Financial Times

LMS margins seen eroding with loss of bunker monopoly
Lanka Marine Services, the bunkering subsidiary of John Keells Holdings which has been one of the conglomerate’s main cash cows, is likely to see lower margins after the loss of its monopoly in Colombo port but could make up for it by lowering prices to increase sales, stock brokers said.

The loss of the bunkering monopoly would force LMS to look at greater volumes in the wake of lower margins, Bartleet Mallory Stockbrokers Research said in a report.

“However, bunkering would remain a moot point unless price revisions take place to match that of regional ports.” Bunker prices in Colombo have been among the highest in the world and the number of ships calling for bunkering fell sharply to a mere 14 ships in 2004 from a high of 285 in 1993.

Shipping lines with ships taking bunkers in Colombo port have long complained about high prices and the effective monopoly held by LMS. However, bunker prices in Colombo port have fallen and new suppliers have emerged after the court ruling that ended the LMS monopoly.

Hasitha Premeratne of HNB Stockbrokers said the loss of the monopoly and increased competition was likely to result in lower profit margins for LMS but added that it could make up for it through better service.

“Now it depends on whether JKH can still give quality service to maintain customers and prevent them going elsewhere,” he said. “With competition there would be a drop in profits but it would have only a minor impact on net profit. I do not see it as a significant issue because JKH can differentiate themselves through quality service and other competitive measures as they have proved themselves in other markets.”

Premeratne said bunker volumes will increase. “Competition would be good for the industry – overall market size can increase,” he added. “So LMS may lose market share to competitors but with the market size increasing they can make up for it.”

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