Fixing ships online

 

Fixing ships online; A diversion of views; The Baltic Indices

 

Richard Hext, LevelSeas;

Lawrence Royston, Strategic Software;

Mike Elsom, Baltic Exchange;  The BalticExchange.com system

Fabrice Demichel, AXS Marine;

 

Carlo Rossi, Agip Petroli

Mario Ghiggino, GoReefers

Shipping Direct

Harry Bird, Chartering Solutions

 

Neville Smith, Lloyds List

 

Freight derivatives trading

Vetting procedures

 

Phil Parry, Spinnaker Consulting

Working in e-commerce

 

The Digital Ship e-chartering conference, held in London on October 18, stimulated some very interesting revelations and debate about how far the development of e-chartering tools have come.

 

Bringing together the main players LevelSeas, Strategic Software, BalticExchange.com, AXS Marine, GoReefers, Shipping Direct and Chartering Solutions into the same room for the first time led to some interesting results.

 

Probably the most interesting discussion was about the future role of the broker. We have moved on slightly from the tense standoff this time last year, when brokers were refusing to have anything to do with e-chartering because they thought it would make it easier for their principals to negotiate directly and cut the broker out of the transaction.

 

Whilst the discussion has moved on a bit, there are still many unanswered questions about what the role of the broker will be.

 

 

A diversion of views

 

Among the technology companies, the Baltic Exchange is adamant that it is a tool for brokers; Strategic says it will never do anything to upset the brokers, its core customer base, and AXS says it is a tool developed by brokers. All of these companies will be very careful not to do anything which could possibly jeapordise the brokers’ position.

 

LevelSeas stands out because while being extremely careful not to upset the brokers, (indeed broker Clarksons is one of its most important member companies), it is certainly not going to go out to protect the brokers position but expect them to adapt to the new economy.

 

The argument about what e-chartering does to destroy or improve the position of brokers is an awkward one. Some people observe that the number of transactions taking place directly between a charterer and shipowner (ie without a broker) is increasing anyway, and this has nothing to do with e-commerce companies.

 

Other people observe that the e-commerce companies desperately need the support of the broking community to get started, but are unlikely to return this support later when charterers discover they can use the site to deal directly with owners.

 

Possibly the cleanest argument, expressed off the record by one e-chartering CEO, was that there will always be a need for real human beings to sift through large amounts of market information and generate deals, and brokers are in the best position to provide that service. The attitude of treating shipbrokers as a tribe which need protecting is an irrelevant one. Brokers need to accept these new market conditions.

 

Alex Gray, head of information technology with Clarksons, said that it is important to look at things in terms of what e-business can do for shipbroking, not what shipbroking can do for e-business.

 

A number of other brokers pointed out that e-chartering is not being sold to them in the right way. “There’s a lot of bad faith out there,” one said.

 

 

The Baltic Indices

 

Another interesting debate revolved around the Baltic Exchange’s decision to restrict access and usage of its freight rate indices, a pillar of the shipping community for many years.

 

The indices are gathered from real transactions made by shipbrokers around the world who are Baltic members. The indices are pooled together, to provide the most accurate possible information about how much a vessel of a specific size is worth on a specific route on a specific day.

 

The move is to protect the status of shipbrokers. The indices provide a very useful basis for freight rate transactions, particularly in futures transactions, because they have an enormous amount of credibility and are based on large numbers of real fixtures.

 

The Baltic has argued that the indices make it much easier for charterers to trade directly with owners, cutting out the broker. They provide an accurate indication of how much a vessel is worth and so make it much easier for the two principals to agree on a price; getting the principals to agree on a price is normally one of the most important services a broker provides. This means that the brokers which provide the data are penalized because of it by losing business.

 

However if the Baltic takes its indices away from free circulation, then the industry really loses. The freight futures trading market, in particular, really needs a standard set of freight rate indices which everybody trusts. They are particularly helpful to the other e-chartering sites (rivals to the Baltic’s own one, Baltic Exchange.com) and derivatives trading services such as Enron and IMAREX.

