Articles in Category: Logistics

As a microcosm of the European shipping scene, Southampton takes some beating. The port is owned by Dubai World Ports and serves the twin markets of Cruise Liners (booming) and Container shipping (disaster). Unfortunately Southampton typically has four container ships for every cruise ship moored up at its quays and it is this highly visible sight of the city’s reason for existence that is most in trouble. Unlike other industries that appear to have stabilized and are now returning to growth, the container shipping industry is still badly depressed in Europe. Many of the world’s largest shipping lines serve the port including, Zim Lines, Evergreen and Hapag Lloyd. The world’s largest, Maersk, did run a service until they pulled out earlier this year. Dubai Ports doesn’t post figures for individual operating companies but Southampton’s great rival Hamburg, also serving the North Sea Asia routes and with the same lines providing regular services has seen trade slump 25% with tonnage dropping 23.7% in the first half and (TEU) container movements 28.7%. Many are expecting a major line to go down; they are cumulatively expected to lose about $12bn this year after making only $3bn profit last year.

Meanwhile container rates have collapsed from $1350/20′ box to $380 today. Chang Yung Fa, the boss of the fourth largest container fleet, Evergreen, estimates around 15% of the container vessels are idle or soon to be laid up and talks of a gruesome over capacity in the industry according to a business magazine in the city.

Meanwhile US ports are reporting a 17.7% drop in container movements from last year according to Logistics Management, but other reports suggest the market is beginning to pick up a little with projections for the balance of the year making modest gains.

–Stuart Burns

For the past 18 years, the masters study of the logistics market has identified trends in the field of logistics by benchmarking various performance criteria via surveys of logistics users. The results of this year’s survey is printed in stages by Logisticsmg.com and analyzes data collected by Georgia Southern University and the University of Tennessee in partnership with the IT services and business consultancy Capgemini and JDA Software. Some 830 logistics, transportation and supply chain professionals participated. The respondents accounted for an estimated $28.4 billion in transportation expenditure and nearly $14.5 billion in international transportation across the range from very small companies to very large and across some 14 industry sectors.

The survey is called Masters of Logistics and uses an interesting model to make year over year comparisons of the industry. They split logistics companies up into three groups, the Masters with sales over $3b, the Contenders with sales of $500m to 3b and the Challengers with sales of less than $500m. In recent years, the Masters have been investing heavily and engaged in consolidation with the aim of providing seamless end to end logistics services and high levels of service. The survey had shown gradual improvements in on time deliveries between 2004 and 2008 but the results were mixed for 2009 with railroads and full truck loads showing a small gain but national and regional less than full truck loads showing a decline. Volatility in volumes is one of the biggest problems for logistics providers and the roller-coaster ride of the last 12 months seems to have hit the major Masters as much as the smaller Challengers. The massive investments the Masters have put into systems has helped them gain efficiencies that have fed through to the bottom line, ultimately helping them survive in spite of high overheads but it has not yet translated into improved service levels. Read more

Though President Obama went to Mexico this week to discuss the swine flu epidemic with Mexican President Felipe Calderon, the two leaders discussed the trade dispute over the US Congress’ ban of a trucking program that would have allowed Mexican origin trucks access to US roads. According to NAFTA, Mexican trucks should be able to operate in the United States, as US trucks and Canadian trucks already do in Mexico.

But Congress failed to renew a pilot program earlier this year allowing Mexican trucks into the US. President Calderon told Obama yesterday that the dispute has harmed job creation efforts in Mexico as well as increase consumer costs and harm trade.   The US Teamsters Union made the claim that Mexican trucks were not as safe (American and Canadian trucks are allowed to cross the border into Mexico) but a US Transport study confirmed the Mexican trucks actually had a better safety record than their US counterparts as we previously reported.

The ban on Mexican trucks into the US forced Mexico to take retaliatory action by imposing tariffs on a very broad range of goods impacting companies as diverse as Proctor & Gamble and Caterpillar. The ban is in effect another form of protectionism. Mexico responded tit-for-tat by imposing the tariffs.

80% of Mexican goods are exported to the US. Mexico is the US’s third largest trading partner after Canada and China. Besides value-added parts such as fabrications, Mexico is a key source of a range of copper products, steel, stainless steel and precious metals. We’ll keep readers posted on any developments.

