THE BOOM IS OVER BUT IT'S NOT A COLLAPSE
The total market for global capital dredging projects is worth somewhere in the region of € 7 billion although only about half the contracts awarded could be said to be the result of genuinely open tenders.
Alex Hughes reports on a rationalised industry still facing competition from regional contractors.
Consolidation of the international dredging industry first began in the crisis-stricken 1980s although continued into the following decade when Belgium-based dredging companies Dredging International and Baggerwerken Decloedt joined forces within the DEME-Group (Dredging, Environmental and Marine Engineering), against an improving market backdrop.
Further consolidation within Europe eventually resulted in the creation of four major players - Royal Boskalis Westminster NV, Van Oord NV, Jan de Nul and DEME - all of whom nowadays wield considerable global influence, while other regional groupings ensure a competitive edge is present in virtually every tender. Finally, given a strong domestic market, Great Lakes Dredge & Dock (GLDD) has also been able to use its solid US base as an international springboard, enabling it to be a major contender in overseas contracts, particularly in the Middle East.
Explaining the rash of mergers in recent years, Boskalis' spokesman Roel Berends points out that these came about as companies strove to strengthen their market position and derive economies of scale from large fleets that were being used over everlarger geographical areas. In fact, the latest - and what may well be the last - act of consolidation took place on 19 December 2003, when the Van Oord Group and Ballast Ham Dredging merged to create a new global dredging and marine construction company, Van Oord NV, which has an annual turnover somewhere in the region of ?850m.
According to the company, the combining of resources has cemented the organisation's global reach, cut costs in terms of fleet, personnel and HQ, as well as making significant savings in investment.
However, none of the major players in today's dredging market now believes that we will see further large scale mergers of this kind in the near future. Van Oord points out that "the rationale is missing", while all agree that attempts to create what would be a super-global dredging company based in Europe would invariably fall foul of the European Commission's competition policy.
Furthermore, DEME spokesman Hubert Fiers sees no signs of consolidation among any of the smaller players to create another global dredging company capable of challenging the current European quartet.
Although it could be argued that consolidation within the industry began as a result of a market downturn, the emergence in the second half of the 1990s of what were huge capital dredging and land reclamation schemes in Hong Kong, Malaysia and Singapore made it almost incumbent on the industry to concentrate capacity in the hands of few dominant players to ensure such contracts could be managed efficiently.
Nevertheless, the reason why such a glut of projects emerged when they did is due in part to investment programmes initiated by the dredging industry itself. As Fiers explains, in 1994, DEME introduced the industry's first "jumbo" trailing suction hopper dredger, the 17,000 cu metre "Pearl River". Ballast Ham followed suit two years later and now all major market players have them. The superior operating economics of such vessels suddenly made previously unaffordable schemes eminently doable.
"Clients saw new opportunities for early delivery of their major infrastructure projects at a reasonable cost. This was a main driver of the expansion of that segment of the market, particularly in the Far East, " explains Fiers.
In fact, business in the 1990s was very good for all concerned. The world economy flourished and drove the need for ports and large scale land reclamation projects. Nevertheless, everybody realised that this boom could not continue indefinitely and the downturn did indeed come in the new century, although was made infinitely worse by uncertainties regarding the future of one of the industry's largest ever land reclamation projects, which is taking place in Singapore.
Contracts worth substantial sums, involving the movement of hundreds of millions of cubic metres of sand over a large number of years, initially provided the impetus for some companies in the industry to invest in new and larger equipment. However, disagreements over sand winning in neighbouring Indonesia and Malaysia have effectively frozen on site activity until such a time that local politicians can find an amicable solution.
Of equal importance is the situation in Europe which generated a large proportion of capital dredging projects in the 1990s, but where for the moment market demand is weak as European governments find themselves faced with ever more severe budget constraints.
Spending in this region has therefore slowed down compared to the recent past resulting in a concomitant reduction in the level of contract placement.
Bill Hanson, US business and development manager at Great Lakes Dredge & Dock (GLDD) also predicts a decrease in the company's level of business for the current year as funding cuts domestically and reduced international opportunities begin to bite, despite having major capital deepening projects underway in New York, Brunswick (Georgia), Manatee (Florida), Houston (Texas), and Los Angeles (California), as well as international contracts in Bahrain and Egypt.
Nevertheless, it would be inaccurate to characterise the industry as being in recession; it is not. Rather, current levels of business are commensurate with the pre-boom period. As Hubert Fiers stresses:
"We are not undergoing an end to capital dredging projects. What we are seeing is a shift of emphasis in the type of project now coming onto the market."
Even so, the very existence of a temporary imbalance between supply and demand for large scale hopper projects is definitely having an affect on the capital dredging industry with some companies having to rethink their approach to the market.
HARD CHOICES Royal Boskalis Westminster NV, which is generally acknowledged to be the market leader in terms of global dredging, has been able to redeploy some assets from Singapore to the Malaysian port of Tanjung Pelepas, among other schemes. By the end of last year however, it publicly conceded that there were insufficient substitute projects to ensure that the company's entire large hopper fleet would be fully employed throughout the current year. With global demand having weakened, Boskalis has therefore taken the opportunity to take a hard look at itself and make appropriate choices.
