Freight train coming

Australia’s rail, air and sea freight forwarding business is known as a cut-throat, low margin, low growth sector. Yet Australia’s economic boom has helped the industry enjoy a relatively strong period during the last five years.

IBISWorld estimates that this industry will grow at an average annual rate of 1.4% per annum during the five year period to 2008-09.

All imports and exports to and from Australia are transported either by sea or by air; as such imports and exports are key determinants for the demand for freight forwarding.

Further, Australia’s exports are primarily bulk commodities, agricultural and mineral goods. Industry growth was supported by strong growth in demand industries and the booming resources sector. Strong growth in imports that was inspired by strong growth in disposable income and consumer spending.

But the dream run is coming to an end. The slowing global economy has seen Australia’s largest resource trading partners either enter into recession in the second half of 2008, or downgrade expected growth. The slowing global economic outlook, lower manufacturing production, staff and shipment cut backs from major miners, and poor consumer sentiment, are expected to see industry growth in 2008-09 negligibly lower than the previous year.

IBISWorld forecasts that this industry will grow at an average annual rate of 3.2% over the five year period to 2013-14. Slower economic conditions are expected to result in 2009-10 being a challenging year for the industry, with industry revenue creeping higher by exhibiting what can only be described as timid growth. Growth will be slowed by reduced mining activity, falling disposable incomes and plunging exports.

Growth in imports is expected to remain positive, supported by continual growth in household expenditure. Exports on the other hand are expected to contract substantially as demand for resources plummets to the lowest level in years as demand from China, Japan, Korea and France in particular retreat.

The outlook for global shipping traffic is equally dim, with the World Bank forecasting global trade to contract through 2009. This is the first decline in global trade since 1982.

More importantly the credit crunch has seen the availability of trade finance disappear, with companies finding it extremely difficult to obtain credit notes, and insure trade receipts. As shipping lines remove excess capacity, the Baltic Index is expected to increase through 2009-10 but remain well below the rates seen in mid-2008.

Demand for transport services and freight forwarding is anticipated to return in 2010-11 to record the strongest growth in a decade. Rail freight activity in particular is expected to remain strong. Industry revenue is expected to return to more sustainable levels in 2011-12.

Key success factors for operators in the industry

• Market research and understanding. Having a good knowledge of market segments and an ability to understand client needs.
• Optimum capacity utilisation. Having a large sales turnover because margins are small.
• Successful industrial relations policy. Having good personnel management and industrial relations capabilities.
• Experienced work force. Having sufficient operational experience, with particular requirements in the loading and utilisation of vehicles and equipment.
• Having a diverse range of clients. Maintaining diversity in the client base.
• Production of premium goods/services. The ability to offer clients a cost and/or service advantage.
• Effective cost controls. The ability to offer clients a cost and/or service advantage. Keeping tight financial control over cost and revenue, especially debt collection and overheads.
• Output is sold under contract – incorporate long-term sales contracts. The establishment of long-term contracts, due to the strong competition within the sector. Attempting to tie clients to a distribution system that commits them to the operator’s facilities and approach.

Products and service segmentation

Major market segments

BISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au