 

“The Baltic information is an asset,” said Tom Mortensen, managing director of IMAREX. “We’re willing to pay for them. But if the Baltic doesn’t supply them then someone else will.”

 

“The Baltic is the premier shipping information house in the world,” said Scott Moncrieff, director of liquid freight trading with Enron. “But if they want to hide their rates there are dozens of people out there. That all just fragment the business even more if we try to use all different types of indices.”

 

 

 

 

 

Richard Hext, LevelSeas

www.levelseas.com

 

Richard Hext, CEO of e-chartering company LevelSeas, talked about how his company is developing.

 

The two men at the top of LevelSeas are Mr Hext, as CEO, who has a background in shipping and spends most of his time in liaison with investors. The other is Dr Kevin O’Connor, previously global head of business to business technology and e-commerce with Deutsche Bank, with a background in technology.

 

Dr O’Connor’s investment banking IT experience is proving very useful to LevelSeas, he said. “The banking industry has already been through some of the problems we’ve been through in terms of providing security, service reliability and robustness.”

 

LevelSeas is very pleased with its decision to write the software in house with its team of ex-investment banking programmers, rather than outsource it, as it did originally. It means that it is very easy to keep making changes to the software, as requests come through from the end users.

 

In fact, there were 167 changes made to the original LSX system between the launch of LSX Version 2.0 on September 19 this year and LSX 2.1 on October 8. “There is a process of continual adaption,” he said.

 

LevelSeas’ ambition is to provide integrated information systems which manage data, extracted directly from user companies’ systems over the internet. The main benefits are increased efficiency, greater transparency, reductions in costs and reductions in errors, he said.

 

The biggest barrier to usage of LevelSeas, he said, is the offline world; people still need a lot of convincing about why they should use it. One of the biggest accelerators to its usage, however, is the gradual adoption of the internet in other areas of people’s lives, particularly at home, he said, which leads to people being more comfortable using it in the office.

 

The main argument to encourage brokers to use the system, he said, was the fact that so many major shipping companies and charterers are using it. “As a broker you can choose as many platforms as you want, but I would suggest that you use the platform that your customers are on,” he said.

 

Many brokers are getting a bit fed up with e-commerce, he said, because lots of e-chartering companies have gone bust after they spent the time looking at their systems. There were 35 e-chartering companies this time last year, he said.

 

LevelSeas thought hard about whether to charge by transaction fee or subscription. The advantage of a transaction fee is that the maritime industry is comfortable with it, paying for what they use. However the service being provided, essentially software makes more sense being charged by subscription.

 

Mr Hext said he thought that the business would grow in concentric circles. It has begun by targeting the largest owners, charterers and brokers, but the circles will gradually grow outward as more brokers, owners and charterers sign up to extend the network already created.

 

LevelSeas is happy to talk to any other company with regard to forming a partnership or developing a common standard for communication, he said.

 

 

 

Lawrence Royston, Strategic Software

www.strategic.co.uk

 

Lawrence Royston, marketing director of Strategic Software (www.strategic.co.uk) talked about its software and communications solutions for shipbrokers. The biggest requirement brokers have at this point, he said, is for a good messaging system which runs internally within their companies; Strategic has been providing software to do this for many years.

 

With the gradual acceptance of the internet, it is possible to bring lots of people together on the same network; the downside (for Strategic at least) is that it makes messaging free.

 

Instant messaging, such as Microsoft Messenger and Yahoo, is proving very popular in the tanker community, he said, although funnily enough, no brokers in dry cargo and sale and purchase are using it. “One of two tanker brokers started using Yahoo and it spread like wildfire,” he said.

 

Strategic is looking for ways to help people do more with the messaging. “Bucketloads of messages are sent through, you have overload with too much information being sent through,” he said. “Until people can take advantage of the information there is a waste.”

 

The most useful service Strategic can provide, he said, is creating a data network which saves brokers from all the manual retyping they have to do. This led to the creation of Strategic IMX, a network for information sharing, with founder members Banchero Costa, EA Gibson, Ispat Shipping, JC O’Keefe, Poten and Partners and Torvald Klaveness Group.

