MARKET. ANALYSIS. PROGNOSES. Lithuanian Marine Business and Transport Indicators Flourish, but Increasing Competition Calls for New Solutions

 

Vilius Juzikis
Management Board Member at SEB Bank, Director of Corporate Banking Division

Vilius Juzikis started his career at SEB Bank as an Assistant Client Manager at the Corporate Banking Division. During this time he also led the SEB Lizingas company and the process of its integration into the Bank. Later he joined the group’s Credit Division in Sweden and then led the Credit Division in Lithuania for four years. As of spring 2017 V. Juzikis is the Director of the Corporate Banking Division and Management Board Member at SEB Bank.
‘Vilius Juzikis has been working in various positions at SEB Bank Corporate Baking and Credits for the last seventeen years and is valued for his in-depth knowledge of business, the ability to develop and maintain corporate relations with business clients and strong leadership skills.’ says Raimondas Kvedaras, Board Chairman and President of SEB Bank.
The insights, offered by Vilius Juzikis, Master of Economy and Banking, on the topics of commerce, shipping, ports, logistics and road transport of are now presented to the readers of JŪRA MOPE SEA.

Freight forwarding as Lithuania’s gold mine

Lithuania is in the lead of the European Union in terms of transport and storage contributions into the Lithuanian budget with freight forwarders and warehousing service providers creating more than one tenth (13 per cent) of the country’s GDP. Lithuanian companies working in this field show record-breaking indices in all types of freight forwarding in a decade and the greatest value comes from international orders. This shows that using the economic upswing smartly, these companies have found a gold mine, useful for both long-term business and the country’s economy. This data was revealed by the analysis of the transport sector, conducted by SEB Bank.

The port of Klaipėda is one of the fastest-growing ports in the European Union

In recent decade cargo handling at the port of Klaipėda has grown by more than 40 per cent, i.e. from 30 to 43 million tonnes. This growth was one of the fastest, compared to the largest ports in the European Union (EU). What makes the Lithuanian port different from other growing EU ports is that its handling indices mostly increased due to the amount of bulk cargo, while the best results in Europe were achieved by ports that managed to become container handling hubs.
Although Klaipėda is becoming increasingly dependent on the cargo from Belarus, the growing exports and imports of Lithuanian goods, as well as increasing distances between the destination markets significantly determine the port’s growth. The competition between the Baltic seaports is huge and will not be smaller, enabling the Seaport Directorate and handling companies to make more investments to increase the ports’ attractiveness to the current and future clients.

The port of Klaipėda has the best container handling infrastructure in the Baltic States

The port of Gdansk is one of the best examples of a successful seaport growth. In just a decade it doubled its handling indices to 41 million tonnes, which was mostly influenced by increasing container handling from 1 to 16 million tonnes after building a deep-water container handling terminal, which can accept the largest ocean-going container ships directly from Asia. For example, Klaipėda has the best container handling infrastructure in the Baltic States, which creates opportunities to become an important container distribution hub, even if not as large as Gdansk. In May the manager of the container terminal has made the long-awaited decision to service ocean container ships in Klaipėda, the cargo from which would then continue its journey to other Baltic ports on feeder vessels.
Both in Lithuania and the world increasing amounts of cargo – fertilisers, scrap metal, wood, grain – are put into containers (the process is referred to as containerisation), which are then transported to their destinations using various means of transport. In several recent years the handling results in the seaports of the world show that the increase of container handling growth is approximately 1.5 times faster than the world’s GDP. Container handling indices in Lithuania have recently been showing fast growth results, increasing by 6.5 per cent in 2017 and in the first five months of this year the growth was larger than during the same period last year by almost one third (in TEUs).

