I have been associated with shipping for a long time. We experienced a downturn in 1980. However due to global economic meltdown, shipping has been hit severely in the last quarter of 2008, causing bankruptcy to ship owners, slowing down of new port projects and low load factor and losses to all major lines.
This recession in maritime is worst than ever encountered. Some generalists during the boom claimed to have made a turn around in 2000 of sick companies. However, when shipping was at its peak, no commercial expertise was required and some companies and banks got the vessel free within five years and ships were operated by management companies without any chief executive.
Now it is the testing time of shipping skill to keep the head out of the water, as recession may cause more casualties in 2009/10, but it opens the doors of opportunities and one can translate the opportunity by taking over business from competitors. Diversified business conglomerates have history of stemming such economic downturn cycles, as it is part of business.
The latest research by prominent maritime analysts forecast a nominal growth of 1.2% in container trade, while expecting demand to grow in 2011. The excess supply is likely to stay until 2011, coupled with low load factors, vessels lay off, demolition and major lines are trying hard to break even, whilst major ports of the world and terminal operators are assisting by reducing tariff to keep the bleeding ship-owners in business. Four hundred and twenty fine container vessels had been laid up and now ship-owners are short of space to lay up in ports, thus requesting Sri Lanka to allow lay up in Trincomalee Bay which may accommodate 50 vessels. The ship breaking industry at Gadani, has got new lease of life due to old tonnage being demolished.
At present, only Gadani has 80 vessels, four contributed by PNSC and one tanker sold to Bangladesh demolishers by PNSC. Current gearing is low for operators but prolonged losses may erode equity and test debt servicing capability of major players. The investment researchers are painting a bleak picture of South Korean Lines due to depreciation of wong and Taiwanese due to high gearing, but Maersk line and Japanese may overcome the losses due to diversified business, mix.
Forwarders will be equally affected due to price conscious exporters and importers, but large forwarders are equipped to overcome the storm due to diversified networks and wide range of services.
While reading drewry and UBS report, economists expect a more prolonged global recession and container shipping has deteriorated worst in 2008, than expected. The operators will continue to suffer deeper losses till 2010. Forwarding in basically 1-2% margin business if regulated and ethics are not compromised, as in Pakistan, Karachi Chamber is crying for long to regulate the forwarders, but to no avail.
The government officials are blank on the subject and all recommendations of Karachi Chamber of Commerce remains frozen in files due to lack of competence of regulators and unawareness, causing misery to poor exporters and importers. Ethically premium margins are achieved by forwarders, who have strong global network and value added services.
The declining volumes on Asia-Europe and transpacific trades may last till 2011, as US trade has faded and west coast ports are facing 37% cut in volumes as dry bulk freight rates have plummeted and US dollar has strengthened. It is believed that ship-owners are operating at or below cash break even levels and laying up vessels to preserve cash and margins. Due to excessive supply growth, zero margins will be seen till 2010 and these trade accounts for 60-80% of revenue of most Asian container, shipping operators.
The expected trading losses may be 5% to 50% up to 2010. If this condition persists for the next 2/3 years, major operators will face serious funding problems.
The analysts have forecast that charter rates and vessel prices will continue to decline. The analysts have revised global container shipping model and have lowered demand forecasts to reflect a protracted global recession. The analysts have collected world-wide data on new deliveries and cancellations and concluded that supply/demand balance may be achieved by 2011.
According to Lloyds list, there is no possibility of direct link between China and Taiwan and about 742,000 TEU is transshipped through Hong Kong. It is interesting to note from the data that 60% to 80% revenue is generated by most listed operators by large vessels and only 7 large container vessels have been laid up when compared to 425 medium sized container ships. A modest impact may be seen in large container ships as most of them are up to 5 years of age.
The decline in freight rates in 2008 has surpassed industry expectations. The magnitude in 09 and speed of decline has led to a situation, where operators are unable to cover cash costs. Service rationalisation and cancellations, vessels lay ups and off hiring of chartered vessels is common in the industry.
We, in Pakistan, are 100% dependent on foreign lines for our containerised export and import cargo of 1.7 mill TEUS. If major players continue to be in distress, many more lines will stop calling our ports thus our ports may consider assisting lines to operate by cutting down their tariffs thus giving comfort to the lines. Similarly, the terminal operators must be regulated on the pattern of TAMP in neighbouring countries and the ministry may constitute a "tariff authority of port and terminals" to regulate tariff.