 

StrategicIMX is not an e-commerce tool, but a means of exchanging information about positions, orders and fixtures, he said. Systems to help manage post fixtures will be available by the end of the year.

 

Mr Royston stressed that Strategic is not forcing anybody to share any more information, or even putting any pressure on companies to share information, simply making it easier for people to send information to people that they were sending it to anyway.

 

The Maritime Data system, which provides information about vessel characteristics and owners, is a useful supplement to Strategic IMX, because it provides updated information which supplements the information about potential deals, straight into brokers databases.

 

Mr Royston stressed that Strategic will never do anything which damages the importance of brokers in the transaction, because they have been Strategic’s customers for the last 18 years. However Strategic IMX will allow principal-to-principal communications. “The reality of the market place is that a proportion of business has always been done without brokers,” he said.

 

It is very important to move broking communication tools onto the internet at the same speed that people are ready to use the systems, he said. “You can’t go too fast for people. You have to go at the speed your clients want you to go at. Industry speed is all about taking small steps.”

 

Strategic has the benefit of already having customer relationships with a large proportion of the shipbroker community, which puts it in a very good position to develop e-chartering tools for them.

 

Mr Royston says he thinks that there will probably be two final survivors out of all the e-chartering companies. Strategic has always been willing to talk to other companies about possible integration between different platforms, he said.

 

 

Mike Elsom, Baltic Exchange

www.balticexchange.com

 

Mike Elsom, project manager of the Baltic Exchange, talked about the Baltic’s continuing relevance to shipbroking, through its unique system of self-regulation.

“Shipbroking is not regulated by any national or international legislation,” he said. “The barriers to entry are very low. But the Baltic is regulated. We have our own Baltic code.”

 

Members of the Baltic are brokers, owners, with a lessor number of charterers and some related services, he said. There are about 700 corporate members in total, with a growing number of individuals signed on as members.

 

The most useful service the Baltic provides, he said, is resolving disputes and complaints. “We’re recovering about $4m a year from that service,” he said.

 

The secondary most important service is publishing indices of freight rates, based on the fixture information it receives from brokers.

 

Mr Elsom admitted that the Baltic is currently at a crossroads. Its physical building in the City of London is quite possibly declining in relevance, from its role many years ago when it was the main place brokers met to share information. It has been largely superseded by the telephone and e-mail. “This space is used by about 100 shipbrokers on a Monday for about an hour only,” he said.

 

However the Baltic hopes that its BalticExchange.com online system will replace the online trading floor as the place where brokers meet to discuss fixtures.

 

The main argument to brokers to use the system, he said, was the reputation of the Baltic Exchange. “Brokers want to use a platform supplied by a trusted operator that’s going to be around for a very long time,” he said.

 

“As we all know, this web development thing has got quite a way to go,” he said. “There are a number of issues people need to get over, and probably some kind of educational process. But that will come in time.”

 

An emphasis is on making sure that the system does not threaten the role of the broker, he said. There will never be any functionality built to enable deals to be actually completed (ie principal to principal direct transactions).

 

The BalticExchange.com system

 

BalticExchange.com is a means for brokers (and also owners and charterers) to share information about ships and cargoes, being extremely specific about who they would like to be able to view their information. There is a searchable database of all fixtures made.

Although there is no “click to trade” button, already a number of fixtures have been made as a result of brokers using the system, the Baltic has been told.

 

There is also a freight derivatives trading system, which is currently under testing. Only brokers are allowed to trade on the system, although principals are able to view the market.

 

The system will be gradually developed with the addition of voice over internet communications and post fixture tools. “We are looking carefully at how to deliver this extra functionality,” said Mr Elsom.

 

The cost structure is that Baltic Exchange.com will be free until April 1 2002, and then Baltic members will be charged £500 a year to use it, with an additional £100 per year for additional users in the company. Non members must pay £2000 a year to use it, with additional £250 per year for other users in the same company.

