Changing Dynamics in the Shipping Industry-Opportunities for Procurement Today


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This presentation was delivered to Chief Procurement Officers and senior procurement executives at the 2012 Procurement Leaders Forum in Vienna on October 23. Co-founder and CEO of The Smart Cube, Gautam Singh, discussed the issues facing the shipping industry and the opportunities they present for the procurement function.

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Changing Dynamics in the Shipping Industry-Opportunities for Procurement Today

  1. 1. Changing Dynamics in the Shipping Industry –Opportunities for Procurement - Today 23 October 2012
  2. 2. Vessels for free? Case 1: Glencore Industries Glencore shipped grain from Asia Pacific to Europe for less than fuel charges Operator further contributed $2000 per day to partially cover fuel charges for 60 days Reasons — Relocate vessel for next shipment — Other options to ballast vessel (~$50,000 a day for fuel) Case 2: D/S NORDEN Norden chartered a Supermax Vessel for only fuel charges Instead of using own fleet, hired “free” ship to transport gypsum to the US East Coast “Even though we’re paying Glencore, it does make sense. Our other option was to stay in the Pacific and earn poor revenues or ballast to the Atlantic and pay the fuel ourselves” – Steve Rodley, Managing Partner – UK, Global Maritime Investments (February 2012)2 Source: Bloomberg; Financial Times Website
  3. 3. ISSUE OF FREIGHT PRICES What is the issue? Severe overcapacity, poor demand growth, EU crisis Baltic Dry Index – Dry Bulk Shipping Rates Down 85% over last three years 14 11,793 12 May - 2008 Recovery: Global economy Period of Decline: Over Steep Fall: Collapse gradually stabilized supply and weak global 10 in the global demand demand 8 4,661 6 Nov - 2009In Thousands 4 5,615 663 Jan - 2008 Dec - 2008 698 2 Sep - 2012 0 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-08 Nov-08 Jan-09 Nov-09 Jan-10 Nov-10 Jan-11 Nov-11 Jan-12 Mar-08 May-08 Sep-08 Mar-09 May-09 Sep-09 Mar-10 May-10 Sep-10 Mar-11 May-11 Sep-11 Mar-12 May-12 Source: Bloomberg Supply Continues to Increase - Capacity Addition Time Charter(70K Ton Panamax) Time Charter(70K Ton Panamax) August 2012 Time Charter(70K Ton Panamax) October 2011 43% 6 Months: $10,900/day November 2010 19% 6 Months: $19,125/day 12 Months: $10,000/day 6 Months: $23,500/day 12 Months: $15,062/day 36 Months: $11,000/day 12 Months: $22,500/day 36 Months: $14,125/day 36 Months: $19,700/day3 Source: Bloomberg; Intermodal Website
  4. 4. ISSUE OF FREIGHT PRICES Container prices have firmed in 2012, but lane specific opportunities exist Container rates were depressed in H2 2012, but firmed up in Q2 2012 with shippers taking capacity off the market Rates have been dropping in the last six months Overcapacity in the Asia-Europe route will keep prices dampened TCO for many products will change depending on the trade lane selected Container Traffic Growth– YoY Growth in % Shanghai Containerized freight Index 16.6 18.4 1400 5.3 5.2 5.7 2.1 2.3 1.0 1000 -3.0 -3.2 -3.1 -14.2 600 2007 2008 2009 2010 2011 2012F 11/5/2010 11/5/2011 2/5/2011 5/5/2011 8/5/2011 2/5/2012 5/5/2012 8/5/2012 Europe to Asia Route Asia to Europe Route Source: “Container Shipping Market Outlook, Freight Rates and Index Linked Contracts” Drewry Source: Bloomberg (May 2012)4 Source: Bloomberg; “Container Shipping Market Outlook, Freight Rates and Index Linked Contracts” Drewry (May 2012)
  5. 5. DEMAND-SUPPLY Depressed shipping rates are expected till middle of 2014 as capacity additions continue through 2013 and demand is expected to catch supply earliest in 2014 Dry Bulk Shipping – YoY Growth in Supply and Demand Global Dry Bulk Fleet Deliveries 16.9% Overcapacity to 120 17.5% 20% 14.7% 14.8% continue 100 14.5% 13.0% 15% 80 7.7% 9.7% 9.5% 9.0% 6.6% 5.7% 60 5.6% 5.3% 5.2% 10% 6.5% 5.4% 5.7% 5.1% 3.7% 4.6% 40 5% 20 0 0% 2007 2008 2009 2010 2011 2012F 2013F 2005 2006 2007 2008 2009 2010 2011 H12012 -2.7% Supply Demand Source: “Regional Dry Bulk Shipping Report” Deutsche Bank (September 2012) Yard Deliveries Net Fleet Growth Future Outlook Source: “Dry Bulk Market Review 1H2012” Pacific Basin (August 2012) Freight Demand Supply Economic Decline in Prices international Overcapacity Instability in 2012 Europe trade of of Ships commodities 2–3 1–2 1–2 2013 years years years Dry bulk shipping market is expected to start recovering 2014 in the last quarter of 20145 Source: “Regional Dry Bulk Shipping Report” Deutsche Bank (September 2012); “Dry Bulk Market Review 1H2012” Pacific Basin (August 2012)
  6. 6. PROCUREMENT OPPORTUNITIES Opportunity 1 – New sourcing regions become competitive Sourcing regions which did not make sense 3 years ago, become a possibility (extra 3-4% saving tilts balance) Opportunities available for both dry bulk and containers (specific trade lanes) Consignment buying is an option (given low cost of capital and favourable exchange rate) Dry Bulk Opportunities Container Opportunities Bottles Forest Products Carton Boxes Glass Packaging Wood Steel Packaging Chips Products Dry Bulk MRO Chemicals Cement Equipment Container Supplies Dry Fertilizers Edibles Specialty Depends on Chemical Trade Lanes6 Source: TSC Research and Analysis