The body should be duly represented by Karachi Chamber of Commerce and Industry. Neither ports nor terminals may levy un-announced tariffs. It is also imperative to regulate our freight forwarders, as demanded by Karachi Chamber of Commerce and code of business ethics be introduced by regulators.
The concept of free market economy has failed and markets in greed do not correct themselves thus the need of regulator is established world-wide and we cannot be an exception. The lobbies in Pakistan are quite strong, but should be resisted to boost our exports. Unless we regulate, it is free for all and the trade continues to suffer. It is now high time to implement the assurances for relief to trade to overcome the trade deficit with growth of exports. The ministry may also assist the shipping industry, by offering ship-owners to lay up ships at Gwadar protected bay, as total 1000 ships are laid up and others are in the line. Philippines has translated crisis into opportunity by allowing ship-owners to lay up ships in Subic Bay and Davo protected anchorage and charging only 91/USD per day from owners. Why can't we do the same to generate revenue by translating the crisis into opportunity.
Monday, May 25, 2009
Sunday, May 17, 2009
The entrepreneur should not panic
Business was at its peak for the last one decade. However an economic downturn is unpredictable, but a reality which is part of the business cycle where the economy is in decline. This phase is said to mark the end of a period of growth in the business cycle.
Economic downturns are usually classified by decreased levels of consumer purchases (in particular of durable goods) and, secondly, reduced levels of production by industry and business. Our crisis is attributed more to instability rather than the impact of a global meltdown. Our GDP growth is expected to be 2.5, as PSDP has been slashed to half, whilst India and the Bangladesh economy is expected to grow at GDP of 6/7.
The economic downturn effects small entrepreneurs and their businesses who struggle to survive and keep on growing. However an economic downturn opens opportunities as well. A well-organised company can translate the opportunity by taking away business from the competitors. Resourceful business house may capture the opportunities, from an economic downturn, by innovative methods of doing business, which were never practiced during a period of growth.
The worst sufferers are cash strapped SMES. One must take the challenge of navigating his business through a financial meltdown by realigning his business with the current economic realities in Pakistan/globally.
The need is to refocus on your core clients/customers, reduce your static operative expenses, conserving cash, and manage more proactively, rather than reactively. I quote George Soros here "Stay away when the greed is on and be greedy when the fear is on."
TARGETS AND GOALS The immediate goal is how to survive the current economic impasse, turning to a more efficient and cost-effective performance. The second target is to expand the business during a financial meltdown. You should grow the customer base, improve efficiency, reduce costs, protect assets and lastly conserve cash. The entrepreneur should not panic as historically recessions do not last forever and focus on what one can control, disregarding media rhetoric.
The effective way is to communicate with all. The foremost is to renegotiate with all and develop a win-win approach in negotiations with all vendors, ensuring a favourable bottom line. The fact remains that during a melt down, one has to diligently monitor the cash flows. The idea is to know how to monitor, protect, control, and use the cash to make it work. Cash flow forecast be made monthly to ensure expenses do not exceed receivables.
A good entrepreneur must convert excess obsolete inventories into cash. The core issue is to reduce the amount of your inventory without loosing sales. One cannot discount ensuring timely collection of accounts receivables. The key to success is an efficient collection system that generates timely payments.
It is imperative to renegotiate with suppliers, lenders and landlords and to re-evaluate staffing requirements, shopping for better insurance rates, but don't cut your advertising cost to increase brand awareness and generating additional demand of products and services.
Business houses are well-advised to consult advisors who give professional advise on all faculties of business. No one can dispute that a good entrepreneur will slash across the board expenses by 10-15%. The most difficult challenge is to convince your banks to stay on your right side, as banks become tough and are out for recoveries. You must convince the banks to re-negotiate as it is in mutual interest.
Most of the entrepreneurs are confronted with high rates of interest; benchmarked to the world, creating a financial and liquidity crunch. As utilities have gone sky high, the labour, due to inflationary trends, demands a high salary, thus a businessman is caught between the devil and the deep sea. A businessman, also a human being, comprehends that redundancy will cause hardship to employees and will create social problems, thus the business house averts retrenching labour, groomed and skilled at the cost of the entrepreneurs.
The global melt down has not effected us much due to a strong prudential and regulatory regime. Banks can be convinced by presenting business and action plans. The key is to ensure that your lender will work with you, but frequent communication is critical to keep the banks soft on you and of course, paying on re-negotiated schedules. Moreover the Pakistan business community is more prone to cash than credit cards.
