End of FEFC presents major opportunities for forwarders and their customers

The disbanding of the Far Eastern Freight Conference in October is set to have a major effect on the international shipping market. Purvinder Tesse, Logistics Director of freight forwarder FCL UK, examines the likely impact.

It's now only a matter of a few weeks until the Far Eastern Freight Conference (FEFC) is disbanded.

The end date of October 17th should, in theory at least, create greater competition and better rates for forwarders and importers, as the minimum "Europe to base ports" rate of US$100 per TEU (Twenty-foot Equivalent Unit), set earlier this year, will no longer apply from that day.

Many FEFC members have already buckled due to the current market conditions and eastbound rates of as little as US$25 per TEU are being quoted as the larger shipping lines look to fill slots on their vessels.

Furthermore, with the current slowdown in China, individual TEU rates on freight travelling from east to west, which were as high as US$1000 per TEU at the end of last year, have now sunk to as low as US$300 in some cases and may go lower as the market continues to struggle.

Nevertheless, in either direction, the basic cost is currently bolstered - indeed, multiplied by several times - by the addition of the Currency Adjustment Factor (CAF), currently an additional 17.1%, and the Bunker Adjustment Factor (BAF), which has risen more than sixfold and at time of writing stands at US$675 per TEU.

Even given the rapid rises in fuel costs earlier this year, the rise in the BAF figure has been remarkable and it now accounts for more than half of the overall shipping costs in many instances. However, as fuel prices have fallen again, shipping lines have been generally slow to pass on those savings to customers. In fact they have increased the CAF to 17.9% and the BAF to US$766.00 per TEU for September.

This has been tempered a little by the fact that FEFC members realised that their plans to introduce a Peak Season Surcharge from the start of August 2008 would be unacceptable to the market.

But will the end of FEFC rates really benefit the customer?

At first glance, one would think that the 15 former FEFC members, now in direct competition with one another, will have to reduce their costs simply to win business.

The situation has already become so difficult for some shipping lines that in some cases carriers are returning empty containers from Europe to the Far East, as it is not cost-effective to have laden containers on the vessel.

However, even in an open market, inward rates from the Far East are unlikely to drop much below US$300 in the near future as it is simply uneconomic for vessels to operate at that these levels.

Traditionally, as costs reduce, service levels tend to suffer significantly. And, of course, while cost is a key factor for customers, it is not by any means the only influence on their buying.

The continuing high BAF levels mean that even substantial percentage reductions in the basic shipping rate make only a small dent in the overall cost per container, so forwarders need to look at other areas than just cost to attract business.

Some are taking the acquisition route but acquiring another company's business does not necessarily increase profitability.

In fact, as competition increases, it is actually an opportunity for the forwarder to concentrate on the service levels they offer and add value, backed by competitive rates rather than over-keen pricing.

Already FCL UK are negotiating shipping rates on behalf of our customers on a monthly or even a fortnightly basis due to the volatility of the market which makes 12-month and even three-month volume-based contracts an unnecessary risk. As an example, one-off TEUs can now be transported for as little as US$300 from base ports in China to the UK, whereas previously a typical price for a contract TEU negotiated earlier in the year was US$800.

In fact the real losers from the end of FEFC will be those customers who agreed 12-month contracts based on minimum freight volumes in late 2007 or early 2008 and now will not benefit from lower TEU rates while still paying substantial BAF and CAF.

This is even more the case when it is remembered that while forwarders - the main buyers of shipping services - of course have a responsibility to negotiate rates which are as competitive as possible for their customers, they are equally obliged to recommend suppliers whose reliability and service levels are up to the mark. After all, the reputation of both the forwarder and the importer depends on that.