Wärtsilä: COVID Still Impacting Investment Decisions

Wärtsilä said near-term demand in the marine and energy markets should improve from current levels, but COVID-19 makes any projections tenuous.

“The COVID-19 pandemic continued to limit the appetite for investments in both the marine and energy markets in the third quarter, resulting in depressed vessel contracting and the postponement of decisions on new power plant capacity,” said Jaakko Eskola, during the company’s third-quarter earnings call. “Furthermore, despite some easing of mobility restrictions, low vessel utilization, power plant site access constraints, and customers’ focus on conserving cash led to soft demand for services.”

Wärtsilä expects net sales for 2020 to decline by approximately 10% (€5170 million in 2019). Profitability is expected to continue to be burdened by the effects of COVID-19 and, while service demand is anticipated to improve, the seasonal pick-up is unlikely to be as strong as in previous years, the company said.

Marine markets

The impact of COVID-19 has significantly disrupted the shipping and shipbuilding markets so far this year, the company said. Shipyard delivery volumes have been globally affected by travel restrictions, yard closures, localised lockdowns, and supply chain disruptions. The pandemic has also severely dampened the appetite for newbuild investments. As a result, only 505 vessels were contracted during the period (655 over the same period in 2019, excluding late contracting), with ordering declining across all major vessel segments.

Despite some easing of mobility restrictions, activity in the service market remained soft, as the decline in fleet utilization has reduced demand for spare parts and maintenance activities across all segments. Cruise operations continue to be heavily affected by ‘no-sail orders’, along with the COVID-19 infection rate, which remains high in the main cruise passenger markets. While some cruise lines have begun carefully controlled cruising in Europe, the vast majority of the cruise fleet remains idled. Ferry services have gradually resumed following lockdowns, but the number of port calls is still clearly lower than during the previous year. Low oil prices continue to put pressure on the offshore industry, where utilization of the drilling rig and offshore support vessel fleets has declined to levels comparable to the bottom of the post-2014 market cycle.

However, the expected increase in offshore wind projects will generate demand for specialized vessels, resulting in opportunities in terms of both newbuilds and retrofits of the existing oil and gas fleet. In the LNG shipping sector, project sanctioning remains weak. More positive trends started to materialize during the third quarter, with US exports recently picking up from the second quarter lows and Asian demand improving. After a deep contraction in the first half of the year, the containership sector saw a recovery in the third quarter, with volumes exceeding expectations and idle fleet capacity easing from the peaks of May. Average bulker earnings have improved since May, on the back of record iron ore imports into China and soybean exports from Brazil. Tanker market conditions weakened after record-high earnings in the second quarter, with seaborne oil trade remaining low amidst ongoing OPEC+ output cuts, whilst tanker fleet availability has increased.

The HSFO/LSFO price differential has narrowed significantly since January as a result of both the sharp decline in oil prices and improved LSFO availability. This has negatively impacted the pace of scrubber retrofits and installations on newbuilds. Although the average price spread slightly increased during the third quarter, the market for scrubbers is still characterized by a high degree of uncertainty due to the COVID-19 pandemic and the subsequent turmoil in the global oil markets.

With the European Parliament approving a proposal to include shipping in its emissions trading scheme (ETS), the pressure to decarbonize is growing, with an increased uptake of alternative fuels, the company said. While LNG remains the most widely adopted alternative fuel, with 22% of tonnage contracted since 2019 set to be equipped with dual-fuel engines, R&D activities and investments are also focusing on zero-carbon fuels, such as ammonia and hydrogen, as well as on energy saving technologies. While the pandemic has led to a significant contraction in trade volumes, it has also speeded up the digital transformation through new technologies and digital applications being adopted as a matter of necessity. The use of cloud-based remote solutions has accelerated in response to restrictions in physical travel. Ship-to-port communications, as well as document and data exchange, are increasingly being handled electronically rather than via personal interaction, both on ships and in port. Furthermore, fleet optimization technologies are increasingly being accepted as central to the global requirement for reducing operating costs and complying with environmental regulations.

Power markets

The COVID-19 pandemic and the resulting slowdown of economic activity continued to negatively impact the global liquid and gas-fuelled power plant markets in the third quarter of 2020.

While the market situation has stabilized somewhat and power demand has returned to near-normal levels, the prevailing uncertainty regarding the duration, development, and economic impacts of the pandemic continues to cause customers to postpone investments in new power plant capacity. Furthermore, site access constraints are affecting project deliveries and field service activities, despite certain countries partially easing mobility restrictions. The energy transition is expected to slow down temporarily as a result of delays in project deliveries and investment decisions, cheaper fossil fuels, as well as the continued focus on containing the virus spread and mitigating its business impacts. Nevertheless, activity in the energy storage markets has improved, driven by the increasing need for short-term flexible capacity in power systems with a higher share of renewables. The allocation of financial stimulus packages by governments and monetary institutions to the energy sector will further support investments in green energy, although funding execution details are still pending. Wärtsilä’s market share in the up to 500 MW market segment increased slightly to 9% (8), while global orders for natural gas and liquid power plants decreased by 10% to 16.0 GW during the twelve-month period ending in June 2020 (17.8 GW at the end of March). Global orders include gas turbine and Wärtsilä orders with prime movers over 5 MW in size. The data is gathered from the McCoy Power Report.