 

 

Fabrice Demichel, AXS Marine

www.axsmarine.com

 

Fabrice Demichel, CEO of e-chartering site AXS Marine, said that the climate has changed a great deal over the last year. “One year back, the main question was whether there would be online principal to principal fixing without the broker,” he said. However, the climate has now changed with more discussion about the benefits to brokers.

 

“A question which keep coming back is are you brokers’ friends or brokers’ foes,” he said. “We say that brokers have a role to play. A top broker said to me, the brokers who disappear because of AXS Marine deserve it. Most brokers who have seen the system see it very much as an opportunity.”

 

A major focus is trying to help brokers refine the information they receive, including the piles of tonnage lists, which are far too complex for anyone to manage without a computer system, he said. Another focus is helping brokers fill out vessel questionnaires.

 

The charging structure depends on how the system is used. If a broker uses the system, then no charge will be made directly to the principals, but the brokers will pay for it. However if two principals negotiate directly over the system, then AXS considers itself to be taking the role of a broker and will charge commission accordingly at 0.75 to 1 per cent of the transaction.

 

30 companies are currently using AXS Marine, about equal numbers of brokers, owners and charterers, he said. The system is likely to win favour among brokers because it was actually designed by brokers, he said.

 

The financial position of AXS, he said, is that it can last for 12 months with no income at all. “We need 60-70 subscribers to break even and our expectations are to have 30 signed up by the end of November this year,” he said. “We ran through very difficult times over this year and almost ran out of cash.”

 

AXS Marine is unlikely to consider merging, forming partnerships or sharing data with any other e-chartering company, he said. “Its very difficult integration. We all have different cultures and our ways of getting there are different. I find it very difficult to say one plus one equals three.”

 

 

SUBHEAD

Carlo Rossi

www.agippetroli.it

 

Carlo Rossi, manager of online chartering, crude oil and products chartering division, with Italian oil company Agip Petroli, talked about Agip’s venture, ShippingMed, to streamline its communications about vessel requirements, both within the company and externally.  It is focused on tanker shipping in the Meditteranean.

 

The ambition is to help Agip make decisions, improve information flow within the company and avoid the possibilities of mistakes, he said. It should improve logistical planning, market efficiency, transaction and operating costs.

 

Agip has originally been in talks with ShipDesk, an e-chartering venture which went out of business in early 2001; it had also talked to ShipIQ, an e-chartering venture based in Boston, USA, but talks failed after ShipIQ ruled out the possibility of the two companies working in a joint venture. This led to Agip going on its own.

 

Improved transparency about Agip’s requirements as a charterer was to the benefit of everyone, he said. “Every owner knows all the opportunities that he can have,” he said. “The operating costs can be cut as well as the transaction costs.”

 

Brokers will be encouraged to use the system on behalf of their shipowners. “My feeling is that nobody will cut the broker out of it,” he said.

 

There are plans to develop a freight futures system in the Meditteranean area, with the first cargos posted in mid November this year.

 

 

SUBHEAD

Mario Ghiggino, GoReefers

www.goreefers.com

 

Mario Ghiggino, marketing director of refrigerated cargo management site GoReefers, talked about what his company, offering a range of different services to manage refrigerated cargo, making it more like a freight forwarder than a shipbroker. However chartering entire vessels is something the company does. 

 

GoReefers already has four offices in Africa, offices in New Zealand and Rotterdam, with representative offices in South America. It earns revenues through a mixture of subscription services to the website and offline services, arranging actual logistics.

“We are a new animal,” he said.

 

 

SUBHEAD

Shipping Direct

www.shipping-direct.com

 

Shipping Direct is about to launch an e-chartering system working with a specific short sea charterer on the first of January next year, said CEO Jorge D’almeida. The platform will make it easy to transport data, simplifying and automating a lot of systems. It will include an instant messaging tool.

 

The company is now specifically focused on the short sea broking, which accounts for about 60 per cent of all chartering transactions, the company says. “There are a much greater number of small brokers in the short sea market,” he said. “Information is also much harder to come by.”

