Project logistics supply chain risk: how much is too much?

One of the most visible trends in the project logistics sector has been the change to payment terms: most notably, their increasing duration, according to Helge Ehlers, a member of the executive board at Hamburg-headquartered freight forwarder Conceptum Logistics.

“We are seeing delayed payment terms more and more often, and more rigid credit terms than most of us could even remember.

“If [EPCs and project owners] were more supportive on the payment side, they would get more out of it,” explained Ehlers.

“This has become an unhealthy trend. We are not banks but transport engineers. 90-day payment terms are far too long when jobs have been accomplished long before that. It has put a lot of small and medium-sized enterprises (SMEs) under unnecessary pressure, as they are equally forced to find financing solutions now.”

Numerous executives active in the project logistics business echoed this sentiment.

Longer credit lines

Justin Archard, corporate director at SAL Heavy Lift, said: Everyone is taking longer to pay. It used to be almost instant, within a few days of shipping. Now, if you are lucky, you get it when you are breaking bulk. There are those that will not pay until 30 or 60 days after you have broken bulk. All of this is just adding further pressure on shipowners.”

Forwarders and shipping lines alike are essentially providing overdraft facilities to their customers. Freight rates are certainly not at a level to merit the increased risks facing SMEs active in the logistics sector.

For some, the situation remains manageable, with borrowing costs still relatively cheap. However, a notable increase in interest rates will put all but the very largest firms offering extended payment terms under immense pressure.

This situation will not improve until there is a genuine recovery in the sector. It will not be until a firmer market comes that you have the strength to respond to these demands.

                                                                                                                         - According to Justin Archard

We reported in the September/October 2018 edition of HLPFI that there is an increasing trend of what has traditionally been classified as manufacturer or construction risk being incorporated into cargo coverage. This is happening against a backdrop of increasing project logistics activity.

In some cases, project cargoes get shipped with owners and insurers having different ideas of what is covered and what is excluded. Underwriters have cautioned that incorporating some of what used to be manufacturer or construction risk into cargo coverage must be done with very specific wording.

Another long-running trend that continues to affect those active in the project logistics sector is excess competition, and the continuing battle price.

Unfortunately, there appears to be only one way that players in the market can respond to the risks being pushed upon them.

According to Archard: “This situation will not improve until there is a genuine recovery in the sector. It will not be until a firmer market comes that you have the strength to respond to these demands.”

He added that charter rates need to double if shippers expect to continue receiving the levels of service they have come to expect. “Everybody wants service. But, you cannot maintain a service like this without making some money.”

There are some early indications that this situation is starting to change. Ivar Myklebust, ceo of Höegh Autoliners, said: “After a number of years where the benefits of improved productivity have mainly been transferred from suppliers to the customers, there are many signs on the horizon predicting that overall logistics costs will increase going forward.

“This is necessary to allow for re-investment and normal profitability throughout the supply chain,” he explained.

This article is taken from HLPFI's January/February 2019 edition.