premiums for fabricated equipment, and to accept onerous contract terms from their suppliers. These risks are particularly pronounced for equipment sourced from Europe or Asia: 60 percent of respondents reported delays on delivery of Asian equipment/materials while 74 percent reported delays in equipment sourced from Europe.

On the supply chain logistics front, it appears that some of the pressures have eased over the past couple of quarters. Compared to Q3 2022, IPA clients surveyed report that it is now easier to get freight on board a shipping vessel, to find a well-resourced port, and to secure a vessel for shipments, though more than 25 percent of project teams still reported problems in these areas.

However, vendor delivery delays, particularly for major equipment, continue to be significant problem, as reported by the survey respondents: 80 percent of the companies reported worse vendor supply delivery delays for equipment than pre-pandemic norms. This indicates that while the logistical parts of supply chains are recovering, the main source of delays remains bottlenecks in production among manufacturers and other suppliers of fabricated/intermediate goods.

Engineering delays remain significant as well: the number of project organizations reporting engineering disruptions has stayed between 30 and 40 percent since early 2021, while the length of delay has steadily increased over the same period; it is now 20 percent above the pre-Covid baseline, which IPA data shows was around 30 percent on average for industry.

Survey respondents continue to report concerns about the qualifications and availability of engineering resources, specifically the ability to recruit engineering labor. Eighty percent of companies reported that they were very concerned about how engineering companies are likely to respond as project activity ramps up, and 73 percent were concerned about construction labor shortages.

Services Costs Mount

Over the past two years, the majority of the price increases on capital projects have been concentrated on the “goods” side, with relatively muted growth in prices for engineering and construction resources. However, one key finding of the latest survey is the inflationary pressures beginning to show up on the “services” side of project costs, where 77 percent of companies reported that they are considering higher engineering all-in rates for new estimates, and 90 percent for construction all-in rates than what they paid for projects in the field right now.

Overall, we expect that inflation will become less of a priority for policymakers over the next six months as consumer pricing indices begin to fall and fears of an economic downturn begin to predominate. We expect price levels for capital projects to remain high in absolute terms but to grow at a lower rate than observed in the past two years, as we do not expect commodity prices to fall and capex plans for industry remain robust for now. We also expect that industry will struggle to actually deploy the announced capital spend, as we continue to struggle to secure the critical engineering and construction resources needed to deliver projects.

Downside risks will dominate in the global economy in the medium term: ongoing disruptions and geopolitical polarization from the war in Ukraine as well as the ongoing and uncertain impact of higher interest rates on the global financial system are both significant threats to economic activity in the year to come.

Aditya Munshi is product portfolio officer and Julian Rippy is research analyst at Independent Project Analysis. IPA is an advisory firm on capital projects, providing benchmarking, research, and consulting devoted to the empirical research of capital projects and project systems.