Hyundai Merchant Marine (KSE: 011200) started off 2019 much as it ended 2018, racking up losses.
Despite a first quarter gain in volume that boosted revenue, fuel prices and finance costs from the Korean company’s debt load continue to weigh on results.
The last of South Korea’s container line operators, Hyundai Merchant Marine reported a first quarter loss of $159 million, based on average Korean won-to-U.S. dollar exchange rates during the respective period. The year earlier quarter saw a slightly wider loss of $164 million.
The losses add to an estimated $2.8 billion in losses the company has reported since 2015.
Revenue was up almost 13 percent for the period reaching $1.1 billion. The gain came thanks to higher volumes, which were up 11 percent to 1.087 million twenty-foot equivalent units (TEU) during the quarter.
But operational costs were still too high. Hyundai Merchant Marine reported a $94 million operating loss for the first quarter, compared to a $159 million operating loss in the year earlier period.
Hyundai Merchant Marine blamed the first quarter losses on high fuel costs, with prices rising 13 percent to $423 per metric ton.
Hyundai Merchant Marine said it expects bunker surcharges to help mitigate some of the higher fuel costs associated with the International Maritime Organization’s 2020 low-sulfur mandate. But Hyundai said it also plans to meet the IMO 2020 rule through installing scrubbers on many of its vessels.”
The weak results also stem from the “continuous U.S.-China trade conflict is also one of key factors obstructing the recovery of the market.” Likewise, the addition of new players in the trans-Pacific market means “intensified competition in the Asia-North America trade lane.”
According to the Freightos Baltic Index, container shipping rates across the major trade lanes of Asia-to-Europe and Asia-to-North America West Coast dropped during the first quarter. (SONAR: FBX.CNER, FBX.CNAW)
Along with those factors. the company’s financing costs are another big hurdle to profitability. Interest costs doubled to $90 million for the quarter.
The costs stem from the massive debt load the company is under. In addition to $923 million in long-term maturing this year, Hyundai Merchant Marine has another $2.26 billion in long-term finance lease liabilities on its balance sheet.
About $883 million of that debt burden stems from the sale of bonds last year to its largest shareholder Korea Development Bank. The financing aimed to help Hyundai Merchant Marine pay for 12 container ships of 23,000 twenty-foot equivalent (TEUs) in capacity by 2020.
It is also scheduled to receive another eight container ships of 14,000 TEU capacity each.
The carrier was optimistic that rates would improve in the second and third quarter. But it also said risks from higher oil prices and trade disputes will continue to weigh on ocean carrier results.
Fuel costs are “expected to increase due to the U.S. sanctions against Iran, OPEC agreeing to cut oil production and increased demand of low-sulfur fuel oil,” Hyundai Merchant Marine said. “Uncertainty over the cargo volumes will continue due to the concerns on a global economic slowdown, Brexit and the U.S.-China trade conflict.”
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