The scale of freight forwarding by sea will continue to grow

Although the port of Klaipėda also handles transit containers, the majority of containers come to Lithuania full of imported goods or continue their journey with exported Lithuanian goods. We should note that the distance to the destination markets for Lithuanian goods keep increasing. In the last decade the exports (oil, fertilisers and grain not included) to the largest Asian countries grew seven times and to the USA – five times. The largest share of such goods, transported by ships, travel in containers. Our exporters are not expected to slow down in searching for further markets and thus the scale of freight forwarding by sea should continue to grow. The imports from Asian countries increase as well, thus, Lithuanian consumption levels getting closer to that of the EU average will result in more opportunities to increase the number of goods, imported in containers.
In recent years handling companies of the seaport have made substantial investments into increasing grain handling capacities, considering the grain sellers’ request for larger storage capacity, cleaning and drying functions, as well as faster loading and unloading procedures at the port. Although it’s highly unlikely to repeat the leap in grain handling, witnessed in the previous decade, some opportunities of increasing the handling of these goods are still available. Lithuanian grain harvest should slowly increase in the long run, while the scale of grain consumption should not change much, thus handling 4 million tonnes of grain at the port of Klaipėda is quite possible.
The export growth opportunities for fertilisers, produced in Lithuania, are limited, thus the companies of the port will focus most of their attention on attracting Belarusian fertilisers, mostly consisting of potassium fertilisers, produced by Belaruskalij. Belarus is a competitive producer of potassium fertilisers in the world and continues to invest into production development, which allows to assume that the ceiling of fertiliser handling has not yet been reached at the port.
Competition for Belarusian oil products is more complex than for the fertilisers – the more realistic goals involve maintaining rather than substantially increasing the handling of these goods. The last three years have been particularly good for the Lithuanian oil processing company Orlen Lietuva due to favourable processing margins. Although the market situation is changing, the competitiveness of this plant may pose more challenges to the port due to lack of investments and inconvenient infrastructure.

Promising projects

The Chinese New Silk Road, connecting Asia and Europe, as well as the Great Stone industrial park near Minsk remain major projects that should not be forgotten by the port’s companies. The scale of direct rail freight forwarding between China and Europe has recently been rapidly increasing with new lines from Western Europe launching every week. The majority of goods move along the Ukrainian-Belarusian border, which gets increasingly jammed, thus Lithuanian Railways and the port of Klaipėda should continue reminding about themselves and fight for a flow of such cargo through Lithuania. On the other hand, the current relations between Lithuania and Russia are not so favourable for the latter to be interested in allowing the cargo flow from China or Central Asia through the Baltic states.
The Great Stone industrial partk continues to revolve around construction works with the production promising to gain momentum next year, which means that the port has not been gaining much from this project so far. However, should the expectations regarding the huge investments into the park prove right, the opportunities of freight forwarding from and to the park will increase. We shouldn’t forget, however, that the same freight has been targeted by Latvian ports, which experienced much damage due to the loss of the Russian transit cargo, and are now eagerly eyeing Belarusian cargo.

Handling growth requires more investments

The financial situation of Klaipėda State Seaport Authority and the majority of handling companies at the port is strong, offering lots of opportunities to borrow and make investments. The Seaport Authority is planning more than 400 million Euro of investments into the port’s infrastructure for the period of 2018-2022 with substantial investments into the infrastructure of the handling company itself. Of course, keeping and finding new clients is very difficult and even more so without investments, especially when competitors target the same clients and cargo. By the way, if implemented, such investments could not only increase handling at the port of Klaipėda, but also have a positive effect on the economy of the entire country.

Lithuanian handling companies are small, but profitable in the international arena

Although handling companies in the Baltic states are small (their average revenue is about 50 times smaller, compared to other foreign freight companies), but their profitability put them on the same shelf as the international market participants. Last year the average EBITDA of the Lithuanian handling companies was 43 percent, while that of the foreign countries – 37 per cent. EBITDA of Latvian and Estonian companies depended on decreasing volumes of transit cargo, especially of the Russian oil, thus their average EBITDA is significantly slower, compared to Lithuania (35 per cent in Latvia and 30 per cent in Estonia).
It should be noted that Lithuanian handling companies have been implementing a responsible borrowing policy, which depends on one or several clients, geographic location and terminals. This situation of the Lithuanian handling companies reflects on the ratio of the net financial debt and EBIDA, which was as low as 1.1 last year (compared to 2.6 of foreign countries). The capital index of the Lithuanian handling companies is higher than that of the foreign countries with 69 per cent in 2017 (47 per cent of foreign countries).

