Ship Broking : Tuesday 3rd October

14.00 - 14.30 Soren Wolmar - Quincannon Associates Inc

Some of the recent developments in the business community at large are presenting the shipbroking business with enormous challenges, but also with great opportunities. The large corporations that charter vessels, be it oil companies, grain houses or industrial concerns have all been undergoing downsizing and they are looking to outsource many functions. Many of these companies have been merged into giant entities and their operation has been globalized. On the owners side large pools have been formed between former competitors. All of this is happening at a time when we are faced with the introduction of Business to Business E-commerce to the industry.

In order to prevail in the face of such changes, shipbrokers must find new ways to add value to a traditional process.

Downsizing and Outsourcing

Charterers’downsizing and outsourcing provides brokers with excellent opportunities to fill the void created by these corporate initiatives and add value. For several years big corporations have made announcements to their shareholders of downsizing their administrations, eliminating thousands of jobs, cutting costs and outsourcing services.

Not long ago many large corporations had chartering departments consisting of 10 to 15 people, but today they are left with just one or two persons to do an ever-larger volume of work. Consequently a lot of functions traditionally done in house has been pushed over to the broker. Some examples:

Before a chartering manager attends meetings with his marketing or production planning group he will call his broker and download a spreadsheet with the information he needs. This could include tons shipped, dollars paid for freight and demurrage sorted by product, by port, by customer etc. No longer is it necessary to compile such records in-house.

The down side for the broker is that he will have to work a little harder for the same commission. The upside is that he will become an integral part of the charterers’ operation. Such functions lend themselves well to outsourcing and with computers they can be performed at relatively low costs.

Corporate announcements of downsizing and outsourcing always emphasize job elimination and cost savings, but they rarely talk about the outsourcing bill that will accompany such schemes. Initially the savings are always significant. However, in a few years many companies may come to the conclusion that for the amount of money they spend on outside services, they could employ a whole department of their own, and we will have come full circle. Here the brokers have an advantage. Their outsourcing services will never show up in any charterers’ budgets as costs. Most charterers view the market as the market and do not consider commission as a cost to them.

There are also some examples of charterers outsourcing large parts of their logistic function directly to ship owners through some kind of a partnership. This is perceived by some, as handing a blank check to the person on the other side of the negotiating table. There is conflict of interest here, and therefore such schemes are not likely not prevail in the long run as the charterers could find their transportation costs to be un-competitive. Brokers are in a better position to perform such services, as they have no such conflict of interest.

Mergers, Pools and Global Operations

The number of players in the markets is getting smaller. The structural changes present the brokers with a challenge. Some charterers are concentrating their world wide purchasing power and chartering activities in one single office. Some owners are concentrating the marketing of their vessels through pools. In some sectors of the market there may soon be only a few players left on each side. In such an environment brokers may indeed get squeezed.

However, there are still a number of functions and tasks that have to be performed, and with the downsizing going on at the same time it is possible for the brokers to carve out a meaningful role.

In response to globalization of the principals of the industry, brokers have also started to globalize by opening affiliates and forming alliances with each other. This trend may continue as large customers require services in several different trading areas of the world.

Business to Business E-commerce

Here is by far the biggest potential change to the ship brokerage industry and the biggest and most difficult challenge to tackle. At the time of writing this article the trend has yet to be fully defined.

Bill Gates said several years ago: "As the interactive net assumes the role of a world market place, the traditional middleman will no longer be able to profit from just being there."

Again, the brokers as middlemen will have to find ways to add value to the new situation.

Newly formed .com companies are springing up all over the market. There is no shortage of announcements as to the kind of revolutionary services they will be able to provide. However, the jury is still out as to exactly how they will change the market place. Some of them function well technically, but have still not caught on. They are capable of providing ship positions, cargoes, fixture records, vessel and cargo matching and even freight rate negotiations along with interactive open bidding. Some also have operational and post fixture features.

Originally they were seeking to "disintermediate" the shipping market even though they themselves are intermediaries. The advertised significantly reductions of fees even though they themselves charge a transaction fee not much different from a regular commission.

It is certain that not all of the ".com" companies will survive. Consequently there is a fierce battle going on to:

The push from systems people is often based on the notion that "one size fits all." When it works well for booking airline seats and containers it will also work well for fixing tankers, bulk carriers and other tramp vessels. The people who promote these schemes often do not understand how diversified our transactions are and how difficult it will be to format it into website based programs that will work for the whole industry.

One other point that has to be kept in mind is that the number of transactions in tramp shipping is fairly low when compared with airline seats, containers or selling books to the public. Initially it may not be possible to justify the software development and promotional costs necessary.

In spite of this, there is little doubt that the tramp shipping market, sooner rather than later, will become e-commerce based. The question is how brokers best serve their clients on an e-commerce based market.

Brokers have traditionally brought the following to the table:

How will these services do in the world of e-commerce?

