On the Horizon – 2008 business outlook

As one of the highly volatile commodities, JPMorgan Transport Analyst Matt Crowe, says the impact of oil prices is constantly reassessed in terms of transport companies’ ability to pass coats on to customers.

“We’re currently seeing a much greater increase in transparent pricing line, fuel levies and associated mechanisms designed to make the customer responsible for paying that cost,” Crowe says.

“Most transport and logistics operations are low margin, so they can’t afford to have one input cost rising at that sort of rate without passing it through.

“I think the industry has come to terms with extreme and rapid changes in the oil price by necessity.”

“What we’ve seen in the last two years is that companies have focused more on ways they might make the situation transparent to customers.”

According to Crowe, other major effects of fuel prices include the cost and transparency of emissions and changes the geographic locations of businesses which could see manufacturers and retailers change the way they set up their operations.

“In the past, when transport was so cheap and emissions weren’t priced, you could have retailers and manufacturers on opposite sides of the world,” Crowe explains.

“But that’s no longer the case. The cost of transport is now so great, that it might be more cost effective for companies to set up in high cost economies where they can be closer to their customers.”

A study from The US Performance Measurement Group, LLC, (PRTM) published in the Augusat 2007 issue of the MIT Center for Transportation & Logistics newsletter, shows companies are vulnerable to a false sense of security when it comes to managing price volatility.

What’s more, they need to be more judicious in the corrective strategies they use because what works in one commodity group can be ineffective in another.

Eighty-one per cent of the companies surveyed rated the impact of volatility on their company’s profitability as moderate to very high and those companies with mature volatility-management practices achieved better results.

Clearly respondents acknowledge the link between Price Volatility Management and competitiveness, but many fail to capitalise on it.

It is important to understand that controlling price volatility “is not only about buying goods and services at lower prices,” says PRTM principal Bob Bruning.

“Taking no action is in effect gambling with your company’s profits.”

Over the long term, Matt Crowe predicts the Australian dollar will come back to the 80 cent level but expects it to stay around 88 cents mark over the next few months.

“A stronger Australian dollar makes imports cheaper for transport companies who are often buyers of goods whether they be fleet and trucking equipment or warehousing equipment, or airlines buying major capital goods from overseas,” he says.

However a secondary effect of a strong currency is that of cheaper consumer goods, which means there’s more money to spend on other things and that tends to stir the economy.”

“It’s very difficult to have any form of economic activity that doesn’t somehow involve the transport of goods.”

With official interest rates set by the Reserve Bank and corporate rates set to gradually increase over the next six months, Matt Crowe predicts an impact on the Transport sector, particularly infrastructure related businesses affected by the debt markets.

“Infrastructure businesses, like airports, toll roads, ports, and rail, tend to have high levels of debt funding, so they’re a lot more vulnerable to changes in the debt markets than the airlines or 3PLs, for example,” he explains.

“While interest rates have a big effect on economic activity, to the infrastructure part of the sector it’s a double impact in that they affect demand, and the cost of capital of those industries.

Volatility in the debt markets has slowed in the last three months, but it’s still pretty wild. So I think you’ll see a lot of volatility in transport related infrastructure stocks in the next six months.”

“The fact that US mortgages are falling over shouldn’t really affect the Australian ports industry, but it does because the Australian infrastructure sector is heavily geared, and reliant on increasingly expensive debt.

Australia might have to look at different ways of funding its infrastructure upgrades such as a greater role for equity investors or public spending. But it’s likely we’ll have to reassess the extent to which our projects rely on debt.”

Matt Crowe points to the degree of outsourcing as another major structural driver for the transport and Logistics industry.

“Up to about half of the growth of the sector has been from the outsourcing of transport and logistics functions which has created a huge opportunities for those companies,” he says.

“There’s a question as to whether we’ll see a slow down in that trend, particularly in Australia where retailers are taking back certain logistics and supply chain functions because they are strategically important.”

In terms of consolidation, Crowe believes the rate at which small players are leaving the market or merging with other players, has not affected its competitiveness.

“The barriers of entry for transport functions are pretty low,” he says.

“No matter how much you consolidate, there’s always another guy who will start up next to you and compete. We’re not seeing enormous benefits of consolidation in terms of profits at the company level,” he adds.

“Rather, customers of those transport companies are reaping the rewards through cheaper services.”

Leave a Reply

Send this to a friend