We highlight some of the costs associated with FX execution and hedging that fund managers should be aware of and rank them in order of transparency.
How can freight transport and logistics firms navigate rising FX challenges?
9 May 2023
Freight transport and logistics companies have had to navigate an increasingly disruptive post-pandemic landscape. Levels of European supply chain disruption jumped by 38% in 2022 compared to the previous year, while 70% of supply chain management and logistics professionals expect pressure on global supply chains to continue throughout 2023.
Amongst the growing number of challenges facing freight transport and logistics firms is the threat of adverse currency movements. According to the International Chamber of Shipping, 90% of world trade is conducted via shipping, with over 50,000 merchant ships trading internationally. As a result, the overseas and global nature of freight and logistics companies makes them particularly exposed to foreign exchange (FX) volatility.
Against this backdrop, we believe that freight transport and logistics firms should therefore assess the FX challenges they typically face and how best to implement effective risk management strategies against these threats.
Freight transport and FX: what are the challenges?
There are several factors that can heighten the FX risk facing freight transport firms. These include:
- Payments – The FX market affects a variety of expenses and operating costs for freight companies, in particular shipping firms. These include the payment of crews, maintenance work and port duties. International shippers often make these payments in a variety of different currencies since they may be in a different part of the world at any given time, meaning payments naturally require conversion to local currencies.
- Freight duties - Freight duties form another expense for air and sea transportation companies and can be heavily influenced by currency volatility. For example, if the currency a shipping firm is paying freight duty in is particularly strong (such as the US dollar when it reached a two-decade high last September), this would dent profit margins and drive expenses up.
- Fuel costs - It is estimated that fuel represents up to 50-60% of a ship’s total operating costs. Since fuel is typically bought and traded in USD, the US dollar’s surge during the latter half of 2022 meant that freight companies could purchase less for their money, adding to operating costs even further.
How can freight transport and logistics firms strengthen their FX risk management?
As a result of these factors, freight transport and logistics firms should consider implementing a robust risk management strategy to minimise their exposure to currency movements. There are a number of steps that these firms can take to achieve this:
1. Compare the market - Having the ability to put trades up for competition is central to ensuring access to the best price, which is key to effective risk management. However, many freight transport and logistics firms may be hampered by their inability to access Tier 1 FX liquidity, meaning they often rely on a single bank or broker to meet their hedging requirements. New technology-driven solutions are tackling this problem, enabling transport companies to access rates from multiple banks whilst reducing the operational burden associated with this kind of market access.
2. Use of Transaction Cost Analysis (TCA) - TCA was specifically created to highlight hidden costs and enables freight transport and logistics firms to understand how much they are being charged for the execution of their FX transactions. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.
3. Outsourcing - There is a growing recognition that outsourcing does not necessarily mean less transparency or reduced quality of FX activities, and when using the right partner, companies can improve transparency and execution quality. Outsourcing can enable freight transport and logistics firms to dedicate more time to core business matters, which is all the more important given that volatility and supply chain disruption are expected to persist over the next twelve months.
4. Strong governance – Freight transport and logistics firms may face several steps in the supply chain process which can often be logistically complex. These include scheduling pick-up and delivery dates, preparing any specialist transport equipment, setting out and arranging the right shipping lane (if transport is taking place via shipping) in addition to ensuring the necessary insurances are in place. This operational complexity can make it difficult to maintain transparency. Harnessing solutions which can strengthen governance may help many freight transport and logistics firms improve the cost, quality and transparency of their FX execution.
How MillTechFX can help
With currency movements set to remain volatile over the next year, we believe it is vital that freight transport and logistics firms get the right tools and processes in place to protect their bottom lines against the threat of currency movements.
MillTechFX’s market access, pricing power and operational resource enables it to deliver a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction for freight transport companies.
We provide access to a transparent marketplace for comparative FX execution from up to 15 counterparty banks, while harnessing a unique and significant pricing efficiency for our clients. Rather than spending months setting up multiple FX facilities with different counterparties, freight transport and logistics firms can sign up and begin transacting within weeks.
Jason Gaywood, Head of Corporate Solutions
Jason has over 20 years’ experience in the deliverable FX and Payments space. During his time in the industry, he has worked extensively across the UK, MENA, North American, and Australasian regions. Prior to this, Jason started his career as a graduate at Liberty Brokerage Inc. (now part of TP ICAP plc) where he spent six years as a US Treasury IDB.