tag:blogger.com,1999:blog-37982102607706233722024-03-13T21:59:41.240-07:00Interjas Logistics BlogInterjas Logistics is incepted to offer valuable services to Industry considering commitments to their customers. Interjas Logistics Official BlogInterjas Logistics Bloghttp://www.blogger.com/profile/14141088491203944522noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-3798210260770623372.post-79915510769575570642016-03-11T03:55:00.000-08:002016-03-11T03:55:54.340-08:00As shipping freight rates fall; what does the future hold?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">What is the
similarity between oil prices and shipping freight rates? Of course, the first
similarity is that the prices of oil and shipping freight rates have been
consistently falling for the last two years. Both oil prices and shipping
freight have another similarity. Both have been hit by a global economic
slowdown which has resulted in contraction in demand. But the most important
similarity between oil prices and shipping freight rates has been the build-up
of excess supply. Like oil companies invested heavily in shale capacity when
oil prices were at above $100/bbl, similarly shipping companies also built up
tremendous capacities during the last 3 years when the CCFI Freight Index was
quoting in the range of 1150-1200. Today the index is down to 735 and, with
more capacity coming up by the year 2019 it is doubtful how much the freight
rates can increase from here. <o:p></o:p></span></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">Consider this
simple example. Today it costs less than $300 to move a 40-foot container from
Shenzhen in China to Rotterdam in the Netherlands. This is not even sufficient
to cover the cost of fuel and handling. Even if we do not consider the
exorbitant Suez Canal fees, the entire trip is unviable to begin with. But
cargo is still moving at these cheap rates, before ships cannot afford to idle.
Remember, both oil extractors and shipping companies have taken on tremendous
debt to fund this expansion and hence they will have to continue to supply,
irrespective of low prices.<o:p></o:p></span></div>
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<b><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">Falling Freight Index...<o:p></o:p></span></b></div>
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<a href="https://3.bp.blogspot.com/-L-QY7Pvg014/VuKwmxoHAkI/AAAAAAAAABg/S0ehazaXB-02qNdAjzWNgwlNoS5oKzs8g/s1600/China-Containerized-Freight-Index-InterJAS.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="252" src="https://3.bp.blogspot.com/-L-QY7Pvg014/VuKwmxoHAkI/AAAAAAAAABg/S0ehazaXB-02qNdAjzWNgwlNoS5oKzs8g/s640/China-Containerized-Freight-Index-InterJAS.jpg" width="640" /></a><br /></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">As the above
chart suggests, Shipping Freight Index has fallen from a high of 1150 in 2014
to as low as 735 in March 2016. For a very long time, the large shipping
companies could manage to maintain the price at profitable levels due to their
control over the shipping lines. But then, enormous shipping capacity has been
built up in the last 3 years. Shipping capacity grew from 15.4 million TEU in
2011 to 19.6 million TEU in 2015. Hence, the luxury of managing price is not
there with shipping companies any longer. The immediate mandate is to run all
ships at full capacity and focus on market share instead of pricing.<o:p></o:p></span></div>
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<b><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">So, is it all about a global slowdown in trade?<o:p></o:p></span></b></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">There has
been a slowdown in trade worldwide over the last one year, including in China.