  7. 7. PROCUREMENT OPPORTUNITIES Case Example: Plastic components price differential – China vs Europe PET Plastic components Landed Cost Comparison - China vs Europe ($/tonne, Q1 2009 – Q4 2012) ~15% cost saving ~20% cost saving 3,971 3,377 3,557 2,855 Q2 2011 Q2 2012 China (Including Freight Charges) Europe Extra 5% landed cost benefits for extruded plastic components from China Client is relooking at strategy to do one off or have a dual sourcing strategy for this specific product7 Source: TSC Research and Analysis
  8. 8. Case Example: Specialty Chemicals are now affordable from South East Asia Specialty Chemical Price in UK and Indonesia Specialty Chemical Price in UK and Indonesia ($/tonne, Q3 2010) ($/tonne, Q2 2011) 958 965 78 45 1,033 920 864 880 UK Indonesia UK Indonesia Domestic Price Freight Rates Domestic Price Freight Rates Specialty Chemicals are now affordable from South East Asia Still not worth the effort of buying directly from Indonesia, but a negotiation point when negotiating with Tier 2 suppliers8 Source: TSC Research and Analysis
  9. 9. PROCUREMENT OPPORTUNITIES Opportunity 2: Lock in at low rates for the long term Leverage bargaining power and lock in rates for the longer term Help Supplier with Beneficial Payment Terms Current Liquidity Issues Agree volume deal Tactical methods to Lower ship speeds – better fuel efficiency improve Efficiency Lock in the current low rates, by providing stability of business demand Index-Linked Long Term Contracts Shipping companies more amenable to index-linked contracts – with current outlook these would work for next two years Case Study – Vale SA Vale identified the opportunity and entered into long term contracts for deliveries of it’s iron ore consignment; the company has further sold existing company owned vessels to benefit from the low prices9 Source: Bloomberg
  10. 10. PROCUREMENT OPPORTUNITIES Opportunity 3: Identify indirect savings due to freight costs across supply chain Landed Costs for Home Appliance Components from China to the US Home Alliance 2012 Assembly Cost– Component Shipment Shipment Landing Cost–US Mexico Cost–China $60.05 $3.80 $10.2 $1.60 $75.6 Home Alliance Assembly Cost– 2011 Component Shipment Shipment Landing Cost–US Mexico Cost–China $60.05 $4.75 $10.2 $2.0 $77.0 Fall in shipping rates impact the total cost of input materials for your Tier 1 and Tier 2 suppliers Aid in product price negotiations10 Source: Fast Global Supplier Website
  11. 11. PROCUREMENT OPPORTUNITIES Case Example: MRO and Packaging categories can be optimized by using a regional sourcing model Company XYZ Local sourcing preferred due to high shipping costs Manufacturing Manufacturing Manufacturing Location #1 Location #2 Location #3 Low Value Items Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Local Suppliers Hybrid Sourcing Optimizing sourcing to Company XYZ changing shipping costs Continuous sourcing Bulk shipping Manufacturing Manufacturing Leverage low freight Location #1 Location #2 rates Low critical items Supplier 6 Supplier 7 Local Suppliers Supplier 8 Supplier 9 Low inventory holding costs Hybrid sourcing model is Regional Supplier Regional Shipper preferred11 Source: TSC Research and Analysis
  12. 12. KEY TAKE AWAYS Conclusions and Key Take Aways Low demand and over capacity in Shipping Industry are here to stay till 2014 Opportunities for procurement over next 2 years ― New supply sources now viable – reassess category strategies ― 3-5% benefit for certain commodities in certain trade lanes ― Lock in low prices using long term index-linked contracts ― Analyze freight costs in supply chain; supplier to share benefits Usage of “Should Cost” OR “Could Cost” Models to identify opportunity Keep a track of rates/cycles12
  13. 13. OVERVIEW The Smart Cube is a recognized industry leader delivering high value research and analysis support Customized Supply Chain, Marketing and Investment Research − Global coverage, across sectors − Combination of secondary research and advanced analytical techniques; supported by primary research Strong Fundamentals 45% annual growth for last 3 years 150+ Corporate, Consulting and Financial Services clients − ~20% of the Fortune Global 100 companies Highly Satisfied Clients 70% of new business from referrals Function as an extension of client teams − Strong cross-domain expertise Global Services − 400+ high caliber analysts in India, Romania and Uruguay; 3 delivery locations; Onshore/Offshore support in China by Q4 2012 − Client relationship offices in Chicago, Detroit, New York, London Experienced Teams and Zurich All project teams with 5+ years experience Strong emphasis on quality of both output and service delivery ISO 27001 certified13
  14. 14. ContactGautam SinghT: +44(0)20 3301 3940M: +44 (0)7958 567 453gautam.singh@thesmartcube.comwww.thesmartcube.comConnect