Port of Rotterdam white paper looks into breakbulk market development
Breakbulk sector has not been spared by the Covid-19 pandemic that has impacted the world. However, there are whispers of roaring twenties, a new commodities super cycle as signs of economic recovery emerge.
In a White paper issued by the Port of Rotterdam, Johan-Paul Verschuure and Hugo du Mez discuss the impact, threats, and opportunities for the various breakbulk markets.
After the Covid-19 outbreak, end of 2019, predictions for the world economy were gloomy. The virus would strike hard and recovery would take years. Numbers fell sharply, but since the low point in May last year, world trade has grown solidly. In November, world trade was even back at pre-corona levels. This is shown in the CPB World Trade Monitor, which is published monthly on behalf of the European Commission, the white paper reads.
Hick-ups in production and logistics
The breakbulk sector is also showing signs of recovery, according to Johan-Paul Verschuure. As Project Director of the Ports & Logistics Team at consulting company Rebel, he closely monitors market developments, supply chains and shipping structures.
Verschuure attributes the recovery partly to the good government intervention and the generous policy of the ECB: “Partly thanks to financial support programmes, the damage has been limited and we are seeing a strong recovery. That gives a positive vibe, which in turn acts as a driver for the demand that has been stimulated.”
Nevertheless, he believes it is too short-sighted to speak of a new commodities super cycle, or a revival of the roaring twenties.
“Growing demands are healthy. But both production and logistics are facing hick-ups worldwide. These are the logical consequence of lagging supplies of raw materials and stocks, delayed projects, or the late start-up of factories. A good example is the steel industry. China may have remained remarkably stable in terms of production capacity, the US and Europe are struggling with an after-effect, due to a delayed upscaling.”
Breakbulk price push
Increased demand is pushing up prices, especially in Europe. More expensive raw materials are also contributing to the higher prices.
“On top of that, a number of parties on the demand side have anticipated the scarcity by building up large stocks. This hoarding has created additional demand in some parts of the breakbulk market. The effect is noticeable throughout the supply chain and may eventually slow down the economic recovery,” adds Hugo du Mez, advisor business intelligence at the Strategy & Analysis department of the Port of Rotterdam Authority.
A growing concern for the climate also contributes to scarcity. And thus to the price push. China, for example, seems to be restricting extremely polluting production facilities. They are allowed to scale up less, which removes overcapacity from the market and reduces supply volumes. According to Verschuure, the growing focus on more sustainable production could become a trend in the years to come, which would further push up prices.
Trade relations and politics
Both experts are convinced that factories and producers will be able to pass on the extra costs to end users.
“This is and will remain a question of supply and demand and will certainly remain that way this year, but probably also in the first half of 2022,” Du Mez predicts.
“Moreover, everybody is sharing the same predicament. The whole market is affected by higher prices. Nobody will lose market share or harm their competitive position by passing on higher prices,” Verschuure adds. “That is quite a difference from previous years, when price differences could result in a loss of market share.”
Partly because everybody is sharing the same predicament and supply chains are changing only gradually, the developments mentioned do not have an immediate profound impact on global trade relations, according to both.
Structural growth is still in Asia, while the European market is more mature. Any growth there will mainly be cyclical. Obviously, political developments continue to play a role here. During the Trump years, sanctions on both sides were rather rule than exception.
“When we have a look at trade between the EU and the US, this will not change any time soon,” Du Mez predicts. “As long as the domestic steel industry is satisfied and there are no major complaints, there is no reason for Biden to normalise trade with Europe. Moreover, there are still sectors that have not yet fully recovered. So the luxury of just opening up everything is not yet an option as well.”
“We did learn from Covid-19 that it is important to think strategically on how to allocate production capacities. By leaving multiple options open and not being dependent on just one production location, risks remain limited. I therefore expect that we will move more towards diversified supply chains,” Verschuure continues.
“That does not necessarily imply that everything will be produced in the backyard. Global supply chains will continue to be driven by the cost differences that existed before Corona. As long as those cost differences are substantial, the focus will remain on Asia. But certainly more and better thoughts will be given to minimising risk.”
Specific developments in the steel market
The various breakbulk markets are affected by specific developments. For example, the steel market is subject to several trade restrictions.
Du Mez: “Especially now that the EU has extended safeguards on steel imports for a number of years, markets remain protected and a part of the scarcity is created.”
According to Du Mez and Verschuure, the scarcity and the strong price increase, as a result of this protection, are at the expense of trade and end users. “They will be presented with the bill,” Verschuure says. “For trading, that might be negative. On the other hand, (local) employment benefits from these developments.”
“Particularly with the energy transition on the horizon, steel producers will not be sorry about this development either. After all, this transition requires a lot of funding. It is a matter of billions in investments,” Du Mez adds.
It is true that the European Commission has promised support to the steel industry for making the transition to hydrogen. Polluting products from abroad will be charged extra at the border, so prices will be at a comparable level. On the other hand, the exemption for ETS emission rights for the steel industry will end.
“The upside of this is that steel producers will be directed more towards cleaner production,” Verschuure says.
He believes that European steel producers will focus even more on the production of high-quality steel products.
“There are definitely opportunities to make production more efficient and sustainable. ‘Green’ steel is a logical step and will certainly have value in the future.”
In this respect, Du Mez feels that Europe is leading the way, but ultimately, worldwide, everybody has to comply with the climate agreements: “So we are definitely going to see measures elsewhere too. That is inevitable. Even China, for example, is taking the first careful steps towards phasing out the most polluting links in the supply chain.”
Energy transition major gamechanger
Without a doubt, both experts consider the energy transition to be one of the major game changers for the breakbulk sector. The demand for non-ferrous metals such as copper, nickel, lithium, and aluminium is expected to grow substantially as a result of the growing number of (offshore) wind farms, amongst others.
The question remains as to what impact this will have on the breakbulk market, or whether the container sector will benefit. Nevertheless, the sky-high container rates certainly offer opportunities for the breakbulk sector.
For Heavy Lift and Project Cargo, HLPC in short, the impact is definitely stronger. Production facilities worldwide that run on coal or other fossil fuels will switch to cleaner energy sources. The handling and shipping of components for electrolysers, hydrogen storage tanks, compressors and battery stations will boost breakbulk supply chains. The same applies to offshore wind.
Verschuure: “The number of offshore wind farms, for example, has increased considerably over recent years. In the future, that growth will continue exponentially. Moreover, the wind farms and the turbines themselves are getting bigger and bigger. Ships and facilities will have to keep up. This clearly offers opportunities and is one of the main drivers for the HLPC and steel markets.”
It can be interesting for individual breakbulk parties to team up. By joining forces and making use of each other’s knowledge, they can strengthen their position and deliver an even better product to the offshore wind sector.
“Opportunities also arise for providing services, for example in the f ield of maintenance,” Du Mez thinks. “Strong clusters have a bright future ahead of them.”
Verschuure too is positive about the future: “There are plenty of opportunities for the breakbulk sector; with offshore wind and the energy transition as main drivers.”