–Lisa Reisman

A review of the current freight market in Logistics Management paints a pretty dire picture of the state of our shipping and trucking industry. The good news for anyone with goods to move is rates are way down, likely to stay down and shippers are aggressively seeking new or incremental business. The caveat is some shippers will not be there by year end.

Traditionally the Hong Kong ” Los Angeles run is the benchmark for Asia Pacific shipments and as an example, 40ft standard container rates are down from $1800 last year to less than $1000 this year. Even though lines are playing with surcharges, any increases can’t begin to make up for the loss in the basic rate. Lines are withdrawing vessels to try to match supply to demand but capacity utilization is still way down. This, combined with the mothballed vessels is jeopardizing the viability of some lines.

If anything the situation is worse on the roads. Trucking can broadly be broken down into less than truck loads (LTL) and full truck load (FTL) movements. LTL is showing over capacity but one carrier, YTL which represents 25% of the national capacity, is in crisis and has asked the government for support. If this is not forthcoming and the company fails, the situation could change rapidly into deficit and rates would rise.

A spokesman for AlixPartners, a turnaround firm, is quoted in the article as estimating that 150,000 units are standing idle. To put that in perspective, that is ten times the fleet size of Swift Transportation the nation’s largest truckload provider. Truckers are keeping a close eye on diesel prices. The low prices this year are all that has kept some of them afloat. Although diesel prices have risen a little this year they are still, on average, below the level at the beginning of January 2007. A rise in refined diesel product prices could be the end for some firms.

As the most expensive form of transportation, air freight is suffering worse than any. But the major carriers, UPS, Fedex, etc moved swiftly to park planes and cut costs. Even the newly deregulated USPS is flexing its muscles looking to take business from the established players. Ground parcel deliveries are the only sector showing growth this year as shippers look to save costs at the expense of slower deliveries.

Lastly industry experts do not see the situation changing this year or early next, so what should be our takeaway? While this represents a welcome cost saving for shippers, it comes with risks. Some shipping companies and trucking firms will fail, and it won’t necessarily be the small ones. Take the time to keep tabs on how your shipping and trucking firms are managing financially. Keep a close look for early signs of service degradation and delays indicating possible financial problems. Renegotiate freight rates during the second half if you can fix them far enough forward but don’t drive your provider to the very last cent. They may not be around for you to collect it. A little give and take with a view to the long-term may yield a bonus in terms of relationship when the markets finally do return to some semblance of balance.

–Stuart Burns

Lower freight rates and lower metal costs, for both struggling exporters and consumers, have been about the only two developments that could be considered as a silver lining to the last 12 months of turmoil. But as with long term commodity prices, the industry’s reaction to the crisis will sow the seeds for a longer term problem.

Carl Steen, head of the shipping, oil services and international division at Nordea Bank Norge ASA is quoted in this article as saying he would not be surprised if more than 30% of the new ships on order were canceled over the next three years. Cancellations are currently running at 20%. That would affect commodity ships such as bulk ore, container and grain to a great extent and tankers to a limited extent, he said. The world fleet is set to increase by 42% this year as new orders come up for delivery but shipping companies who are unable to cancel imminent deliveries will have to finance new vessels by selling equity rather than taking on debt as vessel values have plummeted and banks are unwilling or unable to lend.

In some parts of the world, the problems of financing new vessels is even more acute such as India where 50% of the fleet is going to exceed acceptable age limits during the next three years yet lines can’t raise the cash to finance new orders according to the Hindu Business Line. As new ship orders are canceled, and lines fight to stay solvent by slashing costs, the current over capacity will be gradually reduced but as always happens in industries with such long lead-times and high capital costs to bring new capacity on stream, the inflection point comes and goes with a dreadful lag in it. The balance is never struck and may be two to three years from now a dearth of capacity will push up rates again as they did in 2006-7. Add rising shipping rates to growing supply side scarcity at mining companies and you can see how the seeds of the next cycle are being laid.

