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Logistics Business Needs Strong Capital

The high freight rate amid the business chaos of the pandemic has disturbed the logistics business cash flow. Hence, strong capital (injection) is needed to secure cash flow, thus making the business run as expected, according to Link Pacific Logistics (PT Link Pasipik Indonusa), one of Indonesia’s leading forwarders.

Players in shipping and logistics industries, including shipping lines, forwarders, port operators, and shippers, were all surprised in the early year of 2021. The increase in demand was stronger than expected. During the pandemic, demand for container shipping has grown, bouncing back quickly from an initial slowdown.

However, problems occurred in line with the demand increase and lack of supply. The imbalanced demand and supply were caused not only by the increasing demand but also by many causes. The underlying causes are complex, including changing trade patterns and imbalances, capacity management by carriers at the beginning of the crisis, and ongoing COVID-19-related delays in transport connection points, such as ports.

These problems have occurred anywhere in global trade, including Indonesia (Jakarta). Indonesia is getting extra impact due to containerized trade model.

Even though the problem of container shortage in Jakarta only refers to the size of 40/40HC / D45, there is a surplus of D20 and Reefer Container. This situation has been taking place for a very long time. Indeed, demand is strengthening, making complaints about the lack of empty containers a hot and national issue.

Strong imports, which bring raw materials and auxiliary materials for manufacturing purposes, make MLO prioritize loading full (laden) containers rather than loading empty containers (repo in) to Jakarta. This case creates a “time gap” between the availability of empty containers with the need for empty containers for export, especially for D40/40HC, due to delays in MLO providing empty containers of D40 / HC.

In addition, shippers in Indonesia must compete with shippers in Thailand, Malaysia, China, and Vietnam to get ship space to America or Europe as transshipment takes place in Singapore or Malaysia.

This situation has disrupted Indonesia’s export/import activities and skyrocketed the freight rate.

General Manager of Link Pacific Logistics Yulia Ningrum amended those situations, saying the problem has disturbed the supply chain, export-import activities from/to the country, and the logistics and forwarding activities, thus triggering a high freight rate.

Like other global trade routes, the freight rate from/to Indonesia rises at any international routes, ranging from 50-300%, according to Yulia.

Though some reports have indicated that beginning August this year, the freight rate has been stable, after 22 consecutive weeks of increases, the disruption will predictably continue until next year, even longer.

According to the Drewry report, the freight rate seemed to stop the rise in the last week of September, a possible early indication that ocean freight spot prices may finally have peaked.

Rates on Shanghai to Rotterdam, Rotterdam to Shanghai, Shanghai to Los Angeles, and Rotterdam to New York remained stable at the previous week’s level, said, Drewry.

Freight rates on Shanghai to Genoa gained 1% or $144 to reach $13,646 per 40ft box. However, spot rates from New York to Rotterdam dropped 8% or $91 to $1,107 per feu. Similarly, rates on Los Angeles to Shanghai and Shanghai to New York fell 3% and 2% to reach $1,404 and $15,849 per 40ft box.

Imbalanced Supply and Demand

One of the critical factors in this supply chain disruption is the imbalanced supply and demand. The demand for container shipping has grown higher than the supply during the pandemic.

“It is true. There is an increasing volume on the one hand, while on the other hand, it is so hard to book containers and space from shipping lines. Since early this year, the situation has been taking place,” said Yulia.

LPI, she said, enjoyed a volume growth until August. Until August, Link Pacific Logistics’s volume increased 13% year-on-year and exceeded the target (forecast).

This took place over all LPI services of export LCL (less than container load/consol), import LCL, export FCL (full container load), and import FCL. Until August, Link Pacific Logistics’s export LCL reached 106% of the target, import LCL (102.81%), export FCL (147%), and import FCL acquired 178.73% of the target.

But, Yulia also affirmed these difficulties in container and slot booking from shipping lines.

Evidence has said that container shortage and unavailable slot/space significantly halted Indonesia’s export-import activities and industry productivity. Many export commodities were blocked at some factories, forcing them (factories) to stop production.

Yulia affirmed that some severe problems of container shortage had hit the logistics and transportation business and unavailable slot/space as most of the containerships were fully booked. “The shipping lines rejected so many shipments. This disturbs forwarding business, and customers (cargo owners), of course,” Yulia said.