But weak trade does not tell the whole story. For example, China’s annual
imports are at $1.95 trillion and annual exports at $2.4 trillion. At a total
trade value of $4.35 trillion, China is still contributing a lot more to global
trade than it was doing 3 years ago. Ironically, the CCFI freight index was at
a high of 1200 before 3 years. Therefore, the fall in volumes does not entirely
explain the sharp fall in shipping freight rates.<o:p></o:p></span></div>
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<b><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">It is actually about overcapacity in shipping:<o:p></o:p></span></b></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">We have
already seen how Global Container Ship Fleet has increased its capacity by 27%
in the last 4 years. The demand has simply refused to keep pace with this
massive overcapacity that was initiated back when the CCFI Freight Index was at
a high of 1150-1200 range. In fact, global consultancy firms like the Boston
Consulting Group (BCG) expect another 30% increase in container ship fleet
capacity by 2019 before the overall supply will plateau out. <o:p></o:p></span></div>
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<b><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">The road ahead for container ships:<o:p></o:p></span></b></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">The scenario
described above is hardly a sustainable scenario. But the bottom-line is that
this situation is unlikely to change for the next couple of years till the time
supply does not plateau and demand does not pick up. Both are unlikely to
happen immediately. Broadly, there are a few key strategies that global
shipping freight companies are adopting to overcome this supply glut:<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="line-height: 24.0pt; margin-bottom: 24.0pt; margin-left: .25in; margin-right: 0in; margin-top: 0in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span lang="EN-IN" style="font-family: Symbol; font-size: 13.5pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt; font-stretch: normal; line-height: normal;">
</span></span><!--[endif]--><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">The fist strategy has been to keep their cost of
operation at optimal levels to stem losses for the next few quarters. One
example is of container ships moving oil via the Cape of Good Hope instead of
the Suez Canal. Due to cheap crude oil prices, shipping companies can afford to
do the same. This also enables them to save on the Suez Canal fees and also
make profit out of trading in oil in the midst of volatile prices. <o:p></o:p></span></div>
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<!--[if !supportLists]--><span lang="EN-IN" style="font-family: Symbol; font-size: 13.5pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt; font-stretch: normal; line-height: normal;">
</span></span><!--[endif]--><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">Some shipping companies are trying to kill
excess capacity to ensure that this supply disruption will impact prices
positively. For example, Maersk A/S, the world’s largest shipping company has
recently cancelled orders for 6 Triple-E class ships. Such cancellations may
become more common as shipping fleets will try to move towards supply
disruption. <o:p></o:p></span></div>
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</span></span><!--[endif]--><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">Shipping of freight is a highly commoditized
business and the scope for differentiation is quite limited. Hence some of the
larger shipping fleets are trying to diversify towards other higher margin
businesses like port terminal operations, marine maintenance services and
supply chain management.<o:p></o:p></span></div>
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<!--[if !supportLists]--><span lang="EN-IN" style="font-family: Symbol; font-size: 13.5pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt; font-stretch: normal; line-height: normal;">
</span></span><!--[endif]--><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">There is likely to be a major shakeout in the
shipping freight industry. Many large fleets have invested hugely in creating
economies of scale. Smaller and medium sized companies in this space may now
become acquisition targets as supply gets automatically streamlined and
rationalized. Normally, such tough times get to see synergistic alliances where
competitors tend to complement each other. For example, two of the largest
shipping companies, Maersk A/S and MSC have already formed alliances to share
routes and costs. Similarly, four of the largest Chinese have also formed a
national alliance to create virtual scale in the shipping industry to tide over
this situation.<o:p></o:p></span></div>
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<b><span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">Future lies in Uberization of Shipping Fleet:<o:p></o:p></span></b></div>
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<span lang="EN-IN" style="font-family: "Georgia","serif"; font-size: 13.5pt;">We believe
that the future of the Shipping freight industry lies in a kind of Uberization.
Today the Shipping industry is vastly demarcated between the large fleet
carriers and the small & medium sized carriers. The small and medium
carriers are already finding it hard to survive in this tight freight market.
With the larger names forming formal and informal alliances, the effort will be
to squeeze out the small and mid-sized companies from the shipping freight
business. The major drawback in the global shipping freight industry is that
there is no scientific methodology for aggregating demand and supply and
matching them. Once this is done the entire shipping freight business can
become a lot more democratic and competitive. That is probably the best answer
to the woes of the shipping freight industry today. <o:p></o:p></span></div>
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Interjas Logistics Bloghttp://www.blogger.com/profile/14141088491203944522noreply@blogger.com2tag:blogger.com,1999:blog-3798210260770623372.post-68361846013807381792016-03-02T03:59:00.000-08:002016-03-11T03:45:11.410-08:00FDI in Logistics industry and the major challenges ahead...<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;">A clear cut FDI plan for the logistics sector in India becomes
critical considering that the logistics sector in India is currently in the
growth stage. China and the US where logistics cost as a percentage of cost of
manufacture is much lower, Indian companies still spend nearly 14% of their
cost on logistics. This is substantially higher than the 6-7 % that most
developed countries spend on logistics due the fact that the logistics
infrastructure is much more matured and fine-tuned in these countries. That is
where FDI in the logistics sector along with the strategic, procedural and
technical know how can be a great value addition.</span><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span><br />
<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;"><br /></span></div>