–Stuart Burns

According to Lloyds List, the marine industry news publication, container freight rates between Asia and Europe have fallen back to levels not seen since earlier this year and shipping lines are bleeding to death. Lines lifted rates in April in an attempt to achieve a level of solvency but they failed to hold and have since sunk back to about $350/teu (twenty foot equivalent unit ” a standard end opening 20ft container), just $50 above the rick bottom lows earlier this year. At a time when most lines combine the container rate and the bunker fuel charge this is especially difficult as fuel charges have risen. Unless lines manage to lift rates in the next few weeks ahead of what is usually the busiest time of the year for cargo moving from Asia to Europe they face many months of extremely depressed conditions that some will not be able to survive industry insiders are quoted as saying.

Shipping lines are looking to raise rates for the busy summer season. All the lines have posted intended rate increases of $300-400 per teu and CGM, an industry leader, is moving onto invoicing bunker charges separately. But whether the rate rises will stick remains to be seen. In an interview with MetalMiner, Damco a major UK freight forwarder and part of the A.P. Moeller-Maersk Group, admitted inbound volumes were down 30% and they had heard about 500 vessels are laid up because of the downturn.

The lack of container traffic is not just evident on the Asia-Europe route. Logistics Management in their June publication quoted industry sources as saying Asia-USA cargoes are down nearly 23% to under 1.5 million teu’s.

If lines cannot lift rates over the coming months they will probably not be able to raise them until after the 2010 Chinese New Year, by which time some carriers may be well and truly under water, metaphorically if not literally!

–Stuart Burns

No we are not talking Pirates of the Caribbean… and the perpetrators bear little resemblance to Johnny Depp. The high profile case of Captain Richard Phillips rescue by the US Navy last month is only the tip of the iceberg and though the issue fades from our TV screens, it becomes a growing threat to lives and shipping economics for services having to transit through the West Indian Ocean and the coastal waters off West Africa. Pirates based in Somalia and Nigeria extorted between $18-30m last year (figures are vague because ship-owners prefer not to embolden pirates by talk of ransoms paid). This year alone 80 ships have been seized and 16 vessels are still being held according to a report on moneycentral.msn.com

Somali pirates in the Gulf of Aden have taken most of the media interest so far but a growing threat is pirates off the west coast of Africa based in Nigeria.

Unfortunately the cost to shippers is out of all proportion to the ransoms paid. 1400 vessels sail through the waters off Somalia last month alone and insurance rates have risen from $500 to $20,000 and could reach $400 million annually. Logistics Management reports a surcharge is likely on Asia-Europe traffic transiting the area as ship-owners are faced with the choice of insuring and taking the risk of going through the Suez Canal or adding up to $1.5m in fuel and voyage time to transit the long way round the South African Cape of Good Hope. Routing a tanker from Saudi Arabia to the United States through the Cape of Good Hope, for example, would add 2,700 miles (4,345 kilometers) to the voyage and boost annual fuel costs by about $3.5 million, according to the U.S. Department of Transportation’s Maritime Administration. In addition, it said using that route would mean the ship could make only five round trips a year instead of six, cutting delivery capacity by 26 percent.

The International Union of Marine Insurance is worried this will become a business model copied elsewhere. West Africa already has a growing problem with pirates based out of Nigeria and the Straits of Malacca off Malaysia has experienced similar problems although not to the same extent as Somalia.

With so much downward pressure on sea freight rates the impact for consumers is likely to be low for now. But if capacity becomes scarcer as ships are laid up or demand gradually returns, expect owners to try to raise surcharges to compensate.

–Stuart Burns

In what may not be good news for shipping companies we can find some encouraging rumors for those consumers of metals that are keen to see lower costs. 2007 was a record year for new ship orders and though 2008 was down on 2007 it was still up on 2001-2005. With freight rates dramatically reduced from their highs of 2008, it is no surprise to find that shipping line utilization rates are also down and ship owners are canceling new vessel orders. Even so there will be an increase of 9% in the bulk carrying capacity of the world’s fleets in 2009 as already started vessels enter into service according to the Bank of Greece. Greek ship owners control about 15% of the world’s vessel by number, making them the world leaders. The Greek order book stands at 55% of the existing fleet and 16% of the global order book in spite of OECD predictions that global trade will shrink by 13.2% this year.

