Troubled Waters

While the majority of the top 20 ocean carriers have all gleefully announced their record profits in the last 12 months, most intra-Asian shipping lines have all struggled to remain in the black. Although low freight rates have played a part in this poor performance, rapidly increasing charter hire costs have been the main culprit.

For the South Korean ocean carrier Sinokor Merchant Marine, this has been a big concern. JH Lee, the company's charter team section chief, lamented: "It is very difficult to make money. Sometimes, we decrease the number of vessels we are operating, and we change the vessels in our services many times to obtain the best efficiency, which gives us a chance of contributing to our bottom line". Consequently, the balance between owned and chartered tonnage is crucial.

Lee explained: "Three years ago, most of our fleet consisted of chartered tonnage, but in recent years, as the charter market has gone up so much, this policy has changed, and now we own some of our ships. We have 17 vessels in our fleet, and about 60% of these are now owned. In the past few years, we have bought on the secondhand market, to reduce our exposure to vessel operating costs. Despite this, our charter rates have still tripled in the last two years".

As well as trying to reduce vessel costs Sinokor has had to concentrate on its most profitable trades. In some cases, this has meant reducing the number of vessels deployed, or has even led to the cutting of services. In addition, because freight rates have been so poor, Sinokor's profitability is affected more because its portfolio is based mainly on the South Korea/China trade lane. Nevertheless, in comparative terms, the company has continued to do fairly well financially. In 2003, it had a turnover of USD260 million.

For the future, Sinokor remains optimistic, but at the same time it realizes that long-term profitability and security does not necessarily lie in the intra-Asian trade lanes. Lee explained: "The South Korea/China market is instable, and we need to focus on other routes. But, to do this we need good partners. This is not easy because of the mutual differences in both culture and commercial policies. We tried joint ventures in the past, but they failed because each of us wanted to call at different ports. For the moment, we will reduce our service scope and wait for the charter market to stabilize. Then, we will start introducing new services. We may venture into the transpacific trade. Smaller ocean carriers like us do have a vision to enter into these major trades. It is not just a dream - it will happen within the next five years".

1. Think of the main pillars that keep a shipping company afloat.

2. Evaluate the strategy worked out by Sinokor for the future.

3. Explain why the balance between owned and chartered tonnage is crucial.

4. Suggest, with reasons, why shipping companies sometimes buy vessels on the secondary market.

5. Using evidence from the text and your own knowledge say what influences freight rates.

6. Speak on the current situation in the world shipping.