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  • Writer's pictureStephen Fodor

Profits Skyrocket, ground logistics evolve, more terminal congestion is expected

Monday Morning Wake Up Call

March 22, 2021

Hapag-Lloyd profit skyrockets with ‘stellar performance’

(Freightwaves) Hapag-Lloyd Group’s 2020 net profit was up a staggering 155.4% to $1.06 billion from $418 million the previous year.

“2020 has been exceptional, with stellar performance in the industry,” Chief Financial Officer Mark Frese said during Hapag-Lloyd’s presentation of its 2020 annual report with audited financial figures on a call Thursday morning.

The figures were not surprising as they were in line with the preliminary numbers released in January, but they reinforced just how good the second-half performance was for the world’s ocean container carriers.

Full-year 2020 earnings before interest, taxes, depreciation and amortization (EBITDA) were $3.08 billion, a 38.6% hike from the $2.23 billion posted in 2019. Earnings before interest and taxes (EBIT) took a 65.3% leap from $908 million in 2019 to $1.5 billion in 2020.

Hapag-Lloyd said the main drivers of the “improved” results were cost savings of more than $500 million as well as “slightly improved freight rates and lower bunker prices.”

The cargo surge of the third and fourth quarters was not the case in Q2, when “transport volumes plummeted” and full-year transport volumes were down 1.6% from 12 million twenty-foot equivalent units (TEUs) in 2019 to 11.8 million TEUs in 2020.

Despite the revenue surge of the third and fourth quarters, full-year revenue was up only 3.3%, from $14.11 billion in 2019 to $14.57 billion in 2020. The average freight rate for the full year was up 4% from $1,072 per TEU in 2019 to $1,115 in 2020.

“We had a good start to the year, then the pandemic hit us late Q1/early Q2 with a massive decline of volumes. Things started recovering in Q3 and Q4 was pretty crazy as everybody tried to sort of catch up with demand,” CEO Rolf Habben Jansen said on Thursday’s call. “Because of that, performance in the second half was much better than originally anticipated.”

And because of the “very successful financial year,” Hapag-Lloyd said it was able to pay down about $1.3 billion in debt and proposed to pay out a dividend of 3.50 euros (about $4.18) per share.

“In spite of COVID-19, we were able to improve our profitability, strengthen our balance sheet and earn our cost of capital for the first time in a decade,” Frese said Thursday, adding that as a result of increased liquidity, “the ratio of net debt to EBITDA has decreased to 1.8 times, which is the lowest level in a decade, and this may be in the industry the strongest ratio right now.”

Port congestion

Habben Jansen said congestion, particularly in San Pedro Bay as container ships wait at anchor for days before berthing at the ports of Los Angeles or Long Beach, remains a problem.

“That will take some time to get that resolved. We see a slight improvement — or a reduction of the number of ships waiting outside ports — but we also still see dwell times are really long and it takes a lot of time to get the boxes back out,” he said. “I don’t think that the congestion there is going to go away very soon. It’s going to take a couple of months before things settle down. I hope we’re going to be back to a bit more normal situation towards the end of Q2 to the latest early Q3.”

Habben Jansen said port backups are not limited to Southern California.

“The port congestion has been very significant. A lot of people talk about LA/Long Beach and yes, it’s an issue there, but it’s definitely not the only place. If we look at the average delay we have seen in our voyages, in December we had three days. When we look ahead to January and February, it actually deteriorated further,” he said.

Hapag-Lloyd has tried “to provide additional flexibility if and where that is possible. We’ve offered discounted detention rates for all shippers. And then we’ve also had a number of initiatives to improve the customer service in our quality service promises,” Habben Jansen said, adding that the “service quality is getting back up, even if I do believe we can get even better than where we are today. “

Strategic investments

Hapag-Lloyd announced Wednesday that it was acquiring NileDutch, a container shipping company that specializes in the African market.

