The heavy and oversized cargo business may have to brace for some slowdown even if the pandemic gets beaten this year, cautions Tim Killen, executive vice president of leading project forwarder deugro. Confidence of investors has been shaken and will take some time to rebuilt, he says.
The project cargo sector has bounced back from disr[ds_preview]uptions last year. How far from normality is today’s market still for deugro?
Killen: Last year and coming into this year, there were vast amounts of cargo we had to move, most of it contracted prior to the pandemic. The challenge for us was to do that safely and securely despite all the safety and operational impacts across the world. For every kilo of cargo we put at least two or three times more effort into ensuring it was moved successfully. Currently it is even harder to execute shipments because of the tightening in the transport markets. The impacts we saw in container shipping have bled into the multi-purpose vessel market. There are huge shortages with regards to space and availability, and we are seeing cost increases and volatility like never before. It means we need longer lead times for planning, designing and delivering solutions because we cannot continue to react on a semi-spot basis when it comes to securing vessel space.
How do clients cope with increased cost volatility in freight and logistics? Are budget overruns jeopardizing capital projects?
Killen: An increase in logistics costs of 20 or even 30 % is an inconvenience; it adds to the budget. However, usually the cost of logistics is only between 3 and 7 % of the total project cost, so the impact is not huge. In the current environment, it could be necessary to incur such extra costs only to avoid logistics failures and much bigger cost overruns on the job sites. Imagine 5,000 people on a construction site waiting for key commodities to be delivered and they arrive four weeks late! The point is to make the right decisions to support the project, not just the logistics budget.
Is the project cargo market “out of the woods” then or is the lull still to come?
Killen: We see a lot of project logistics enquiry today, but such requests don’t necessarily translate into capital investment (FID) decisions. After a tough 2020, a lot of clients are looking to reassess the risk, cost and the opportunity for their investment decisions. This is for projects which may not happen until 2023 or even beyond. I think we will see investors taking a much more cautious approach not just because of the cost of logistics but because of developments in the commodity sector overall. The prices of steel, aluminium, lithium and other raw materials increased hugely over the past year. There are concerns that some may not be available in the necessary quantities. Based on this, I believe FID activity will be slower going forward. Projects are likely to be smaller and lower-risk, with more brownfield extension projects rather than major greenfield investments. It will take time for confidence to increase again.
Finally, what are deugro’s business expectations for the full year?
Killen: Last year, we shipped around five-and-a-half million freight tons which was a very solid result under challenging circumstances. We hope that even with the current challenges we can repeat or even beat that volume this year. mph
