Hapag-Lloyd CEO Rolf Habben Jansen put a positive spin on the container shipping downturn during a conference call Thursday as his company logged yet another quarter for the record books.
“I don’t think the bottom is falling out of the market,” maintained the head of the world’s fifth-largest ocean carrier.
“When you look at volume and demand, we saw a very steep decline in weeks 34 and 35 [the last two weeks of August]. Then things rebounded a bit. Ever since Golden Week [the first week of October], it has been up and down. It was relatively weak last week. This week started stronger. It’s quite volatile.”
Short-term inventory, seasonal effects
Container Trades Statistics reported a 25% year-on-year drop in trans-Pacific volumes and 9% drop in global volumes in September. “The global economy is certainly not shrinking 10-20%,” said Habben Jansen, who argued that “a significant element here is a correction of inventory.”
“We had a long time where a lot of boxes got stuck in global supply chains. With the easing of congestion, those are now being delivered to the warehouses, which probably filled up quicker than anticipated. People logically reacted by saying, ‘I’d better slow down a bit with new orders.’”
High inventories lead to a “short-term drop in volume,” he said. “There’s always the question: Is it mainly caused by an inventory correction or is it weakening demand? I’d say it’s probably a little of both.
“People also ordered earlier for Christmas this year,” he added. “We saw very strong volume at the beginning of peak season and a slowdown after that. That’s why we see limited orders now, together with a weakening economy and the easing of congestion.
“Looking ahead, the global economy is still expected to grow a couple of percentage points next year. So, one would normally expect somewhat of a bounce-back.”
Capacity reductions to save on costs
In the second quarter of 2020, when demand was decimated by COVID lockdowns, ocean carriers kept spot rates from collapsing by “blanking” (canceling) sailings and bringing transport capacity down to match cargo demand.
A big focus now is whether carriers can once again blank sailings to put a floor on rates. There have already been considerable cancellations. Ocean carrier Maersk estimated that 15% of both Asia-Europe and Asia-U.S. capacity has already been removed. But some analysts believe carriers have not pulled capacity out fast enough.
“We have not taken out a lot so far,” Habben Jansen conceded. The reason, he said, is “because our first priority right now is to get all the ships back in position.” Port congestion is easing but fallout on service schedules is not over.
“We have sailings that have slid [were pushed to the following week] because ships stuck in Northern Europe came back to Asia later than originally anticipated,” he said. Once schedules are back on track, capacity will be reduced as needed as a cost-savings measure.
“Keep in mind that of all the costs you have when you sail a ship, about 60% to 65% are variable costs. That means we would never sail two ships with 50% [utilization]. We would always sail one ship with 100%, simply because we can take out a tremendous amount of costs. Especially with ships getting bigger over the years, that is a lot of money in absolute terms.
“And from a cash perspective it is even higher [than 65% of variable costs], so you will always try to take out that cost because it helps you retain cash.”
Sharp earnings drop expected in Q4
Hapag-Lloyd reported net income of $5.2 billion for Q3 2022 — a new record — up 9% from the second quarter and 54% year on year. Earnings before interest, taxes, depreciation and amortization came in at $5.7 billion, also a new high and 7% above the analyst consensus forecast.
The carrier kept its guidance unchanged for full-year EBITDA of $19.5 billion to $21.5 billion. This means it expects Q4 2022 EBITDA of $2.9 billion to $4.9 billion, down 14% to 49% from the third quarter.
Volumes in Q3 2022 remained flat year on year and versus the second quarter. As with other carriers, exceptionally high profits were driven by higher rates. Hapag-Lloyd earned $6,212 per forty-foot equivalent unit in the third quarter, its best average ever. Rates increased 6% quarter on quarter and 39% year on year. According to Hapag-Lloyd CFO Mark Frese, “Declining spot rates were compensated for by long-term rates. Even quarter over quarter, the average freight rate increased moderately despite gradually declining spot rates.”
Habben Jansen said that a little over half of the company’s total volumes are on long-term contracts, with about a quarter of those on multiyear deals.
“If you look at Q3, we still had pretty decent contract compliance,” he said. “Of course, sometimes there are questions raised by customers as the delta between contract rates and the spot market increases. It is certainly a challenge going forward.”
Newbuilding wave in 2023
The orderbook is now very high, with capacity under construction at 29% of on-the-water tonnage, according to Clarksons Securities. In absolute capacity terms, the newbuilding orderbook is the highest it has ever been, according to Alphaliner.
“The industry probably needs an orderbook that’s a little bit smaller than we’re seeing right now,” said Habben Jansen. “When you look at the global supply-demand balance, it is likely that next year will see more supply growth than demand growth, even if there are a number of mitigating factors.”
Hapag-Lloyd currently estimates that vessel supply will grow at least 4% next year (with newbuilds partially offset by demolitions, blankings, etc.) and that demand will grow 2%.
The CEO noted that around 25% of his company’s chartered fleet could theoretically be redelivered to owners within the next 12 months.
“Normally, the percentage would be a bit higher. In the last couple of years, like everyone else, we signed more longer-term charters than before. But from the perspective of 2023, being able to redeliver a quarter of our chartered fleet is still a decent amount of flexibility. We also have a number of [owned] ships we could scrap.”
Analysts expect a sharp pullback in carrier earnings next year, particularly as annual contracts reset — but not full-year losses.
Deutsche Bank’s current estimate is for Hapag-Lloyd to post EBITDA of $8.5 billion in 2023. The Bloomberg analyst consensus is for EBITDA of $7 billion. That would make 2023 the third best year in the company’s history after 2021 and 2022, despite the newbuilding wave.
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