Logistics, exchange rate woes
• Finding the right partner becomes a critical step in the value chain
Considering there has been more than R1.2-trillion of imports into SA within the past 12 months it is easy to understand that the trade finance sector plays a critical part in the sustainable development of the country’s economy, according to Greg Cline, head of corporate accounts at Investec Import Solutions.
He says the most volatile parameter of the trade finance equation relates to the exchange rate with imported goods being foreign currency denominated; however, the political climate at the moment and the strengthening rand bode well for foreign trade.
“The other side of the trade finance equation relates to logistics, which have become more complex in that there has been much consolidation in the shipping lines over the past 18 months with the result that the numbers of sailings on the trade routes have reduced. Furthermore, container costs have almost doubled over the same period.
“Freight costs have doubled in the past year-and-a-half and suppliers are competing to get their goods onto ships. Obviously it is a supply and demand equation with prices being driven up,” says Cline.
He says finding the right partner becomes a critical step in the value chain.
“The import process is not an easy one to undertake. From not having sight of products throughout the supply chain to being concerned about landed costs, import tariffs and the impact it all can have on cash flow, businesses often feel intimidated. Yet, this does not have to be the case.”
Cline says using a single provider to be the one point of contact in the import process can mean the difference between maintaining effective business growth and stagnating due to these external factors.
In addition, a high value import specialist will be able to finance the cost of goods as well as the forwarding and clearing costs. For small business limited by cash flow, this is a life-saver. Having that one point of contact to oversee the process means decision makers can stay focused on meeting their core deliverables.
He says that another foreign trade challenge to overcome in SA currently is a shortage of infrastructure. For example, the storms in Durban last year resulted in damage to a number of cranes that move the containers on and off the ships, so lead times for ships to move goods to and from Europe and China have increased, because although ships might arrive in the bay timeously they take longer to berth as there are not enough cranes to discharge the containers from the ships without delay.
“We have experienced up to two-week delays, which has impacted trading, particularly in the non-food merchandise sector. For example, some goods expected in December only arrived in January.
“In the past it was almost an obvious choice as to whether to airfreight or sea freight imports into SA. Now, with the delays, there is a cost of funding for the goods that needs to be considered as airfreight only takes a few days, whereas sea freight through Durban can take anything from three to six weeks, because of port delays.
“We have seen an increase in the amount of goods that are being airfreighted to SA, because the lead times are reduced resulting in less interest to be paid,” says Cline.
From a trade finance perspective, the trend among Investec’s clients is to look at the cost of debt within their business. “In the past many of our clients might have used an overdraft facility or some other type of debt structure. However, today more and more clients make use of trade financiers as we are able to grant additional finance based on their stock value and make quick decisions together with the advantage of a strengthening rand.
“What this all translates to is an increased stock turn — we see businesses that were bringing in stock three times a year bringing in stock four to five times and that is where we see improved profitability.”
Cline says another element connected to logistics is dealing with South African customs.
“It is essential to be able to deal with customs effectively. It is important to have strategies in place, the history of the number of stocks per tariff code, and having the expertise to be able to motivate on a case-by-case basis or else an issue that could take only a couple of days to clear could take a couple of weeks.
“For example, the longer it takes to return the container back to the shipping line the more it costs in outstanding fees that eat into the gross profit margin of the goods and we are living in a highly competitive environment in which every present matters,” says Cline.
A strengthening rand together with technology advances will allow clients to trade in a more efficient and cost-effective manner, which should translate into increased imports and exports.
“We think companies are going to start exploring whether they should import through Durban or change to another port such as Port Elizabeth.
“Businesses are becoming more sophisticated and are able to leverage technology to improve the efficiency of their supply chain. Overall, we expect investment and trading conditions to pick up in 2018.”