Bermuda Container Lines expects that in the face of escalating global shipping costs, freight rates will increase at a much higher rate over the next few years.

The company sounded the warning yesterday after announcing that for the third straight year it had experienced a decline in net earnings.

Its 2004 figures fell 11 percent to $3.6 million as compared to the year earlier when net earnings were $4.1 million. The decline occurred despite increased freight revenue as expenses grew at an even faster rate during the fiscal year ended December 31, 2004.

Revenue increased to $3.6 million ? with 12 percent primarily due to cargo volume increases, 8 percent due to the BCL service and 12 percent in the SISL service from Florida.

All major expense categories, however, experienced increases over the previous year pushing 2004 total expenses up 16 percent to $4 million.

For the past two years, BCL has warned of cost pressures on the entire shipping industry, however, in its earnings statement yesterday, it said that the local shipping industry has been able to keep freight rates stable due to cargo volume increases and cost containment efforts.

BCL said that the volume of container cargo handled by the regular liner services to Bermuda has increased 71 percent since 1986 with the growth in Ro/Ro and non-container cargo higher.

?This volume growth allows fixed costs to be spread over more containers so reducing the per container cost though variable costs continue to increase,? BCL said. ?Stevedoring and cargo handling expense is the single largest expense category, it is a variable one and absorbed 41 percent of the BCL service gross freight revenue in 2001 but three years later in 2004 it absorbed 48.5 percent.?

The company said there is a limit, however, to how much costs can be offset by volume growth and it in fact expects cargo volume growth to moderate in the coming years. For the first four months of 2005, cargo volume has actually been on the decline compared to the same period of 2004.

Cost containment efforts, including converting the to burn heavy fuel oil in 1998, have also helped in keeping freight rates down but BCL said there is a limit to how much costs can be reduced by improved processes and new methods of doing business.

The shipping industry world-wide is facing cost pressure due to the significant growth in world trade with the cost of ships up dramatically. BCL said that a replacement ship for the 2004 dry-docking cost nearly three times the one for the 2002 dry-docking. The cost of repairing and maintaining the 15-year-old is surging as is the cost to eventually replace her with a new ship. At the same time, new container and other cargo handling equipment costs have increased upwards of 20 percent in the last 18 months on high demand and significant increases in the price of raw materials such as steel.

BCL said that the growth in world-wide trade is also having a negative impact on shore side operations. Volume growth at all major container ports in North America last year exceeded 10 percent and is expected to see significant growth again this year. BCL noted that port congestion around the world is also driving up costs significantly. Given trends elsewhere, it expects stevedoring and cargo handling costs to increase at a greater rate than the rate of inflation.

?The inescapable conclusion is that freight rates will have to increase at a much higher rate over the next few years than they have over the past 19.

?The directors of BCL are aware of the unfortunate impact this will have on the already high costs of doing business in Bermuda. Unfortunately, these cost increases are outside the ability of BCL or even Bermuda to control,? the company said.