 

 

SUBHEAD

Harry Bird, Chartering Solutions

www.charteringsolutions.com

 

Harry Bird, CEO of Chartering Solutions, based in Connecticut, USA, talked about his internet based chartering system. Chartering Solutions does not handle any messaging, but is a collaborative working tool for charterers, brokers and owners to work together to produce the charter party document, charging a fee of 0.1 per cent of the transaction.

 

The company is “well on the road” to patenting its system, he says, which could lead to repercussions for other e-commerce companies trying to put systems together.

 

Most of the potential customers for the system are currently waiting to see what happens in the market before making any big decisions of who to go for, he said. Mr Bird said he would be willing to selling the system at the right price, but hopes that eventually the platform will earn money itself.

 

There is a sophisticated colour coded system, where a charterer can see which aspects of the charter party are still up for negotiation and which have been agreed.

 

 

 

SUBHEAD

Neville Smith, Lloyds List

www.lloydslist.com

 

Neville Smith, manager of Lloyds List.com, talked about the importance of journalism in the maritime industry, and how this can work on the internet. “Journalists have a role, spending their time digging up leads that companies don’t want you to know about,” he said.

 

A major problem is the difficulty of charging for content. In some countries, such as Bulgaria, there are now laws against taking content from a website and republish it on a different website; this makes charging for content very difficult. For example, Lloyds List can charge money for access to content on its own site, but cannot stop a company from republishing it free of charge.

 

A problem is that many people still expect information on the internet to be free of charge, but somebody has to pay the journalists.

 

 

SUBHEAD

Freight derivatives trading

www.imarex.com

www.balticexchange.com

www.enron.com

www.ssyfutures.com

 

There was an interesting debate about trading shipping futures and derivatives, involving Baltic Exchange, which operates a forward freight agreement (FFA) trading platform, Enron, which trades freight futures with charterers and shipping companies, IMAREX, which operates an online exchange for trading futures and Simpson Spence and Young, a shipbrokers with a futures division.

 

The service is geared around the fact that the price of shipping is very volatile, because it reacts very sensitively to supply and demand. Rather than have the potential success of their deal at the whim of the market, they can hedge the risk with a company like Enron, agreeing to pay a specific price for the future freight.

 

If the actual price is lower than the agreed price, then the counterparty makes money; if it is higher than the agreed price, the counterparty loses money. While it all sounds like a bit of a gamble, there are real market benefits, because companies can take a lot of the risk out of their transactions by hedging them. “Its a way of smoothing out the cashflows,” said Enron’s Scott Moncrieff. “They can manage long term company finance.”

 

Tom Mortensen, manager of IMAREX, said that the system opens for live trading on November 2, 2001. IMAREX does not provide counterparty risk itself; other parties do.

“We are a market concept for freight derivatives, not a software company or internet company,” he said. “We are a new market concept. We believe there is a good growth potential.”

 

Scott Moncrieff, director of liquid freight trading and shipping with Enron, talked about what is company is doing to offer services to help charterers and shipping companies hedge their risk.

 

“I think [the development of futures trading] will be a slow, gradual process,” Mr Moncrieff said. “It will take time to become a fully operational marketplace. The obstacle is the failure of a lot of companies to see the benefits of hedging the risk. Shipping companies have traditionally been big risk takers themselves.”

 

Commodity traders rarely trade without some kind of hedge, he said, and it is strange that people are comfortable trading shipping services without hedging against price fluctuations at all.

 

There was some discussion that maybe charterers do not hedge against shipping because the cost of shipping is negligible compared to the cost of the oil being carried, and charterers will pay the cost of the shipping whatever it is at that day.

 

“Shell lost $80m by not hedging freight,” commented John Banaszkiewicz, futures trader with brokers Simpson, Spence and Young. “It sounds like a lot of money to me.”

