Rising oil prices and lower spot market rates dampen Q1 maritime margins

 (Photo: Pexels)

(Photo: Pexels)

Shipping majors like Hyundai Merchant Marine, Yang Ming, and Hapag-Lloyd have released their Q1 earnings, reporting deficits in the quarter - as the maritime industry faces a steadily rising oil price and a spot market that had been weak for the initial few months of the year.

"We have had a solid start into the current year, but the market environment is challenging," said Hapag-Lloyd CEO Rolf Habben Jansen in a statement after the earnings release. “Freight rates have been under pressure, bunker costs and trucking cost in some important markets were up, and we faced a weaker U.S.-Dollar, whereas higher transport volumes and synergies supported the result.”

Hapag-Lloyd posted a net loss of $40.5 million in Q1, which is significantly lesser than its Q1 ‘17 net loss of $68.8 million. The reduction could be attributed to the company merging with United Arab Shipping Company (UASC) last year which incidentally, might render direct year on year comparisons moot.

The much anticipated Maersk Line earnings report is coming out tomorrow, and the forecast has not been much different for the container line, with investment bank Jefferies expecting Maersk’s net profit to hover just above the breakeven point.

The price of IFO 380 bunker fuel has been gaining ground from June of last year when it was $325 per metric ton to hitting $463 per metric ton this week. As the rise in price shows no signs of abating, the operational costs for the container lines should witness a constant increase.

On top of this, the U.S. pulling out of the Iran Nuclear deal has sent alarm bells ringing in the industry as this move would put back the sanctions and thus restricting Iran’s oil export. This could potentially trigger a fresh rise in oil prices, further weakening prospects for a better Q2. The impact of a lessening of Iran’s capacity to export oil remains to be seen, as the U.S. could increase its shale oil output to help put a cap on the rising oil prices.

On a brighter side, the ocean rates have been picking up over the last few weeks, after plummeting to extreme lows in April, when the China-U.S. rates were over 20% lower year-on-year. Data from Freightos’ Global Container Index shows a revival from late April, as rates have risen by 22% in the last three weeks to $1268 for FEU containers.

 (Source: Freightos)

(Source: Freightos)

The fall in spot market rates at the start of the year was due to the burgeoning shipping capacity, as container lines raced ahead with the production of large container ships, anticipating a surge in volume. The trans-Pacific capacity has witnessed more than 8% increase, while volume increase is somewhere between 5 to 6% widening the gap. But with the surge of e-commerce and a stronger U.S. dollar, the price cascade has been arrested as ocean rates are necking the year-on-year rates now.

The management of the various shipping companies have echoed positive sentiments about the rest of the year, expecting a leveling in the supply and demand equation, with Jansen suggesting that the impact of market growth on Hapag-Lloyd would only be seen by the later half of the year. Nonetheless, as oil prices continue to climb, the shipping majors would remain exposed, and would face stifling operational costs. For the companies to fare better this year, they would desperately need the spot rates to keep ascending and reach a historical year-on-year high for them to turn in a profit for the remaining quarters of 2018.

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