Hapag-Lloyd CEO: Container market is volatile but not declining

Hapag-Lloyd chief executive Rolf Habben Jansen upvoted the slump in container shipping during a conference call on Thursday as his company posted another quarter for record books.

“I don’t think the market has bottomed out,” said the director of the world’s fifth largest shipping company.

“If you look at volume and demand, we saw a very sharp drop in weeks 34 and 35. [las dos últimas semanas de agosto]. Then things went up a bit. From the Golden Week [la primera semana de octubre], there were ups and downs. The past week has been relatively weak. This week started stronger. It’s pretty volatile.”

Short-term stocks, seasonal effects

Container Trades Statistics reported a 25% year-on-year decline in trans-Pacific volumes in September 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 relief, they are now being shipped to warehouses that were probably filling up quicker than expected. Of course, people reacted by saying, ‘You’d better slow down a bit with the new orders.’”

The high inventories are leading 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.

“Also this year, people have been placing their orders for Christmas earlier than expected,” he added. “We saw very strong volume early in the high season and then slowed down. Because of this, we are currently seeing limited orders, along with the slowing economy and the reduction in congestion.”

“Looking ahead, the global economy is expected to still grow a few percentage points next year. So the normal thing would be to expect some rebound.”

Capacity reduction to save costs

In the second quarter of 2020, as demand was decimated by COVID lockdowns, shipping companies prevented spot prices from collapsing by “washing” (cancelling) shipments and reducing shipping capacity to meet demand for cargo.

Now it remains to be seen whether the shipping companies will be able to cancel ships again in order to set minimum prices. There have already been many cancellations. Shipping company Maersk estimates that 15% of capacity between Asia and Europe and between Asia and the United States has already been reduced. However, some analysts believe airlines have not been pulling capacity fast enough.

“We haven’t reduced much capacity so far,” admitted Habben Jansen. The reason, he said, is “because our first priority right now is to get all the ships back in place.” Port congestion is easing, but the impact on operating hours is not over yet.

“We have delayed departures [se han trasladado a la semana siguiente] because ships stuck in northern Europe have returned to Asia later than expected,” he said. Once schedules are back on track, capacity will be reduced as needed as a cost saving measure.

“You have to remember that of all the costs involved in sailing a ship, between 60% and 65% are variable costs. That means we would never sail 50% with two boats [de utilización]. We would always sail a 100% boat simply because we can save a lot on costs. That’s a lot of money in absolute terms, especially for ships that are getting bigger and bigger over the years.

“And from a treasury perspective, it’s even higher [que el 65% de los costos variables]so we always try to eliminate this cost because it helps conserve the treasury.

A significant drop in profits is expected for the fourth quarter

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

The company left its full-year EBITDA guidance unchanged at between $19.5 billion and $21.5 billion. That means EBITDA for the fourth quarter of 2022 is expected to be between $2,900 million and $4,900 million, down 14% from the third quarter.

Volumes in Q3 2022 were flat year-on-year and compared to Q2. As with other airlines, exceptionally high profits were made from rising fares. Hapag-Lloyd earned $6,212 per forty-foot-equivalent in the third quarter, its best-ever average. Interest rates rose 6% for the quarter and 39% for the year. According to Mark Frese, CFO of Hapag-Lloyd, “The drop in spot rates has been offset by long-term rates. The average freight rate also increased moderately quarter after quarter, despite the gradual decline in spot freight.”

Valuation of spot rate 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 is in long-term contracts and about a quarter of that in multi-year contracts.

“If you look at the third quarter, contract fulfillment was pretty good,” he said. “Of course, customers sometimes have questions when the spread between contract rates and the spot market widens. Without a doubt it is 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 the tonnage in the water, according to Clarksons Securities. In terms of absolute capacity, the order book for new ships is the highest in history, according to Alphaliner.

“The sector probably needs a slightly smaller order book than what we are currently seeing,” said Habben Jansen. “If you look at the global balance between supply and demand, supply is likely to grow faster than demand next year, although 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 newbuilds being partially offset by demolitions, laundries, etc.) and that demand will grow by 2%.

The Director-General pointed out that theoretically around 25% of the fleet chartered by his company could be returned to shipowners in the next 12 months.

“Normally the percentage would be a bit higher. In the last two years, like everyone else, we have signed more long-term charters than before. But from a 2023 perspective, the ability to redeliver a quarter of our chartered fleet is still a decent amount of flexibility. We also have a number of ships [propios] that we could throw away.”

Analysts expect shipper profits to fall sharply next year, mainly due to the rebalancing of annual contracts, but no losses for the full year.

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.

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