 

 

SUBHEAD

Vetting procedures

 

There was some debate about how commoditised shipping actually is, and so how suitable it is for futures trading. Carlo Rossi, e-chartering manager from oil company Agip Petroli, commented that he did not see shipping as a commodity, because of all the vetting procedures which oil companies make any ships they use go through. Ships which have passed the vetting procedures get a much higher price than ships which haven’t, he said.

 

Mr Moncrieff from Enron pointed out that all of the freight rates used to make the Baltic indices assume that the ships have all the necessary approvals, which are specified exactly. 

 

 

SUBHEAD

Phil Parry, Spinnaker Consulting

www.shippingjobs.com

 

Phil Parry, managing director of maritime recruitment consultancy Spinnaker, gave his perspective on how much shipbrokers are worth in the new economy and where they can best find employment.

For shipbrokers in general, the outlook is very poor for the next few years in just about every sector, he said. “We have a lot of unemployed shipbrokers on our books.”

 

Shipbroking is becoming a much more dog eat dog business, he said, with people being motivated by fear of losing their jobs as much as anything else. “Its highly stressful,” he said. “You’ve got to be able to produce and do it quickly.”

 

“Good brokers succeed through a mixture of greed and fear,” he said. “Its amazing what the fear factor can do. The key element is that people are really quite fearful for their jobs. They know they’ve got to perform very well to survive.”

 

There are differences between small companies and large companies, he said. Small firms are more likely to expect their brokers to take a bigger risk, with more of their pay tied up in bonus structures. Larger companies are more likely to take a structured salary approach.

 

“People are not given the length of time to produce as they would have been in the past,” he said. “Graduates on trainee positions don’t get more than a year or two if they can’t produce.”

 

Companies can keep their costs and risk low by having a heavier emphasis on the bonus rather than the salary, he said. “The higher salary you are on, the greater risk you are at,” he said.

 

Current salaries are £15,000-£16,000 for trainee brokers, which can rise to £30,000-£35,000 within a couple of years for precocious people. Senior brokers can be on a £30-£70,000 basic, whilst directors can be on £50-85,000 basic with a possible 60 per cent bonus.

 

Good brokers continue to be well paid though, he said. A star broker can leave a company and take all of his business relationships with him, so companies are very keen that this doesn’t happen. “Individuals who are very good tend to have very good packages,” he said.

 

When considering your next move, it is very important to consider how interested you are in developing a career, how much you need job security and whether you are willing to relocate in order to get tax breaks, he said.

 

It is also important to get a sensible idea about how good you actually are, he said. “A lot of people think they’re good shipbrokers but most people are not,” he said. “Most people think they understand the needs of the industry but they don’t.” Most people are not interested in your qualifications but just your track record, he said.

 

SUBHEAD

Working in e-commerce

 

The attitude people have to working for e-commerce companies has undergone a great deal of change, he said. “In 2000 everybody was clamouring to work for the e-commerce companies. It was quite incredible. Once we got to October, November last year, people were saying, don’t you dare put me near an e-commerce employer.”

 

Since then, the attitude to e-commerce has changed again, as people have come to realize that e-commerce almost certainly has a solid future, so long as you get in with the right players and get the right position in the company.

 

Most of the demand from e-commerce companies is for sales people, he said, not for people with specific skills in developing companies. A secondary need is for academics, people capable of analysing business and structuring marketing programs, he said.

 “We’ve gone beyond the strategic advisory element. Most people know where they’re going now,” he said.

 

The benefit structures are very different now to last year, with e-commerce companies starting to bring in benefit structures and long-term benefits, rather than just a system of cash bonuses.

 

The marketing director of an e-commerce company can expect to earn between £45,000 and £75,000 at this point, he said, with a potential bonus if the business is successful. The CEO’s salary has gone down a great deal from the £     150,000-£250,000 it was on last year. But the lower salary expectations have been replaced by an increased job security.

 

To work for an e-commerce company, it is very important to be technically literate and understand the shipping business much more than just being able to fix ships. “If you’re missing something then do something about it, don’t just put in a CV and hope for the best,” he said.