Habben Jansen said Hapag-Lloyd was lucky to acquire NileDutch as “options out there are limited” and that it was a good addition to the portfolio.

“If you look at global trade and if you try to look ahead to the future five or 10 years, I think that one of the markets that for sure is going to grow above average is the African market. If you want to grow with the global market, then you need to make sure that you are also present in those markets that are growing above average,” he said.

Habben Jansen said NileDutch has a little over 300 employees and moves about 200,000 TEUs annually. He expects the deal to close in the next three months.

Idle fleet ‘basically zero’

Adding to the Hapag-Lloyd fleet through newbuilds is another strategic investment.

“We invested for the first time in quite a few years into new ships, where we’ve chosen to go dual fuel” to help achieve sustainability goals, Habben Jansen said.

Hapag-Lloyd announced in December that it had ordered six ultra large container ships for delivery between April and December 2023.

“We have chosen to go dual fuel energy. We’ve also chosen to go for large ships, which has a lot to do with the composition of our fleet. We are underrepresented in that large segment and as such I think it’s a question of time before we would go to the yards to order those ships, so we are very happy we managed to sign that contract and I look forward to getting those ships from 2023 onwards,” he said.

“The idle fleet is down to basically zero these days,” Habben Jansen said. “In terms of our fleet, all ships that we have are sailing. We have invested significantly in making more boxes available. … We deployed many more extra loaders than we normally do and in terms of our network, we’ve certainly moved ships around to try and accommodate demand in those places where demand is the strongest and then where possible we try to avoid congested ports, but that’s not all that easy.”

Regarding equipment, Habben Jansen said, “We’ve certainly seen a container shortage as well, driven by the fact that it took us about 20% longer the last couple of months to get the boxes back compared to a normal time, which means you need about 20% more boxes to move the same amount of cargo.”

What will redistribution of imports mean for surface transportation?

(American Shipper) Import volumes continue to climb, creating bottlenecks at some of the largest ports in the U.S. Importers are scrambling to find a more reliable point of entry by booking freight coming into less-congested areas. The Inbound Ocean Shipments Index measures freight booking activity for shipments entering the U.S. at the port level based on estimated departure dates. The Port of Oakland has been outpacing many of the nation’s largest ports in terms of shipment growth since the end of September. Port Houston recently saw a huge spike in bookings in the middle of March. What will this do to the already strained surface transportation providers networks and subsequently rates?

Over the past year the driving storyline for the economy and transportation has been the surging consumer demand for durable goods, which has led to extreme growth in imports and domestic freight movements.

The largest lanes for maritime imports originate in China and end on the North American West Coast, predominantly the ports of Los Angeles and Long Beach. As of last week, the Southern California ports handled over 40% of the shipments entering the U.S.

According to this week’s chart, bookings for freight bound for alternative ports are increasing faster than LA and Long Beach. Given these are percentages of much smaller starting figures, the changes are significant against the backdrop of historic norms.

Not only are the ports infrastructures set up to handle a smaller amount of container volumes, but the surface transportation providers such as drayage, rail and truckload will also be tested as freight flow patterns disrupt network balance.

For drayage providers, this will simply be an abundance of demand that will inevitably push rates higher and keep them busier than normal. The amount of drayage capacity will directly impact what happens downstream to warehouses and trucking providers, potentially limiting or delaying their exposure to surging demand.

Rail networks were already tested last fall with heavy volumes moving from west to east, creating large imbalances. This new pattern may actually help even things out on their end with freight being more evenly dispersed. The big risk to rail in the long run if importers decide to push more freight into the East Coast ports is eliminating the cost advantage rail has for long haul moves over 800 miles. This could mean lower volumes over time.

Truckload networks take a long time to build efficiently and drastic changes to domestic freight flows can wreak havoc on available capacity. Some markets may benefit from additional volumes. Northern California for instance is normally oversupplied in relation to the rest of the country with more freight entering than exiting the area. A growth in import volumes could help balance the markets as outbound demand rises.