Link Pacific Logistics’s Warehouse

Efforts to Secure Delivery

Swelling freight rates and container shortages have become a global challenge disrupting supply chains across industries. Over the last six to eight months, shipping freight rates across transportation channels have gone through the roof.

These have made Indonesia’s industry suffer the same as other countries globally, especially ASEAN countries, which are experiencing container shortages and an increase in freight rate, which has reached 300 percent on average. The rise in transportation costs is tough for Micro-SME exporters as it is not balanced with the selling price.

This shortage of containers certainly burdens exporters who use 40-feet containers. On the other hand, imports use 20-feet containers, causing an imbalance in their utilization.

“Many of our customers are worried about this situation (container shortage and high freight rate). The situation makes them feel insecure as there were some cancellations from shipping lines. Sometimes, the cancellation occurred after they sent the buyer’s delivery information,” Yulia said.

Since shipping lines fully control the process, Yulia affirmed nothing more the forwarders and logistics companies couldn’t do except giving some notes. “Usually, we will give notes of ‘subject to Space + DO + container availability,” said Yulia. 

Customers also complain that the skyrocketing freight rate will make their products less competitive in the global market.

Some are forced to stop their export as the high freight rate makes their products lose competitiveness. “We have a customer of garment commodity from India that stop shipment due to high freight rate,” Yulia said.

In addition, Yulia explains some steps the forwarding companies (Link Pacific Logistics) offered to customers to secure their business during this challenging condition. Some actions are taken, including asking customers to submit volume forecast, pre-booking for shipping two weeks before, making a personal approach to shipping lines, updating freight rates weekly, and building cooperation with many shipping lines (more than ten shipping lines) for comparative rate.

And to make customers loyal, Link Pacific Logistics has taken some steps: building a personal approach with a customer (follow up by phone, social media, entertain); proactively making information updates (every two weeks), do schedule updates, and proactively informing customers on relating information of space and container availability.

Strong Capital to Secure Business

Yulia affirmed that in addition to the imbalance supply and demand, in which demand grew higher than supply, the skyrocketing tariff is also caused by the shipping line action of ‘profit taking’ from this condition.

Apart from the points mentioned above, a few lesser-known contributors to the high freight rates. Communication issues stemming from last-minute diversions or cancellations in the current scenario are one of the reasons for booming freight prices.

Also, the transportation sector, like other industries, tends to have ripple effects when corporations take significant actions. So, when the market leaders (the largest carriers) decide to increase their costs to recuperate losses, the overall market rates are inflated too.

“This is also due to shipping lines’ profit-taking action,” Yulia said.

According to Yulia, the freight rate, which has been increasing significantly by around 50-300%, has disturbed the cash flow of forwarding and logistics companies. At this time, logistics should have extra cash for payment to shipping lines before getting credit payments from customers.

“It depends on the business model and credit term. Importers usually pay in cash. But, direct fabric customers usually have a credit term of one month,” Yulia said.

But in anticipating this condition, Link Pacific Logistics has changed the credit term to one-two week. “We have explained the situation to our customers, and they understand it,” she said. Adding the Link Pacific Logistics would provide no credit (term of payment) to logistics companies, except cash. Recently, Link Pacific Logistics also handled cargoes of other forwarders.

Though some have said that the freight rate has been on a plateau, it will not soon come to normal until supply and demand. When is it? Hard to predict. It is as tricky as predicting the end of the Covid-19 pandemic.

This is still happening because the pandemic is still not over. In fact, following the growth in the flow of goods, MLO or international shipping operators have begun to purchase orders for new ships and new containers. However, procurement cannot be instant. Shipyards in China (currently the cheapest) are also busy receiving orders. Likewise, with the manufacture of containers.

Within the situation, what the forwarders and logistics company can do? “Secure and maintain cash flow,” commends Yulia. She said logistics companies now need high capital for their business.

According to Yulia, there are some ways the logistics company can do at this time to secure business cash flow, first, capital injection, second, retained earnings, and third, change credit term (term of payment). “We change the credit term (term of payment) from one month to cash or one-two week only,” she said.

Yulia expects this chaos of container shortage will end soon, and the freight rate will come to normal. She expects shipping lines to build a relationship with forwarders as partners to have a win-win solution in facing any problems.

She also expects the government to make policies that support the country’s export growth and proactively bridge the exporters, forwarders, and shipping lines.

This coverage is published in the October 2021 edition of the ISG Magazine.

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