Communication and market coverage have already changed drastically and will change even more. Traditionally, a charterer would use the brokers’ network to ensure his cargo is brought to the attention of every ship owner in the world. That broker function will diminish, as other channels become easily available. The brokers can no longer count on this being a major asset to their customers.

Some information brokers have traditionally provided, like positions, cargoes and fixture reports, will be easily accessible elsewhere through the Internet. But decisions are not based on such information alone, and there will still be a need for the kinds of information brokers gather through the daily dialogue with clients. This includes spotting trends, future plans, intentions, strategies and special circumstances.

For any platform or portal to be successful it must be backed by strong computer and Internet expertise. Equally important it must also have strong shipping industry expertise behind it. Shipbrokers can add value here by providing this expertise. Indeed some of the schemes are formed by brokers or have broker participation.

Most fixtures are not concluded based on a simple auction system. Bringing a shipping transaction to a successful conclusion requires more than that. To format a complicated fixture negotiation on to an inter active website will defeat the purpose of saving time and money. The same applies to post fixture operations and claims settlement. These are still functions that lend themselves better to a phone call or a meeting.

In the imperfect world of tramp shipping there will still be berths that don’t quite have the expected draft, vessels that can’t quite load the cargo they are fixed for etc. These kinds of problems cannot be formatted in to a "one size fits all platform." Brokers will still have a role in trouble shooting.

There is more misrepresentation, fraud and cheating on the Internet that anywhere else. No doubt there will be cases where an owner floods the e-commerce market with bogus cargoes to distract his competitors while grabbing the only firm cargo for himself. There will indeed be a need for trust and security, which brokers can provide.

In the end there is also the human element. Like anywhere else, lots of people in the industry like the personal contact, and will not likely substitute this for a faceless website.

Considering the situation, the broker community still has to find a way to capitalize on e-commerce. At the moment there is no perfect answer, but here is one idea:

The broker community at large should create one joint, interactive and open website. It cannot just be a closed network among the brokers themselves. It must be accessible directly by the customers, because that is what they want in their quest for B to B e-commerce.

A charterer or owner who has access will have to be sponsored by one or more brokers. When orders or positions are placed on the web, the sponsoring broker or brokers’ name(s) will appear with it. The brokers will control and police the system according to established trading ethics. If a principal is placing non-serious items on the system or engages in unethical trading, their sponsoring broker’s name will be affected as well.

A large charterer could be sponsored by say five brokers and could attach all five when placing an order on the system. Alternatively he could reward one broker with an exclusive cargo and only attach his name to that cargo. If more than one broker is used, the owner would select one of them for his offer. Brokers would control who has access to their web pages and quotings. Such a market platform could work pretty much the way the market works today.

The system described here could be used as just a vessel position and cargo information exchange. It could also be used for the exchange of offers and counters, and it could even be used as an open auction type bidding vehicle. Principals and brokers are of course also free to conduct traditional private negotiations off the system.

If a sponsoring broker finds out his principal is just using the system to gather information, while conducting his business elsewhere, he will simply take him off the system.

It should perhaps start as a relatively simple system, but after gaining acceptance additional features could be added such as post fixture information, demurrage/dispatch, Bill of Lading and survey information, ship particulars, port information system, etc.

The website should be able to interface with other systems like BOLERO (electronic transfer of Bills of Lading) and with customers’ order management systems, like the oil and chemical industry in the use of its the SAP system. Such integration will allow the system to offer real value and also to provide an assurance that the principals will consistently conclude the deals through the system.

For a system to catch on it must be open to everybody with a legitimate interest, and like the BOLERO system, it must be based on a strict book of rules.

At the moment a number of brokers are working on setting up their own websites, but so are many owners and charterers. Individual websites will not give the brokers a central role in the e-commerce market.

Most of the new .com companies are sponsored by a couple of owners and charterers. Regardless of how impressive the sponcers are, they will have a hard time to obtain critical mass, as they will not be perceived as neutral. Having a number of participants in a system will be more important than the technical features.

The broker community will have to establish one uniform worldwide market place, at least for each market segment, if they are to maintain their position.

Could the broker community get together and agree on such a system? That is a big question, but it should be kept in mind that the tanker brokers did just that with the Reuters System and that did function well for many years. In other markets, like stock markets, there are a lot of common formats and platforms that competing brokers have agreed upon. Of course, many aspects of such a system would have to be given careful consideration. For example large broker houses may object to small and opportunistic brokers being given an equal place at the table.

Who would finance, organize and develop such a system? It would probably be necessary to have the first initiative come from neutral organizations like ASBA or the Baltic Exchange. The latter has already made announcements about a project.

It will take a long time to develop a system and even longer for it to catch on. It is interesting to note that the BOLERO system has been slow in catching on in spite of the caliber of the organizations that sponsored it.

This idea may not be the right approach. Other ideas may come up, but one thing is for sure, the brokers must start a discussion and get a vision of how e-commerce can best be applied to the industry. Otherwise the ship broker community will be left behind in the wake of the e-commerce revolution.