Savannah, however, is on the opposite end of that spectrum. Savannah produces more freight than it consumes thanks to the port and a relatively low population density. Carriers will have trouble finding enough inbound loads to keep the market well supplied. Carriers will more than likely reposition trucks from Florida and South Carolina to meet the growing demand.

While these are nearby, they will also require “deadheading,” in which they move the truck without an active paying load, driving up the outbound rate.

In the big picture, this also means more freight to move in general throughout the U.S. As mentioned previously, there may be limitations to downstream providers that buffers their experience to an extent, but that will lead to an extended period of elevated demand versus a large spike.

Looking at import shipments clearing customs and tender volumes for truckload shipments, there appears to be a ceiling that has formed for the time being. This supports the notion that a spike is unlikely without a strong catalyst.

So even as imports grow and are redistributed across various ports, the main risk to transportation markets will be pushing certain areas out of balance.

To Read More:

Imports spike at ports across US, Hapag-Lloyd warns of terminal congestion

(SupplyChainDive) The consumer-driven import surge that has stressed Port of Los Angeles' operations is not showing any sign of letting up, Seroka said.

"With more people getting vaccinated, the latest stimulus checks in the mail and in-store safety protocols increasing, there are more options for American buyers," he said.

Retail sales did drop more than 3% in February compared to the previous month, according to the latest release from the Census Bureau. But economists have said this was more a result of the winter weather than an indication of a slowing economy.

The National Retail Federation said it expects retail sales to grow between 6.5% and 8.2% YoY in 2021.

"With another round of stimulus checks being mailed right now, we expect another large boost in consumer spending over the next few months," NRF Chief Economist Jack Kleinhenz said in a statement Tuesday.

Multiple ports across the country saw their imports surge in February. Import levels were up 26% YoY in Oakland, California, and 10% YoY at the Northwest Seaport Alliance. Figures from S&P Global Market Intelligence's Panjiva show that overall U.S. seaborne imports in February were up more than 29% YoY and up 20% compared to the same month in 2019.

"The growth in imports of consumer discretionary products was broad-based in the first two months of the year, including a 28.5% increase in consumer electronics despite the emergent semiconductor shortages, and a 41.8% increase in home furnishings," S&P wrote in a research note. "Even the apparel sector returned to growth with a 12.8% rise in February, bringing the first-quarter-to-date total to a 4.8% improvement."

Imports show little sign of letting up at the Port of Los Angeles, with its three-week forecast currently showing import levels will be more than doubling 2020 levels through the first three days of April.

There were just 17 container ships at anchor in the San Pedro Bay Tuesday, with 10 of those heading to the Port of Los Angeles, which is the lowest figure since December 2020, Seroka said. But the port does expect 18 more vessels to arrive over the next five days.

Hapag-Lloyd's latest regional update for North America said that shortages of labor, trucking capacity and rail capacity mean that congestion at the California ports of Los Angeles and Long Beach are still affecting shippers.

"All terminals continue to suffer from severe congestion due to the spike in import volumes," Hapag-Lloyd wrote.

Seroka said that improving the container flow will require getting vaccinations for the dock workers, truckers, terminal employees and warehouse labor in the region to get operations running at full capacity. It also requires that importers pick up cargo quickly from the port. And increased sharing of data could also improve the situation, he said.

"We need to share this data specifically across our port community system, employ a deep reservation system for truck movement, broadly segment cargo to increase gate fluidity — especially at business times during normal hours," Seroka said.

Seroka said that some shippers are looking for alternative sourcing to improve supply chain bottlenecks they are currently experiencing, but they're working with partners to find efficiencies. He underscored just how unprecedented the current situation is, even with a more efficient system.

"I don't think there's going to be one lever that we can push or pull for that matter, to be able to find ourselves never talking about port congestion again," he said. "It's a confluence of events that hit all at one time, from a 100-year pandemic to a manufacturing squeeze and a consumer buying pattern that had never been anticipated before."

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