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<strong style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; box-sizing: border-box; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; outline: 0px;"><span style="border: none 1.0pt; color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt; padding: 0in;">FDI in Logistics sector</span></strong><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span></div>
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<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;">Currently, the <a href="https://en.wikipedia.org/wiki/Foreign_direct_investment_in_India" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; box-sizing: border-box; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; outline: none;" target="_blank"><span style="border: none 1.0pt; color: #8c68cb; padding: 0in;">foreign direct investment (FDI)
in India</span></a> is allowed thorough 2 routes viz. Automatic Route and
Government Approval Route. Most of the key logistics related services are
covered under the 100% automatic route for FDI. Hence, there is no specific
approval required from the Foreign Investment Promotion Board (FIPB) or the
Cabinet Committee on Economic Affairs (CCEA). Current FDI regulations permit
100% FDI via the automatic route in areas like Transport services, Transport
incidental services, Rental and leasing of transport vehicles, rental of
transport equipment, storage services and warehousing services. While FDI has
not yet been permitted in the transport operator service, there is still
sufficient scope for the FDI to add value in the support services space. Some
of the mega logistics management companies in the world like NYK Line, Hitachi
Transport Systems, Sembcorp Marine, Kerry Logistics, TNT and FEDEX are already
present in India and have already acquired stakes in Indian companies through
the M&A route.</span><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span><br />
<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;"><br /></span></div>
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<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;">It is interesting to note that nearly 35 out of the top-50
global logistics companies already have a presence in India. Their presence
could either be through the M&A route, subsidiary route, JV route or
liaison route. The tax incentives are also quite attractive. For example for
the cold chain and warehousing facility, there is a 100% deduction on capital
expenditure incurred during the year (other than acquisition of land, goodwill
and financial instruments). The question then is why is FDI not coming into India
in a big way? The answer has partially to do with policies and partly with the
ease of doing business.</span><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span><br />
<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;"><br /></span></div>
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<strong style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; box-sizing: border-box; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; outline: 0px;"><span style="border: none 1.0pt; color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt; padding: 0in;">Challenges to FDI in Logistics
sector in India...</span></strong><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span></div>
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<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;"><br />There are some key challenges to the inflow of FDI into the
logistics sector in India and here are a few that the sector faces to attract
FDI:</span><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span></div>
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<ul style="text-align: left;">
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">India still ranks 133rd in terms of
ease of doing business. China is ranked 89th. This ranking has improved
marginally after the efforts of the present government but there is still a
long way to traverse.</span></li>
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">It is not just about ease of doing
business. Even in terms of starting a business, enforcing contracts and winding
up a business, India ranks way behind other emerging market economies like
China, Russia and Brazil.</span></li>
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">Although logistics FDI is defined as
under Automatic Route, there are Ministry level clearances that need to be
obtained. Additionally, there are environmental clearances which can be quite a
cumbersome task.</span></li>
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">There is also the risk of
rehabilitation and relocation clearances. If your project displaces the local
population or impacts their livelihood, then the businesses need to focus on
how to relocate and offer alternative livelihood to those displaced. More often
than not, such activities acquire political and activist overtones and global
business houses may want to avoid getting embroiled in such matters.</span></li>
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">Adjacent infrastructure development is
a key risk for many such projects. For example there may be a projection of
revenues based on traffic and demand which will be based on certain
assumptions. If the adjacent infrastructure, on which you have no control, does
not keep pace, then such projections can go awry negatively impacting the
financial viability of the project.</span></li>
<li><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span class="apple-converted-space" style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;"> </span><span style="font-family: georgia, serif; font-size: 13.5pt; line-height: 24pt; text-indent: -0.25in;">Time and cost over-run is another risk
that FDI in India faces. In India activities like land acquisition, rising cost
of material, rising cost of equipment can result in time and cost over-runs.
Since many of these activities have regulatory implications, the investor is
not in control of many of these things.</span></li>
</ul>
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<span style="color: #232629; font-family: "georgia" , "serif"; font-size: 13.5pt;">To cut a long story short, the challenges for FDI in the
logistics sector in India are many. But then so is the opportunity. Logistics
is already a $400 billion industry and is likely to be a $1 trillion industry
in the next 5 years. This is the one area that can promise humongous growth for
foreign investors. Secondly, logistics is the missing piece in catapulting
India’s GDP growth from 7.5% to 10%. We have seen in China how infrastructure
and logistics can combine to give a major thrust to growth. India is in a
similar sweet spot. Thirdly, there is a fairly FDI-friendly regime as far as
the logistics sector in India. There are challenges on the ease of doing
business but the current government is moving on a war footing to make India
more competitive and friendly to foreign investors. It is more a question of
when; rather than whether!</span><span style="font-family: "georgia" , serif; font-size: 13.5pt;"><o:p></o:p></span></div>
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