Larger transport companies show greater perspectives

The largest cargo flows travel by road and the majority of the orders (about 90 per cent) in terms of tonne-kilometres come from the abroad, which means that long-distance truck drivers should have plenty of work in the near future. Truck business constitutes as much as 9 per cent of Lithuania’s GDP.
The criss ten years ago taught companies some very important lessons and the currently flourishing transport companies not only enjoy their increasing revenues, but also take care of their financial sustainability and liquidity in order to dodge any possible economic downturns. However, the greatest potential of surviving in the long run lies with the largest companies.
They not only renew their transport park, implement IT solutions and create new jobs, but also accumulate higher liquidity reserves and do their best to diversify in terms of geography, clients and type of cargo carried. Such companies feel at ease discussing downturns, because they know what to expect from their sector in case of negative economic characteristics and prepare for that.

The effort in the East will pay off

Although after the introduction of Russian sanctions the freight forwarding business has successfully focused on the West and about 80 per cent of the tonne-kilometres were transferred on the EU roads, the signs of recovering Russian economy create new business opportunities. Lithuanian companies have put a lot of effort in working in the East, which will undoubtedly eventually pay off and enable more efficient competition with other EU forwarders. In addition to that, Russian language skills and experience of communicating with the East helps the sector solve the issues of qualified workforce. More and more Ukrainians and Belarusians drive the trucks that belong to Lithuanian transport companies.

Outrun EU old-timers

Truck drivers see better days due to the policies, introduced by companies and the European Union as well. This year marked new changes in the EU directive, aiming to unify the working conditions of the workers, placed on detached work in EU countries.
Experts predict further growth in the transport sector this and the following year, fuelled by positive business environment. What gives even more hope for Lithuanian carriers is that the giant old-timers of the market – Germany, France and Italy – keep facing the increasing issue of larger workforce costs. Therefore, Lithuania, just like Poland, Romania, Slovakia, Bulgaria and other Eastern and Central European countries, keep taking their share of the international forwarding market from the said countries.

More profit for the small carriers. Is it possible?

One percent of the transport companies in Lithuania manages 70 per cent of the country’s truck fleet and usually earns more profit than the small transport companies. What are the ways of ensuring profit for the small carriers? Should they grow and join the one-percent club?
The largest companies in the Lithuanian transport sector use the economic growth to increase their turnover. Having signed record-breaking equipment purchase contracts, in the past few years these companies expanded their fleets and business, while modern IT solutions, advanced management and process management systems helped to improve efficiency and competitiveness. These companies start taking an increasingly larger share in the European forwarding market, which, together with the growth of carriers from other energetic Eastern European states, raises concern among the market old-timers from Germany, France or Spain.
With 100 or more trucks, these companies offer various advantages. First of all, their fixed costs are smaller, enabling them to earn more profit. Second, upon deciding to purchase a larger number of trucks or their accessories, these companies strengthen their negotiation power and can achieve prices that small carriers will never have. Fuel suppliers offer better conditions for large companies as well.
Third, a large fleet and a team of many people enables to balance the activity better, finding a replacement for a broken truck or an ill driver, while a loss of one client can be balanced out with other orders. Overall, the more equipment you have as a carrier, the denser is the network of your routes, which means more trucks with cargo and more revenue. The large companies also often include subcontractors – the revenue may be smaller, yet the troubles with long-term obligations, condition of the equipment and drivers is smaller as well. The subcontractors are what a company would shed first in case of difficulties caused by a loss of several orders.
Fourth, larger companies have greater opportunities of attracting larger clients and direct orders from large international companies both directly from the producers and large international logistics companies. The opportunities of small companies to work without intermediaries is not so great, while each intermediary in a business chain means decreasing income and profit margin.

A chance for the dwarves: even successful carriers have to look out not to lose their opportunities

