Container market volatile but not collapsing

Hapag-Lloyd CEO Rolf Habben Jansen gave a positive assessment of the downturn in container shipping during a conference call on Thursday, as his company posted another quarter for record books.

“I don’t think the bottom is falling out of the market,” said the head of the fifth largest shipping company in the world.

“If you look at volume and demand, we saw a very sharp drop in weeks 34 and 35 [the last two weeks of August]. Then things went uphill again. Since the golden week [the first week of October], it went up and down. It was relatively weak last week. This week started stronger. It’s quite volatile.”

Short-term stocks, seasonal effects

Container Trades Statistics in September reported a 25% year-on-year decline in transpacific volumes and a 9% decline in global volumes. “The global economy is certainly not shrinking by 10-20%,” said Habben Jansen, who argued that “a key element here is an inventory correction.”

“We have had a long time where many boxes have been stuck in global supply chains. With the easing, these are now being delivered to stockpiles, which have likely filled up faster than anticipated. People, logically, responded by saying, ‘I’d better slow down a bit with new orders.’”

High inventories led to a “short-term drop in volume,” he said. “The question always arises: is it mainly due to an inventory correction or weakening demand? I’d say it’s probably a bit of both.

“People have been ordering earlier for Christmas this year, too,” he added. “We saw very strong volume early in the high season and then slowed down. So we’re now seeing limited orders, along with a slowing economy and easing congestion.

“Looking ahead, the global economy is expected to still grow a few percentage points next year. So normally you would expect some recovery.”

Capacity reduction to save costs

In the second quarter of 2020, as demand was decimated by COVID lockdowns, shipping lines prevented spot prices from collapsing by “wiping out” (cancelling) sailings and reducing transport capacity to match cargo demand.

A big focus now is whether airlines can again cancel trips to cap rates. There have already been significant cancellations. The shipping company Maersk estimates that 15% of the capacities between Asia and Europe and between Asia and the USA have already been reduced. However, some analysts believe airlines have not been pulling capacity fast enough.

“We haven’t taken much out so far,” admitted Habben Jansen. The reason, he said, is “because our first priority right now is to get all ships back into position.” Port congestion is easing, but the impact on rosters isn’t over yet.

“We have sails that have slipped [were pushed to the following week] because ships stuck in Northern Europe returned to Asia later than originally expected,” he said. Once schedules are back on track, capacity will be reduced as needed as a cost saving measure.

“Remember that of all the costs you have in sailing a ship, about 60% to 65% are variable costs. That means we would never sail two ships at 50%. [utilization]. We would always sail a ship at 100%, simply because we can save an enormous amount of money. That’s a lot of money in absolute terms, especially for ships that are getting bigger and bigger over the years.

“And from a cash perspective, it’s even higher [than 65% of variable costs]so you will always try to take this cost out because it helps you keep cash.

Strong profit decline expected in Q4

Hapag-Lloyd reported net income of $5.2 billion for the third quarter of 2022 — a new record — up 9% from the second quarter and 54% up year-on-year. Earnings before interest, taxes, depreciation and amortization came in at $5.7 billion, also a new high and 7% above analyst consensus forecasts.

The airline kept its full-year EBITDA guidance unchanged of $19.5 billion to $21.5 billion. That means EBITDA for the fourth quarter of 2022 is expected to be in the range of $2.9 billion to $4.9 billion, down 14% to 49% from the third quarter.

Volumes in the third quarter of 2022 were flat year-on-year and compared to the second quarter. As with other airlines, the exceptionally high profits were driven by higher rates. Hapag-Lloyd earned $6,212 per forty-foot-equivalent in the third quarter, its best-ever average. Rates rose 6% qoq and 39% year over year. Mark Frese, Chief Financial Officer of Hapag-Lloyd, said: “Declining spot rates were offset by long-term rates. The average freight rate also increased moderately quarter by quarter, despite gradually falling spot rates.”

Spot rate valuation in $ per FEU. Blue Line: China West Coast. Green Line: China East Coast (Graphic: FreightWaves SONAR)

Habben Jansen said just over half of the company’s total volume has long-term contracts, with about a quarter of them multi-year contracts.

“If you look at Q3 we still had pretty decent contract compliance,” he said. “Of course, sometimes there are questions from customers when the delta between contract rates and the spot market increases. It is certainly a challenge for the future.”

Wave of new construction in 2023

The order book is now very strong, with capacity under construction at 29% of on-the-water tonnage, according to Clarksons Securities. According to Alphaliner, the order book for newbuilds is higher than ever in absolute capacity values.

“The industry probably needs an order book that’s a bit smaller than what we’re currently seeing,” said Habben Jansen. “If you look at the global supply-demand balance, it’s likely that supply will grow faster than demand next year, even if there are a number of mitigating factors.”

Hapag-Lloyd currently estimates that ship supply will grow by at least 4% over the next year (with new builds being partially offset by demolitions, emptyings etc.) and that demand will increase by 2%.

The CEO noted that around 25% of his company’s chartered fleet could theoretically be returned to owners within the next 12 months.

“Normally the percentage would be a bit higher. In recent years, like everyone else, we have signed more long-term charters than before. But from a 2023 perspective, being able to return a quarter of our chartered fleet is still a decent amount of flexibility. We have quite a few too [owned] Ships we could scrap.”

Analysts expect airline earnings to fall sharply next year, especially as annual contracts roll back – but no full-year losses.

Deutsche Bank’s current estimate is that Hapag-Lloyd will report $8.5 billion in EBITDA in 2023. The consensus of Bloomberg analysts assumes an EBITDA of 7 billion US dollars. This would make 2023 the third best year in the company’s history after 2021 and 2022, despite the wave of new construction.

Chart of Hapag-Lloyd KPIs

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