October 2019
Bulking up

The senior management team from CNCo and Swire Bulk talk to Swire News about a dry bulk shipping growth story that shows no signs of stalling.

It would not be inaccurate to state that the global dry bulk shipping sector has faced significant headwinds in recent times. Trade flows have been disrupted by a series of exceptional events over the last six months, including the Brumadinho dam disaster at the Córrego do Feijão iron ore mine in Brazil, and an outbreak of swine flu in China that has lowered demand for soy beans. Lingering uncertainty around the future of US-China trade relations has also impacted the market.

It is all the more cheering to note, then, that the team at the helm of Swire group's shipping arm, The China Navigation Company ("CNCo"), and its dry bulk division, Swire Bulk, exude a quiet confidence in the continuation of the latter's remarkable growth story to date.

Sam Swire, Chairman of CNCo, dots the eyes of the lion at the opening ceremony for the company’s new China Headquarters in Shanghai.
Sam Swire, Chairman of CNCo, dots the eyes of the lion at the opening ceremony for the company's new China Headquarters in Shanghai.

"The growth in the bulk division has been an exciting new venture for the company," says CNCo Chairman Sam Swire, noting that Swire Bulk's parent business is the oldest operational business in the Swire group.

He adds: "We have invested many hundreds of millions of US dollars into new ships in this decade, and the company itself has grown dramatically. There have been challenges along the way, but we are confident that we have timed our entry into the market well and that we will make decent returns over the length of the current cycle. This will be a matter of years, not months, but as a ship owner with the ability to take a long-term view, we are well positioned to succeed in this sector."

Seas of opportunity

(Left to right) CNCo’s Managing Director, James Woodrow and Swire Bulk’s General Manager, Rob Aarvold.
(Left to right) CNCo’s Managing Director, James Woodrow and Swire Bulk's General Manager, Rob Aarvold.

That view is echoed by CNCo's Managing Director, James Woodrow. He readily acknowledges that there will always be challenges in a sector where commodities and the management of assets (in this case, ships) are paramount. However, he believes dry bulk's exposure to wider economic variables favours operators who take a long-term view and are uncompromising on quality and sustainability. "We have grown Swire Bulk to where it's at today in a relatively short space of time, but we've been very careful to make sure the fundamentals of our business are strong," he says.

For his part, Swire Bulk's General Manager, Rob Aarvold, insists that the singular dynamics of dry bulk shipping make it more exciting – and more freighted with opportunity – than many outsiders imagine. "We have seen probably the worst sequence of events imaginable this year, but this volatility actually creates the space to add value and become more competitive. Dry bulk is a trading business that requires a trading mindset and it's a sector with fantastic opportunities to build meaningful long-term partnerships with customers."

Balancing act

Established in 2012, Swire Bulk now accounts for a far greater proportion of CNCo's revenues than the company's traditional mainstay, Swire Shipping, its liner shipping division, which focuses on niche markets in the South Pacific. Swire Bulk has emerged as a top-five geared operator in the dry bulk segment and expects to post turnover of US$750 million this year and US$1 billion in 2020. Earlier this year, it acquired the bulk shipping business of Germany's Hamburg Süd, including a fleet of 45 chartered vessels, from Maersk.

"Dry bulk is a global business and one that's very scalable," says James Woodrow, when asked what motivated the initial shift into dry bulk. "In 2012, we decided it was time to diversify, and we determined that the handy-size bulk segment – that is, carriers that can take up to 40,000 deadweight tonnes ("DWT") – was one we could be successful in. These vessels are very adaptable to carrying different types of raw materials: agricultural products like grains and fertilisers, construction materials like cement, logs and steel, and minerals like salt and sand."

He adds: "CNCo had already had success with building ships in China, so Swire Bulk's first piece of business was to place orders with Chinese shipbuilders for what would eventually add up to 24 new-build B.Delta ships. Similarly, we decided to focus on markets that we already knew well through the Swire Shipping footprint, so the greater part of our early business was focused on Australia, New Zealand and China – particularly logs from New Zealand into China."

One of the B-Delta handy-size logger bulk carriers that was built at Chengxi Shipyard in China.
One of the B.Delta handy-size logger bulk carriers that was built at Chengxi Shipyard in China.

At the time, Aarvold – who began his career at Swire Shipping in 2002, left the Swire group to gain experience in the dry bulk sector from 2008, then returned to the fold to become General Manager of Swire Bulk in 2017 – was able to observe CNCo's move from outside.

"Going into the log market was shrewd, because it allowed CNCo to use its network and experience of dealing with Chinese shipbuilders to go out and find a market-leading design for its loggers," he says. "That gave Swire Bulk a running start. Establishing that China presence was also key, because today China accounts for about 65% of global bulk volumes. In almost any commodity you can think of, China is either a producer or a major consumer."

Since those early forays, Swire Bulk has, accordingly, increased its exposure to different commodity classes, and also its fleet and its geographic reach. What started as an APAC-centred business now has a global footprint, says Aarvold, explaining that success on the minor bulk chessboard demands strategic balancing between the number of ships you have and the number of commodities you are focused on, between owned and leased vessels, and between "front-haul" and "backhaul" cargos.

