Articles in Category: Logistics

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

Haulage Industry Challenged

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According to Fleet Owner, a weekly magazine and online newsletter written for the commercial trucking market, fleet utilization rates have not been as low as they are today since the early 1970’s in the grip of the post- OPEC oil  crisis induced recession. In a recent article the magazine advised first and second quarter earnings will show a rapidly deteriorating position even from the fourth quarter of 2008 when operators at least had the benefit of a sudden drop in diesel costs. The paper warned that small to medium size operators will be particularly badly hit. Noel Parry a consultant with industry experts FTR said, The gap between low- and high-risk fleets is huge. In downturns, large fleets tend to do better than small fleets because they have cash reserves, and most large fleets entered this recession with a lot in reserve. The result by 2010 will be fewer and probably larger haulage companies left in the market place.

If the assessment is correct, expect bankruptcies among small to medium truckers to pick up as the first half of 2009 develops. Not wanting to hasten the demise of any smaller operators, it goes without saying buyers should ensure their cargoes are being moved on hauliers who are financially stable and not in danger of going broke. If cargoes are stranded on trucks or in transit warehouses while under the control of distressed hauliers, buyers could find they do not receive deliveries on time and even have problems reclaiming their material while rights of ownership  are settled. When buyers are working extra hard to minimize inventory the last thing they need is a missing truck load of material!

–Stuart Burns

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