Differently than in Lithuania, the majority of the European market is rather fragmented, predominated by smaller companies, owning up to 100 trucks. The market is full of small clients and cargo, while information technology has substantially improved the business environment and solutions for the small and medium-sized businesses, helping them to get into and maintain a direct contact with smaller clients.
The majority of smaller Lithuanian transport companies also engage in successful business, especially, when the economy is on the rise. With increased demand and lack of trucks, the forwarding dwarves can negotiate for even better prices than the giants. However, they have to find ways to stay profitable without being a market giant, creating more added value and staying independent of the economic fluctuations as far as possible.
One of the ways is specialisation, i.e. finding your market niche, using the available capacity and creating the most favourable business model.
Finding new opportunities usually means getting out of your comfort zone. Companies that have been there for a while usually focus all of their attention on business management and don’t find time for innovations so much sought-after by startuppers.
Companies that are determined to find strategic growth opportunities can be observed at SEB Innovation Centre, where small and medium-sized businesses participate at the rapid corporate growth training programme. These include transport companies, searching for what makes them unique, acknowledging the fact that they have to get out of their comfort zone to find new opportunities. An opportunity to step into different shoes – to get to know the provisions and mentality of a startupper – is very useful for businesses with many years of experience to encourage the implementation of innovation culture.
Small and medium-sized companies don’t have to compete in the huge market with large carriers, because they can focus their effort on a narrow and profitable niche, completely satisfying their client needs and achieving great results.
Finally, both small and large Lithuanian carriers have a good reputation all over Europe – we are valued as reliable partners, which creates a firm foundation for long-term and valuable relations with clients. Connections, based on mutual trust, help to ensure better business profit margins and finding better business conditions. This benefits everyone, because small and medium-sized business is the cornerstone of each country’s economy.

Lithuanian carriers push towards the EU market – the numbers of leasing agreements increase

Lithuanian carriers use leasing to buy more cargo transport and, using the favourable conditions, increase their positions in the European Union market. That is confirmed by the SEB Bank statistics: the net value of SEB Bank leasing in the first half of 2018 increased by one fourth, compared to the same period last year – 24.5 per cent (up to 714.5 million Euro), while carrier companies continue to stay at the top of the most active parties for leasing agreements.
In recent several years the major Lithuanian carrier companies have been developing their activities and investing into the renewal of the fleet. During the first half of this year this tendency has increased even more with 7 thousand new leasing agreements in this period alone, which is almost one thousand more than during the same period last year and more than half of these agreements involve freight vehicles. These companies start taking an increasingly larger share in the European forwarding market, which raises concern among the market old-timers from Germany, France or Spain, as well as carriers from other energetic Eastern European states.
In the first half of 2018 the value of new leasing agreements regarding cargo vehicles reached 152.9 million Euro, which is 23 per cent more than in the first half of 2017. The value of this year’s new leasing agreements is 263 million Euro, i.e. 21 per cent larger than in the first half last year, when it was 217.6 Euro.
Recently SEB Bank has provided a record-breaking funding of 105 million Euro to Girteka Logistics Group – the largest international transport and logistics supplier in Europe. The funds will be used to renew and expand the fleet, which currently consists of 5 thousand trucks and 5.5 thousand semi-trailers. This is the largest leasing transaction, funded by SEB Bank this year.
Lithuanian carriers have taken strong positions in the European Union market. Lithuanians are capable of efficient fleet management using innovation technology solutions and improving processes, thus taking an increasingly larger share of the international freight forwarding market from the old-timers together with Poland and other Eastern European carriers. This is one of the major reasons for their growth.
Client business development is gaining momentum, thus in recent years we’ve been talking about record-breaking leasing agreements, which greatly influence general results. Acting as partners we help companies to implement long-term strategies and assess their opportunities. Currently they are optimistic, we don’t notice any signs of overheating, but we should keep in mind that the market is dynamic and there’s always a risk of a surprise.
In recent three years the number of newly registered trucks in the European Union has been increasing, but the market is not completely full, making growth opportunities in the short-term rather favourable.
On the other hand, fast development pose numerous challenges as well: carriers need to find qualified drivers and maintain them, as well as meet the new labour requirements while placing their staff on detached service according to EU directives.
For several years in a row increasing numbers of cargo fall on Eastern European companies, since their costs are smaller due to cheaper staff maintenance. Just like Polish, Bulgarian or Romanian carriers, Lithuanian companies hire third persons – non-EU citizens – as their drivers. The experience, accumulated in Eastern and Western markets become a competitive advantage of Lithuanian companies.
Lithuanian business managed switch to Western markets and adapted to the EU requirements, but their effort and business relations in the East are still there, creating opportunities for profit. Russian economic upturn is beneficial to Lithuanian carriers.
However, the transport sector is one of the most sensitive indices of the general economic environment, signifying upcoming changes. Thus, the fact that carriers keep investing and implementing their development plans could be regarded as a positive sign of further economic growth.

 

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International business magazine JŪRA MOPE SEA has been published since 1999
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The magazine JŪRA has been published since 1935.
International business magazine JŪRA MOPE SEA has been
published since 1999.

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