Can shippers benefit from liberalisation through low freight rates?

Wednesday, 13 December 2017 00:00 -     - {{hitsCtrl.values.hits}}


  • There is no link between shipping agency ownership and freight rates; exporters misguided on benefits to trade

Reading a few articles written last in the last few weeks on how liberalisation will bring down the freight rates benefiting exporter, I was rather surprised of the little knowledge the authors of these articles possess about shipping and logistics. It is evident that whoever pushes for liberalisation is misguiding both regulators and the general public by providing wrong information.

Freight is the income of shipping lines and ship owners and are determined by cost and commercial considerations. Freight rates are fetched globally based on demand and supply for cargo between destinations and largely on the ship owners cost structure. They are based on various factors such as distance between two ports, size and costs of the vessel, crew costs and insurance and bunker costs. 

Port cost also forms a large part of the ship owner’s cost structure. The agency cost for a shipping line is insignificant and is not a determining factor for freight rates and even if the foreign lines had their own office in Sri Lanka they would still have to bear the cost of performing the agency function and hence not have a huge cost saving which can be passed to exporters/importers. 

The global market place has seen a severe decline in freight rates over the last few years due to oversupply of large container vessels. However prices have become stagnant as a result of shipping lines controlling supply through measures such as scrapping. Apart from this, world oil prices will also play an important role in freight rates. 

There’s a myth among many Sri Lankans that agency offices decide freight rates and therefore a Sri Lankan cartel decides the price shippers have to pay. This argument itself shows the ignorance of the so called experts. Shipping agencies do not decide the freight rates. The principals decide the freight rate based on the dynamics which I have mentioned above.

However all this time, Sri Lankan agencies have played an active role in negotiating better rates with principals on behalf of the shippers. Especially when the principals were not allowed to recover THC from shippers, many principals started losing interest in Colombo and the agencies had to fight hard to retain this business in Colombo. In fact it is the freight forwarders who mark up the freight which is quoted by shipping agencies.

However in the future if we pave the way to full liberalisation these principals will take full control of pricing and reintroduce cost recoveries such as THC which will affect our importers and exporters adversely. If any shipping line says that they can lower the freight cost if trade is liberalised, we need to ask them why they can’t reduce the rates now as they already control the prices. We should also ask the percentage in which they could reduce the rates. Currently they are not reducing rates as they prefer to cater to markets which derive a higher revenue rather than Sri Lanka which places constraints on their cost recovery.

Currently we can see many shipping lines forming mergers so that in the future the number of players in the industry will be much less and it’s a continuous battle for survival. Collaboration and mergers are therefore a global phenomenon which can be seen in the local market as well. If we do not strengthen our local agencies, these global lines will start controlling prices which will adversely affect our economy and there will be no local interest in these negotiations. 

Besides, after controlling prices and recovering the total costs from our locals, they would happily repatriate all profits without investing a cent in Sri Lanka. As usual we will be sitting here wondering what happened. Shippers should be aware that they are being used by a few interested parties with personal agendas and incorrect justifications.