Panel discussion

Monday, 10 June 2013 00:00 -     - {{hitsCtrl.values.hits}}

Moderated by Daily FT Editor Nisthar Cassim, the panel comprising Chinthaka Jayaweera, Parakrama Dissanayake and Rohan Masakorala fielded some pertinent questions posed by the moderator and the audience.

Q: In 2008, do you think Maersk read the future wrong, given the current scenario?

Jayaweera: When we look at the global economies and what transpired over the last couple of years, I’m yet to see a company or an economy that has read it right. Maersk has not been 100% right either. If you look at the industry, it would not have gone from this boom-to-bust cycle if the industry on the whole read markets correctly. Of course, we invested a lot of time and energy into trying to read it right and get it as right as possible. I don’t think that anyone can get it 100% right but you can come close to it.

About China Shipping ordering the Triple-E with 18,400 TEUs – this is correct – but what’s also important is while yes, they are spending $ 135 million for these new ships, they don’t have the energy efficient feature that we have. When we paid $ 185 million, we invested a lot of money and time on innovation so that we save on our operational costs and we also do what is best for the environment.

Q: Can you also comment on whether there will be a paradigm shift in trade from the West to East or greater inter-Asia trade – what does Maersk think?

Jayaweera: What we will see is more trading within certain regional blocs. You have world trade and then you also have regional agreements between countries where a few countries try to promote trade between one another, so I think due to bilateral agreements, we see an increase in the trade between regional blocs.

Another interesting development is that in the past, there were shipments from Asia to Europe and the ships were full on their way to Europe and on the journey back, they were not as full but what we see is that there is also an increase in demand for West to East trade – so we do see markets developing on the reverse now.

Q: You mentioned that there is room for freight rates to go up because it is still below the rate of inflation growth –there have been some adjustments made over the past 12 months but you stated that some revisions need to be made – what is your take on this matter?

Jayaweera: The shipping industry is a price inelastic business – just because the shipping rates are low or high, customers won’t ship more or less. The rates have come down very fast, especially when you take the Asia-Europe trade lane this year, and that’s irrational. When shipping lines are losing money, it’s irrational to bring down the freight rates and it is for the sustainability of the shipping industry that the rates need to go up. If the rates don’t go up, then the shipping lines won’t make investments because shareholders will want to invest money elsewhere and that’s not positive for the industry and economies as a whole.

Q: Will shippers like to take the hike rate now?

Masakorala: I don’t think I’ve ever had problems with freight rates. I’ve always respected market driven freight rates. The problem, which came up around late 1998, is that on top of freight rates, various kinds of surcharges came in and today, the freight rate is less than surcharges in most cases in the region, especially for small shipments. There are over 40 surcharges currently for imports and exports so it’s not a matter of the freight rate.

I think freight rates will continue to be low. I have seen some companies come up with general rate increases every three months or six months – I used to always ignore this because it would last only two weeks – at the end of the day, the market will settle the price at some point. The position of the Asian Shippers’ Council, the Sri Lankan Shippers’ Council and the Global Shippers’ Forum is that it’s not the freight rate, it’s the surcharges.

Q: Chinthaka said that back in the mid-2000s, the operating margins were just 0.1% for the last 15 years or so. In that context, did shipping lines show a sign of over optimism in building capacity?

Dissanayake: It has to do with supply and demand. From 1 June, Maersk has announced a rate hike of $ 750 per 20 foot container on the Asia-Europe route plus the peak season surcharge. Now the question is that can it hold because of supply and demand imbalances. At the end of the day, you have a situation where one product is sold by many. Take the Port of Colombo, earlier there were three lines, now you have six lines selling the same product.

As a result, these factors combine with surplus capacity to drive the rates down. Unless they solve the capacity issues, it will be difficult to maintain rates artificially. If you look at April, Maersk made a lot of money with fair returns in the first quarter but in April and May were horrific months for shipping lines. Rates came down by 40% to 50% on the Asia-Europe route. Of course, lines like Maersk, they have been driving capacity, fair enough, as that is one way of bringing the unit cost down.

Others – how do they survive? They also have to increase capacity to bring the unit cost down and then this cycle continues. You build surplus capacity and the demand on the hand is taking a dip. If levels of demand are in line with capacity of course then there is no issue here.

