Is the FEFC right to increase rates?
Friday, 19 October 2007
Friday, 19 October 2007
The recently announced rate hikes of the Far Eastern Freight Conference (FEFC), in particular on the Europe to Far East (eastbound) direction is testing the patience of many shippers. The FEFC is calculating that the rates are only just at break-even point on the round trip.
What I find so interesting is how shipping lines have arrived at this situation.
Why would any company do business with costs higher than revenue? It is possible that one could see it as a loss-leader – hoping to recoup the losses when the market turns and the prices rise; the ability perhaps to make up the shortfall from another part of the business where the profit margins are much better.
Not withstanding these considerations, the bottom-line surely is to charge what is economically viable for the business to be sustained and grow. Each line must know what its break-even point is. Each line must be able to assess where it thinks the market is heading and where the opportunities for growth exist.
Yet the lines on this route seem to want a conference secretariat to ensure they don’t act individually, and to take away the authority of every independent company to make its own choices and its own commercial decisions. If they (the lines) are barely breaking even, how can it be said that the Conference has served the interests of its members?
There is a discussion item posted on The Shippers Voice (http://www.shipperstoolbox.co.uk/board/loginthread.asp?thread=30) attempting to find out if shippers are paying the higher rates or whether, finally, the FEFC is managing to do what it was designed to do – raise rates on the trade lane and increase the margins equally for all its members. The views I have picked up to-date vary: some shippers are saying that the resistance of the lines to negotiation on the rates is much stronger than they can imagine; others suggest that the desire of the carriers to retain their business is breaking the lines’ resolve to stick to the Conference rate levels.
The conference will close down next October as the regulation in Europe which currently allows cartels in liner shipping is finally removed. Some believe this is simply the FEFC members attempting to establish a higher benchmark of rates that will influence the market once the conference system has ended. I find it strange that the lines are not using this time to develop new strategies that will help them gain a commercial advantage over their competitors from October 18th, 2008, rather than using this time to ensure their competitors are more evenly matched.
What I find so interesting is how shipping lines have arrived at this situation.
Why would any company do business with costs higher than revenue? It is possible that one could see it as a loss-leader – hoping to recoup the losses when the market turns and the prices rise; the ability perhaps to make up the shortfall from another part of the business where the profit margins are much better.
Not withstanding these considerations, the bottom-line surely is to charge what is economically viable for the business to be sustained and grow. Each line must know what its break-even point is. Each line must be able to assess where it thinks the market is heading and where the opportunities for growth exist.
Yet the lines on this route seem to want a conference secretariat to ensure they don’t act individually, and to take away the authority of every independent company to make its own choices and its own commercial decisions. If they (the lines) are barely breaking even, how can it be said that the Conference has served the interests of its members?
There is a discussion item posted on The Shippers Voice (http://www.shipperstoolbox.co.uk/board/loginthread.asp?thread=30) attempting to find out if shippers are paying the higher rates or whether, finally, the FEFC is managing to do what it was designed to do – raise rates on the trade lane and increase the margins equally for all its members. The views I have picked up to-date vary: some shippers are saying that the resistance of the lines to negotiation on the rates is much stronger than they can imagine; others suggest that the desire of the carriers to retain their business is breaking the lines’ resolve to stick to the Conference rate levels.
The conference will close down next October as the regulation in Europe which currently allows cartels in liner shipping is finally removed. Some believe this is simply the FEFC members attempting to establish a higher benchmark of rates that will influence the market once the conference system has ended. I find it strange that the lines are not using this time to develop new strategies that will help them gain a commercial advantage over their competitors from October 18th, 2008, rather than using this time to ensure their competitors are more evenly matched.
Labels: FEFC, liner shipping, rates
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