"We've seen growth in commodities like cement, steel and fertiliser," he says. "Typically, these back-haul trades will be from the Far East into places such as Australia, New Zealand, Hawaii, the US west coast, the US gulf or east-coast South America. These trade flows position the fleet more efficiently than if you were just to ballast it empty. The ships will then pick up higher-paying front-haul cargos to take back to Asia – including logs, scrap, or grain crops."

Critical mass

Having commenced operations in 2012 with offices in Singapore, Melbourne and London, Swire Bulk had already expanded to Miami, Vancouver and Shanghai before the Hamburg Süd deal, which extended the company's presence to Hamburg itself, and to Rio de Janeiro. Finalised in April this year, it also took the combined Swire Bulk fleet to 132 ships – of which 28 are owned, with a further 10 new vessels on order from Japanese shipyards.

"It put us on the map and changed the way the market views CNCo almost overnight," is Aarvold's assessment of the Hamburg Süd acquisition. "As a prominent shipping brand, primarily in the containerised business, they've been around since 1871 – one year longer than us. It's also a family business like Swire and they have always taken a long-term approach to the industry: they have a great reputation in the market for safety and for the commercial relationships they've built up. So we didn't do a deal for the sake of it."

For his part, Woodrow stresses the value to Swire Bulk of incorporating Hamburg Süd's fleet of chartered ships, most of which are in the larger 58-64,000 DWT supra-max class. "It gives us critical mass in terms of our fleet profile and means we can compete across more asset classes," he says. "These ships are also very much aligned with where we want to be trading as a high-end operator: they're modern, fuel-efficient, Japanese-built ships."

Once Swire Bulk's own new-build ships have been delivered, its vessels will be on average four years old – and Woodrow believes having the youngest, most fuel-efficient fleet in the dry bulk sector equates to a significant edge as the company positions itself to get ahead of the market on a wave of change in the wider industry.

One seismic shift looms large: from 1st January 2020, the global shipping industry will be mandated to use fuel with less than 0.5% sulphur – down from the 3.5% sulphur content it has consumed up until now. "The change will add at least US$15 billion to the global freight bill," Woodrow explains. "But we're confident we'll be able to manage the transition, because it will put a premium on efficiency, particularly fuel-efficiency. With the fleet we have, this will improve our competitive position."

Other ways in which CNCo hopes to differentiate its offering to customers include evolving vertically-integrated solutions that make it more of a freight partner than a freight provider. "If we can work with our wider skillset under the CNCo umbrella, and look at trans-loading opportunities, the provision of tugs and barges, or new innovations to reduce inefficiencies in the logistics chain, for example, we can offer a more complete package," says Aarvold.

He is also excited by the possibilities presented by the rapidly-maturing renewable energy industry. "Where minor bulk is concerned, bio-mass – or wood pellets – is the fastest-growing commodity we'll see over the next five years. I really believe we can leverage our reputation as a responsible operator to be at the forefront of that new market."

Similar opportunities lie in wait, he says, for operators who can demonstrate proficiency in shipping wind turbines. "We're looking closely at what we can learn from Swire Blue Ocean, which operates two Windfarm Installation Vessels out of Copenhagen, to see how we can be an accredited carrier for the sector."

Swire Bulk’s global trading footprint.
Swire Bulk’s global trading footprint.

A never-ending journey

The company's drive for fuel-efficiency and eagerness to partner with renewables clients speak of a desire to embrace new challenges, but they are also indicative of a deep commitment to sustainability across the board. "As an industry, we have to get emissions down by 50% by 2050," says Woodrow. "Today, we're a lot more eco-friendly than the standard vessel on the water, but we will continue adopting changes that give us emissions benefits. We have to be on top of this."

He cites CNCo's close supervision of the construction of its new ships and also of the bow-to-stern recycling of ships that reach the end of their lives, as further evidence of the company's "cradle to grave" approach to sustainability, adding that the company supports numerous environmental, conservation and grass-roots social projects in communities where it operates.

Two other priorities, meanwhile, round out the picture of CNCo's vision and values: diversity and safety.

"We have 25 different nationalities within the business, but the facts are that shipping has traditionally been very male-dominated and CNCo is no exception," says Woodrow. "We want to have a more inclusive workforce and we've started a scheme in partnership with the Australian government and our sister company in Papua New Guinea, Steamships, to bring through more female seafarers. It's an industry-wide problem and one we're really just starting out on addressing, but we're determined to be successful and attract a more diverse group of people to the business."

On safety, CNCo has doubled down on putting "zero harm" at the heart of everything it does in the wake of three on-the-job fatalities in 2015. Says Woodrow: "Fundamentally, safety has to come first. Tragic incidents focus the mind on the whole culture of an organisation. We want to make sure that whenever people see the Swire flag they think ‘safety'. Safety at sea and in ports is a never-ending journey, but I believe we have made significant progress."

And what other markers should CNCo have in the market? "I believe our customers recognise the quality of what we do. With our legacy, our history, the operating procedures we have and the balance sheet of our business, we're seen as a reliable, trusted counter-party – and one that will be around for generations to come."
Swire News September 2019 issue
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