As a result, 450 jobs have been shed, several older vessels will be retired, procurement strengthened and "activity portfolios in the European home markets put under scrutiny". However, Roel Berends emphasises it is a "sharpening programme", not a restructuring.
At Van Oord, "a revue" is currently underway to ensure that usage of its combined trailing hopper fleet, now the largest in the world following the Ballast Ham merger, remains optimised and that unnecessary duplication of equipment can be eliminated. As the company's official spokesperson concedes, during prosperous times dredging companies invest in new equipment so when there is a market downturn, it becomes ever harder to make satisfactory returns on capital outlay.
"Governments and state bodies that actually finance capital dredging projects are all too aware that larger dredgers and better techniques have led to lower costs and they are exploiting this by seeking ever lower prices. In Europe, where due to the economic downturn competition between dredging companies is particularly strong, clients are beginning to recognise that now is a good time to go ahead with new projects, since the cost of implementing them has fallen, " he told PS.
Van Oord's involvement in other projects, especially the "Palm Island" and "The World" schemes in Dubai, has allowed the company to realise good occupancy rates for an important part of the fleet.
Nevertheless, the spokesman discounts suggestions that contracts are being awarded on the back of overly low bids. "We tendered very seriously for the work; it was not simply a question of generating work for assets that would have otherwise remained idle, " he insists.
Roel Berends explains the strategy at Boskalis, pointing out the company is avoiding committing itself to long-term projects with a high risk/low margin profile. "We will bid for projects that are of interest to us, where we can create value for our clients as well as having a chance to generate a fair margin for ourselves. This year, we will be living a bit hand-to-mouth, keeping open our options for the longer term, " he stresses.
DEME, which operates a diversified fleet of 75 dredgers including four 'jumbo' hoppers, has been successful in redeploying its assets, although Fiers insists that this has been the direct result of forward planning.
"Our strategy has been to put together a diversified fleet and remain active in all market segments. So, as demand diminishes in one area, as it has with 'jumbo' trailers, we can concentrate on another. Even in the 1990s, we declined to put all our fleet into projects in the Far East, trying instead to achieve as large a geographical spread as possible."
Boskalis has a similar approach. It derives almost a quarter of its turnover from the Netherlands and a further 20% is generated by other European countries. However, activities in Australia and Asia account for 20% of revenue while the Middle East (10%), Africa (10%) and the Americas (10%-15%) are other major contributing regions.
According to Fiers, there is increasingly more work for large cutter suction dredgers with DEME due to take delivery of the largest ever seagoing rock cutter suction dredger as from mid-2005. This ocean going vessel will be able to develop a maximum of 38,000hp, allowing it to concentrate up to 8,000hp alone on the cutter, displacing a similar vessel owned by Jan de Nul as the most powerful cutter suction dredger afloat.
Indeed, as a lot of older dredging vessels have been scrapped throughout the industry in recent years, more cost effective equipment is being added. Boskalis, for example, will take delivery of two modern 16,000 cubic metre hopper vessels in 2004, while GLDD added the 5,000 cu metre LIBERTY ISLAND trailing suction hopper dredger in 2002, bringing fleet strength up to 29 dredgers and 150 pieces of auxiliary equipment.
The potential to deploy both surplus capacity and more efficient equipment in the emerging markets of India and China has yet to be fully realised however. Roel Berends notes that Boskalis has established a toehold in the Chinese market but there are nevertheless significant problems in working outside the industry's traditional markets. "In developing countries, financing major capital dredging projects can be an issue which is often down to how such schemes are perceived. We view them as adding value to the economy by providing infrastructure that will attract business, whereas too often they are merely seen in cost terms. Indeed, it is sometimes difficult to calculate how returns on such infrastructure can be made and there are clearly various interpretations."
Van Oord was the first western dredging contractor to be awarded contracts in China, where it is helping to expand the port of Shanghai. However, its spokesman underlines the fact that neither India nor China are completely open markets, given the presence of government-owned dredging companies in both countries, thereby distorting competition. In addition, in some countries legislation may be in place that prevents the use of wholly non-domestic contractors.
"However, in this type of situation, one of the best arguments that we have is that we can do work better and more efficiently than local operators, " he emphasises.
DEME's Fiers has similar misgivings over the ability of western dredging companies to make significant inroads into these markets pointing out that until now contracts have been sporadic with little sign that China in particular will entirely open to outside contractors, although there is every indication that Chinese dredging companies intend to compete aggressively with international rivals for contracts in their own backyards.
Indeed, he also stresses that competition is not simply confined to the type of mega-projects that the Big Four global dredging companies favour, but also to smaller maintenance and capital dredging schemes where regional operators are also highly competitive.
These local players, he notes, have tried expanding their own fleets, too, especially those operators in Europe, while companies in Japan, Korea, the US and China are highly aggressive, above all in the Far Eastern and Southeast Asian markets.
Van Oord is also cognisant of the fact that smaller regional players represent "serious competition", albeit more in maintenance dredging than in large capital dredging projects. Nevertheless, particularly in Europe these other industry players are also currently feeling the pinch of the regional economic slowdown. As to whether any of these smaller contractors will disappear remains uncertain. "Larger dredging companies concentrate on the larger projects and the smaller companies on the smaller projects, so there is normally enough work for everybody, " concludes Van Oord.
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