Tuesday, November 3, 2009

Kenya: Freight charges set to rise as trade looks up

By STEVE MBOGO - Tuesday, November 3 2009 at 00:00

Signs of recovery in the global economy are likely to result in an increase in shipping charges, although the industry expects price stabilisation if the recovery pace is maintained.

But the expected increase in volume of cargo is expected to lower marine insurance charges, industry analyst said.

“If demand for vessels is higher than supply, then we are likely to soon see higher freight charges,” said John Omingo, the commercial manager of the Kenya Maritime Authority.

The industry, however, did not say whether changes in freight charges and insurance costs are likely to be passed on to consumers immediately, saying it will depend on the margin of change.

But for the immediate future, it could mean that prices of commodities will increase further, putting pressure on the consumers already facing an average monthly inflation rate of close to 30 per cent.

So far, charges for general cargo for a 20 foot container between Cape Town and Mombasa has gone up from $500 (about Sh38,500) to Sh53,900 since early 2008 when the global economic crunch was at its worst.

At the international level, the Baltic Dry Index, a measure of shipping costs for commodities, posted its fifth weekly gain and first monthly climb since June on demand for ships to haul iron ore to make steel according to wire reports.

But analysts said persistent oversupply and “unbalanced, fragile” demand may pull hire rates down next year.

Marine insurance rates have remained constant at the range of 0.4 per cent of the value of the cargo to five per cent, depending on the nature of the cargo and how it is packaged.

For instance, containerised cargo attracts less premiums than cargo that is not in containers, said Marilyn Okello of the Eagle Africa Insurance Brokers.

So far, piracy has not pushed up costs of marine insurance although this could still happen were the activities to increase.

But the cost to insurance will be minimal because vessels are now avoiding the piracy infested route in preference for the Atlantic-Cape Town route.

The overall freight charges for Mombasa Port could also be influenced by the pace at which the local shipping industry succeeds in harmonising vessel landing charges that make the Port of Mombasa uncompetitive.

“Mombasa is far much expensive than the ports of Dar as Salaam or Djibouti although the services here are superior. We also have to operate from this port because it is the regional hub, said Ibrahim Ahmed of the African Shipping Lines.

Last week’s announcement that the United States economy grew at a 3.5 per cent annual rate in the third quarter, probably ending a recession that began in December 2007, has given optimism for the general global economic recovery.

This means that there is likely to be higher demand for Kenyans goods in the US, Europe, Asia and the Middle East and likely increased production in Kenya to serve those markets, meaning an equal increase in imports of commodities like oil and raw materials.

Increase cargo at the port will mean higher demand for vessel services, leading to a rise in freight charges.

But industry players said when the cargo supply stabilises, and as vessels that have been out of operation get back into business, higher supply of vessels will mean a gradual drop in freight charges.

Reports suggested that up to 30 per cent of vessels had been grounded since early last year for lack of business.

Mr Kennedy Wanyonyi, the managing director of Archon Marine Shipping and Logistics said the increase in freight charges that has been evident since early 2008 was bound to continue in mid-term.

“But when we get to a period of scheduled voyage (guaranteed supply of cargo to a particular destination), we are likely to see a drop in these charges,” he said.

Prospects for a rebound in the global economy were given more optimism when the International Monetary Fund raised its forecast for 2010 global growth to about 3.1 per cent from 2.5 per cent.

It expects China’s economy will grow 9 per cent and India’s 6.4 per cent, Japan (1.7 per cent), US (1.5 per cent) and Euro region (0.3 per cent).

In addition to higher freight cost, importers to the Port of Mombasa will have to bear with other landing charges that are factored as overall cost of freight.

The importers will have to pay 16 per cent value added tax on marine services.

This tax will be based on costs paid to the shipping agents, which are also under contention because they are said to be higher.

The shipping agents costs are based on contracts signed between ship owners and their agents.

They are usually confidential in Kenya and that has been blamed for introduction of extra charges to importers.

KMA director general Nancy Karigithu told a recent meeting in Mombasa that those contracts should in future be scrutinised by the authority, as is done elsewhere in the world.

Mr Omingo said some of the charges that are to be investigated include Sh4,620 delay order fee, terminal handling charges at Sh6,930 for a 20ft container and Sh10,395 for a 40ft container, the Sh3,850 equipment management fee and handing over fee which currently stands at Sh1,950 per document among others.

“We are investigating each charge based on the practice elsewhere in the world,” he said.