16 April 2009
A number of freight forwarding companies in UAE with long-term contracts have been constrained to renegotiate some of the contracts with their clients to cater to the unexpected drop in cargo volumes, according to a leading industry player.
The drop in cargo volumes has severely affected the commission and profit margins for most freight forwarders in the country, several of whom are bound by long-term service contracts.
Freight forwarders believe that a renegotiation of the running contracts would help to mitigate the effects of a cargo slump and also keep them afloat during the current financial crisis.
"The past four months have been hard for the freight-forwarding business in the country as cargo volumes have continued to take a declining trend," Captain Mansoor Yasin Ghafoor, President of UAE's National Association of Freight Logistics, told Emirates Business.
"The volumes of cargo handled by a particular forwarder determine their profitability, so this trend has had a hit on the business."
The margins for commissions earned by freight forwarders have also been affected at varying degrees, depending on the company's size, according to Ghafoor.
China, which accounts for a larger portion of imports into the GCC, has been hit by the financial crisis and its export volumes globally have sharply declined since the middle of last year.
Ghafoor noted that freight rates from the Far East to the region had dropped by an average of 60 per cent in the past few months due to the fall in demand and a surplus of ships caused by new deliveries taken last year.
He pointed out that while a year ago, a 20-foot container shipped from China to Dubai would cost $1,000 (Dh3,670), the price for the same had declined to $400.
"This situation was not expected by many people in the industry and it is beyond everyone's control. It is important that business partners workout solutions that will help keep them afloat and also foster long-term business relations," said Ghafoor, who is also Vice-President for the International Federation of Freight Forwarders Association.
He said there have been cases of delayed payments, which have affected business, but added that the problem was not a common phenomenon and would be overcome once business normalises.
While larger freight forwarding companies with long-term contracts have a high chance of navigating through the current economic crisis, smaller companies with low volumes to handle are at risk of being ejected out of business if the situation does not improve soon, according to Ghafoor.
"The rest of this year is likely to be harder for the freight-forwarding business, so smaller companies are likely to suffer more, with some failing to continue doing business," said Ghafoor.
He, however, said cargo volumes were likely to see a light surge in the second half of 2009, with freight rates expected to firm up.
Ghafoor said the economic stimulus packages introduced by a number of countries as well as local efforts to support banks will make it easier for traders to access financing for their businesses.
"We expect a firm-up in freight rates after the second half of this year. Ships that are currently moving half empty will see their load increase significantly as trading activity picks up," said Ghafoor.
He said due to UAE's position as a re-export hub for cargo, the impact of the economic crisis on the local logistics industry has been less compared to other regions. Shipping analysts have said that container rates are beginning to show signs of recovery with major international lines increasing freight rates on some networks on almost a weekly basis.
A number of freight forwarding companies in UAE with long-term contracts have been constrained to renegotiate some of the contracts with their clients to cater to the unexpected drop in cargo volumes, according to a leading industry player.
The drop in cargo volumes has severely affected the commission and profit margins for most freight forwarders in the country, several of whom are bound by long-term service contracts.
Freight forwarders believe that a renegotiation of the running contracts would help to mitigate the effects of a cargo slump and also keep them afloat during the current financial crisis.
"The past four months have been hard for the freight-forwarding business in the country as cargo volumes have continued to take a declining trend," Captain Mansoor Yasin Ghafoor, President of UAE's National Association of Freight Logistics, told Emirates Business.
"The volumes of cargo handled by a particular forwarder determine their profitability, so this trend has had a hit on the business."
The margins for commissions earned by freight forwarders have also been affected at varying degrees, depending on the company's size, according to Ghafoor.
China, which accounts for a larger portion of imports into the GCC, has been hit by the financial crisis and its export volumes globally have sharply declined since the middle of last year.
Ghafoor noted that freight rates from the Far East to the region had dropped by an average of 60 per cent in the past few months due to the fall in demand and a surplus of ships caused by new deliveries taken last year.
He pointed out that while a year ago, a 20-foot container shipped from China to Dubai would cost $1,000 (Dh3,670), the price for the same had declined to $400.
"This situation was not expected by many people in the industry and it is beyond everyone's control. It is important that business partners workout solutions that will help keep them afloat and also foster long-term business relations," said Ghafoor, who is also Vice-President for the International Federation of Freight Forwarders Association.
He said there have been cases of delayed payments, which have affected business, but added that the problem was not a common phenomenon and would be overcome once business normalises.
While larger freight forwarding companies with long-term contracts have a high chance of navigating through the current economic crisis, smaller companies with low volumes to handle are at risk of being ejected out of business if the situation does not improve soon, according to Ghafoor.
"The rest of this year is likely to be harder for the freight-forwarding business, so smaller companies are likely to suffer more, with some failing to continue doing business," said Ghafoor.
He, however, said cargo volumes were likely to see a light surge in the second half of 2009, with freight rates expected to firm up.
Ghafoor said the economic stimulus packages introduced by a number of countries as well as local efforts to support banks will make it easier for traders to access financing for their businesses.
"We expect a firm-up in freight rates after the second half of this year. Ships that are currently moving half empty will see their load increase significantly as trading activity picks up," said Ghafoor.
He said due to UAE's position as a re-export hub for cargo, the impact of the economic crisis on the local logistics industry has been less compared to other regions. Shipping analysts have said that container rates are beginning to show signs of recovery with major international lines increasing freight rates on some networks on almost a weekly basis.
By Ashaba K Abdul Basti
© Emirates Business 24/7 2009