The shipbuilding industry is caught between shrinking trade volumes, falling rates and ship owners struggling to raise finance for vessels on order resulting in record order cancellations. Meanwhile at the Sea Asia 2009 conference, delegates made some interesting observations concerning China and ship construction. It is not in China’s interests to have high freight rates, and industry insiders believe China will maintain an oversupply of vessels to keep world shipping rates low. As many of these new ships are being built in Chinese shipyards, it is believed the government will complete the ships even if the orders are canceled. The expectation is an expensive and painful shipping bubble will now burst. For shipping the worst of the crisis is still to come.

Container traffic is also down across European, North American and Asian ports but in a graphic illustration of how mainland Europe’s state owned port authorities differ in approach to the UK’s private ownership structure, expansion plans developed over the last few years at Rotterdam, Hamburg, Bremerhaven and Le Havre are all going ahead adding more container handling capacity, while the UK’s terminals in SE England owned by Dubai Ports and HPH are postponing plans until the medium term prospects become clearer according to Cargo News.

On balance the increase in vessels and in handling facilities should keep shipping lines competitive and handling costs down for the next few years, helping to control one of the more significant variables in metals costs sourced overseas.

–Stuart Burns

An apparently encouraging article appeared in GlobalAutoIndustry this week reporting that US domestic die casters were seeing a rising trend of parts which had historically been made offshore being brought back to the US. The article credited the trend to three main reasons; concerns about part quality, customer-supplier proximity and overseas logistics. We would not take issue with any of these drivers of change we would suggest three other developments have probably been of greater influence.

First, as volumes have declined the economics of low cost country sourcing become less tenable. The low piece part price is partly a function of high production volumes for which the Chinese have long held a reputation for being well positioned. As volumes have fallen, particularly for automotive which is the main focus of the article, producers unit prices will rise. Further, as volumes fall, the unit freight costs rise as shippers accommodate lower volumes as part container loads or have to consolidate shipments in order to continue to secure competitive freight costs.

Second, there is a huge aversion to risk which has manifested itself in a number of ways. Suppliers to Tier 1 and Tier 2 companies do not want to be carrying the same levels of inventory in their supply chain for fear of client failures or bankruptcies, so it makes sense to buy in smaller volumes domestically and carry less inventory on their own books.

In addition companies are finding it is harder and more expensive to borrow, so financing an extended supply chain where goods may need to be paid under a Letter of Credit is less attractive than working on 60 days terms from a domestic supplier, even if you are paying a higher piece part price. The IMF has found trade finance costs have increased for both domestic buyers and developing country exporters. For domestic buyers the theme seems to be better to trade on lower profit than not to trade at all.

Depending on the Chinese producer, quality has been both proven and questionable for the last ten years. We have seen supporters and detractors in equal measure. We doubt quality has suddenly taken a turn for the worse just when Chinese suppliers are trying to hold onto every customer they can get, but if I were a domestic Tier 2 or 3 company in the US, I would probably sight quality as one of my reasons for bringing a part back home when opening negotiations with a domestic supplier ” it sounds much better than saying we can’t afford to finance an extended supply chain or we have worries about our client’s long term viability and don’t want to carry inventory for them.

–Stuart Burns

Logistics Industry Managing the Downturn

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The transportation market, like everything else,   is down at the moment. But how much down and for how long? Most of our clients keep tabs on truck costs but few of us find time to keep intimately up to date with developments day to day. Perhaps it would be useful to take a look at what is happening in today’s logistics market and where we think costs are likely to trend over this year.

Clearly haulage is directly impacted by business activity; as such it could be taken as one of a few general measures of business trends. It is interesting to see therefore how the following table illustrates the extent of the downturn and where the impact has been greatest.

After consistent years of growth since the early part of the decade averaging some 4%, the industry dropped back sharply over the last 6 months. Interestingly though these figures, courtesy of Logistics Mangement.com include the fuel costs which dropped dramatically in the second half. Consequently actual underlying rates have dropped very little. In addition, rates are still only a little below the benchmark figure twelve months ago although Q1 costs are expected to drop by a further 4.1%. The projection for 2009 is a 6.2% decline as reduced business activity continues to weigh on capacity.

–Stuart Burns

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