We are now pinning hopes on the current G-20 summit to enforce a stringent regulatory regime to curb financial adventures by callow bankers and discipline the financial system globally. The economic glut since the last quarter of 2008, has caused closures of small businesses and created unemployment. However signs of some recovery, by 2010, are in sight.
Let us keep our fingers crossed. The maritime sector suffered the worst impact causing bankruptcy to ship-owners and allied business. Now that excess tonnage is being scrapped, there appears to be some relief by 2010/2011. Most of the maritime port projects are either slowed down or deferred. I am sharing my experience of the last 12 months, my clairvoyance spotting economic trends.
Economic downturns are usually classified by decreased levels of consumer purchases (in particular of durable goods) and, secondly, reduced levels of production by industry and business. Our crisis is attributed more to instability rather than the impact of a global meltdown. Our GDP growth is expected to be 2.5, as PSDP has been slashed to half, whilst India and the Bangladesh economy is expected to grow at GDP of 6/7.
The economic downturn effects small entrepreneurs and their businesses who struggle to survive and keep on growing. However an economic downturn opens opportunities as well. A well-organised company can translate the opportunity by taking away business from the competitors. Resourceful business house may capture the opportunities, from an economic downturn, by innovative methods of doing business, which were never practiced during a period of growth.
The worst sufferers are cash strapped SMES. One must take the challenge of navigating his business through a financial meltdown by realigning his business with the current economic realities in Pakistan/globally.
The need is to refocus on your core clients/customers, reduce your static operative expenses, conserving cash, and manage more proactively, rather than reactively. I quote George Soros here "Stay away when the greed is on and be greedy when the fear is on."
TARGETS AND GOALS The immediate goal is how to survive the current economic impasse, turning to a more efficient and cost-effective performance. The second target is to expand the business during a financial meltdown. You should grow the customer base, improve efficiency, reduce costs, protect assets and lastly conserve cash. The entrepreneur should not panic as historically recessions do not last forever and focus on what one can control, disregarding media rhetoric.
The effective way is to communicate with all. The foremost is to renegotiate with all and develop a win-win approach in negotiations with all vendors, ensuring a favourable bottom line. The fact remains that during a melt down, one has to diligently monitor the cash flows. The idea is to know how to monitor, protect, control, and use the cash to make it work. Cash flow forecast be made monthly to ensure expenses do not exceed receivables.
A good entrepreneur must convert excess obsolete inventories into cash. The core issue is to reduce the amount of your inventory without loosing sales. One cannot discount ensuring timely collection of accounts receivables. The key to success is an efficient collection system that generates timely payments.
It is imperative to renegotiate with suppliers, lenders and landlords and to re-evaluate staffing requirements, shopping for better insurance rates, but don't cut your advertising cost to increase brand awareness and generating additional demand of products and services.
Business houses are well-advised to consult advisors who give professional advise on all faculties of business. No one can dispute that a good entrepreneur will slash across the board expenses by 10-15%. The most difficult challenge is to convince your banks to stay on your right side, as banks become tough and are out for recoveries. You must convince the banks to re-negotiate as it is in mutual interest.
Most of the entrepreneurs are confronted with high rates of interest; benchmarked to the world, creating a financial and liquidity crunch. As utilities have gone sky high, the labour, due to inflationary trends, demands a high salary, thus a businessman is caught between the devil and the deep sea. A businessman, also a human being, comprehends that redundancy will cause hardship to employees and will create social problems, thus the business house averts retrenching labour, groomed and skilled at the cost of the entrepreneurs.
The global melt down has not effected us much due to a strong prudential and regulatory regime. Banks can be convinced by presenting business and action plans. The key is to ensure that your lender will work with you, but frequent communication is critical to keep the banks soft on you and of course, paying on re-negotiated schedules. Moreover the Pakistan business community is more prone to cash than credit cards.
We are now pinning hopes on the current G-20 summit to enforce a stringent regulatory regime to curb financial adventures by callow bankers and discipline the financial system globally. The economic glut since the last quarter of 2008, has caused closures of small businesses and created unemployment. However signs of some recovery, by 2010, are in sight.
Let us keep our fingers crossed. The maritime sector suffered the worst impact causing bankruptcy to ship-owners and allied business. Now that excess tonnage is being scrapped, there appears to be some relief by 2010/2011. Most of the maritime port projects are either slowed down or deferred. I am sharing my experience of the last 12 months, my clairvoyance spotting economic trends.
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