The biggest challenge should not be underestimated. The US, over the last three years, was able to create 500,000 manufacturing jobs. Despite China being the world’s factory, the manufacturing output of the US is still greater than China. The productivity of the US is 7.4 times greater than China. This is why I say that from off-shoring, it is now moving into re-shoring.

Q: Given this scenario, what are the prospects for Sri Lanka’s shipping and ports industry?

Jayaweera: I think there are a lot of prospects for Sri Lanka because the country is such a transhipment hub in this part of the world and I think our biggest advantage is our strategic location. For us, as Maersk Line, what we really look for is cost leadership, then reliability, then customer care and environmental performance. I think Sri Lanka can also help us in that direction, it would be even more promising for us to use Sri Lanka more and I think that those are the areas that we really look at when we want to decide where our networks should be and how we should structure it.

Dissanayake: Chinthaka spoke about the location and yes, comparative advantage is important but as you know, comparative advantage is no more an important factor in the equation. Despite Singapore having the right location in Southeast Asia, overnight they lost four million TEUs to a port called Port of Tanjung Pelepas. Now, it’s all about having a competitive advantage.

Masakorala: Sitting next to the second largest economy in Asia, Sri Lanka has all the potential to grow. We also have the comparative advantage although we have to make some corrections on the competitive side but the opportunities are greater than the negatives, therefore, the port sector in Sri Lanka in the medium to long term should have the advantage of being a key hub in the region.

Q: Our external trade is also on a downward trend, the overall shipping industry is also facing a bit of a setback, we are also adding capacity at the moment but the regional situation isn’t so encouraging. Given the tough times, what would be your advice to Sri Lankan shipping agencies and those in the freight sector in terms of management?

Jayaweera: I think what is really important is understanding market dynamics. We spend a lot of time gathering market intelligence and also trying to understand how economies are developing and as I said earlier, you can never be 100% correct but then when you understand market dynamics, it will also help you structure your business accordingly. This is also why we reduced our capacity last year and we are continuing to manage our capacity. We have stopped ordering vessels. When you understand your demand and supply, you can plan accordingly.

It is also very important to identify the key drivers in this business, whether it is freight forwarding, shipping or transportation. Once you understand these drivers and understand what your customers are really looking for from the organisation, then you can plan accordingly. We have a very outward-in kind of view. We look at the market, the economy and we speak to our customers to find out what they want and then see how best we can support our customers.

 Q: With capacity being expanded, how can we manage the opportunities from a country perspective?

Jayaweera: Investment is important because in any country or company, you invest to get returns. What’s necessary is to understand the markets to get a good return from these investments and be profitable. For us, we are not satisfied with a 4.9 ROI when we have $ 21 billion invested in shipping – it’s not good enough. I think any country or any organisation should look at economies and see if an investment would make sense, what returns would be possible, or if the capital could be deployed differently.

Q: Maersk is part of a conglomerate – does intercompany pricing help its operations?

Jayaweera: I would say that it helps being part of this group which is also why we manage it as a conglomerate. At the same time, we maintain an arm’s length between the groups. If you look at APM Terminals, it is independent and does not work with Maersk Line alone as it services many other shipping lies. Similarly, if you look at Damco as a freight forwarder, it doesn’t only work with Maersk Line. We are a conglomerate but we run those businesses very independently.

Of course, there are common themes that you can learn and share from, such as when you look at employee engagement – how you can build strong organisations, sustainability – how we can transfer our knowledge from one business to another etc. We definitely do share and engage with each other across the group. It’s also difficult when it comes to deploying capital within the group. We look at the returns – the short term and long term returns – and then we deploy capital accordingly. So each business on its own merit has to earn its right for capital.

Q: You ordered the Triple-E ships in 2009 and when you placed that order, you had the option of stopping at 10 units but you ordered 20. Is there any specific reason why you ordered in 2009 and why you continued by ordering the additional 10 vessels?

Jayaweera: When we ordered the ships, the market dynamics were quite good and at that time, the shipping industry was at a boom stage and we had the option of going up to 30 vessels. We initially signed for 10 vessels and then we signed for another 10 but we decided not to go for the last 10 so instead of buying 30, we finally placed the order for 20 vessels. When you look at our business, as a shipping line, not all the vessels we use are our own so as we get our own vessels, we can reduce some of the time-chartered vessels and manage our own capacity better.

The reason we went for 20 vessels was for the economies of scale but more than that, it was for the energy efficiency and the environmental impact. The cost savings we will have through energy savings will be enormous.