The German ocean carrier said the 20 percent year-over-year drop in revenues to $2.1 billion for the quarter reflected subdued economic growth in many parts of the world, tough competition in the liner shipping industry and falling freight rates.
Ocean carrier Hapag-Lloyd of Germany said Wednesday it had a loss of $110.9 million in the second quarter that ended June 30, 2016 compared with a profit of $31.2 million in the second quarter of 2015.
Revenues for the quarter totaled $2.1 billion, a 20 percent decline from the $2.6 billion in the second quarter of 2015.
Earnings before interest and tax (EBIT) fell to a loss of $49.5 million in the second quarter of 2016 from a positive $102.7 million in the second quarter of 2015.
The carrier noted how the first half of 2016 was characterized by “subdued economic growth in many parts of the world, persistently tough competition in the liner shipping industry and further declines in freight rates.”
In the first half of 2016, Hapag-Lloyd experienced a loss of $158.1 million compared with a profit of $175.6 million in the first half of 2015.
Revenues totaled $4.2 billion in the first half of 2016, 19 percent less than the $5.2 billion in the corresponding period last year.
EBIT for the period declined to a loss of $44 million compared to a positive $299 million in the first half of 2015.
The company said it was able to reduce year-over-year transport expenses by approximately 600 million euros (U.S. $671 million), or almost 16 percent.
“Aside from lower bunker prices and consumption than in the previous year, this development was also attributable to synergies realized as a result of the integration of the container business of CSAV and ongoing cost savings and efficiency programs,” Hapag-Lloyd said. “Bunker prices started to go up in the second quarter of 2016 while freight rates remained at a low level. This led to an additional negative impact on earnings.”
Freight rates averaged $1,042 per TEU in the first half of 2016 compared with $1,296 per TEU in the first half of 2015, the company said.
“The first-half result is disappointing,” Hapag-Lloyd CEO Rolf Habben Jansen said. “Our cost saving measures and efficiency programs are on track and the synergies from the merger with CSAV are being realized on schedule. But this isn’t enough to completely compensate for the significant drop in the average freight rate. Even though freight rates have finally gone back up towards the peak season in various trades, this rebound is coming later than anticipated and more is needed going forward.
“In the second half of the year, our main focus will be to further improve our cost base and to do whatever we can to get freight rates back to a more sustainable level,” Habben Jansen added. “In this difficult competitive environment, it is very important to complete the transaction with UASC as quickly as possible and to start the integration of UASC immediately after the completion of all pre-closing conditions. The integration will bring us annual net synergies of at least $400 million, some of which should already take effect next year.”
Hapag Lloyd said that while globally, container freight rates on average for the second quarter of 2016 fell 19 percent year-over-year to $1,019 per TEU, the decline was steeper on the transpacific trade, where rates fell 26 percent year-over-year to $1,223 per TEU, along with on the Far East trade, where they fell 25 percent year-over-year to $723 per TEU.
Habben Jansen said the question of when freight rates will improve was the “$64,000 question.” However, he expressed how the company was cautiously optimistic because of consolidation in the liner industry with mergers and the reduction in the amount of containership capacity on order is smaller.
In addition to Hapag-Lloyd’s planned acquisition of UASC, COSCO and China Shipping have merged, and CMA CGM has acquired NOL and its APL subsidiary.
He attributed much of the decline in falling rates to “carry over” from what happened last year when spot rates fell sharply. Annual contracts negotiated this year reflected those lower rates.
“The challenge has been that we have not seen the rate recovery coming in quickly enough and robust enough to offset that,” he said. “I think we are past the bottom now and we have to see how quickly and sustainable it comes up.”
Reviewing the current market, Hapag-Lloyd said:
• Global cargo volumes growth could reach up to 3.8 percent in 2017, while global container shipping volumes could increase as strong as the forecast rate of growth for global trade in 2017;
• Economic forecasting firm IHS Global Insight is predicting global container shipping volumes will have an average annual growth of 5.0 percent for the period between 2018 and 2021;
• Based off estimates from MDS Transmodal, total capacity of the global containership fleet totaled about 20.9 million TEUs at the beginning of 2016, while the supply capacity should see increases of around 1.2 million TEUs in 2016 and about 1.6 million TEUs in 2017;
• In the first half of 2016, Clarkson Shipping Network said orders were placed for the construction of 36 container ships with a transport capacity of 75,000 TEUs, a sharp decline from the 75 ships with a capacity of 1.03 million TEUs in the first half of 2015;
• Ships with an aggregate capacity of 271,000 TEUs were scrapped in the first half of this year, more than the 193,000 TEUs scrapped in 2015, according to Clarksons, while Drewry is expecting a total of 450,000 TEUs of capacity to be demolished by the end of 2016;
• And at the same time, capacity in lay-up has increased sharply – about 1 million TEUs at the end of June compared with 297,600 TEUs a year earlier, according to figures from ocean freight analyst Alphaliner.
Habben Jansen pointed to sharp improvements in freight rates between Asia and South America as an example of what can happen if capacity is reduced.
There is an improving balance between supply and demand in the Asia-Europe trade since the beginning of the second quarter, which could result in improved rates in the third quarter, Habben Jansen added.
He said he personally expects a gradual improvement in rates that will take “18-24 months before we get to a significantly more stable situation in the industry,” though he said it is possible an improvement could happen more quickly and that rates may remain volatile while gradually improving.
Container carriers are reforming the vessel sharing agreements they participate in – changing partners and reducing the number of global alliances from four to three, effective next April.
Hapag-Lloyd is joining THE Alliance, which will also include the three Japanese carriers NYK, MOL, and “K” Line; Taiwan’s Yang Ming and Hanjin of South Korea.
Asked about the impact of the new alliances, Habben Jansen said he thought they made it less likely that carriers would battle for volume and create new services until the new alliances go into effect, though he said there will be normal winter schedules announced by carriers.
Hapag-Lloyd posts $110.9m loss in Q2
