Hamburg Süd's defies crisis
Hamburg, 20 April 2010.
The economic environment
The global economy and world trade have suffered a virtual collapse since the middle of 2008. Immediately prior to the global financial crisis, economic growth of almost four per cent was still being forecasted for 2009. Contrary to this, global economic output in 2009 contracted by 0.8 per cent after even more pessimistic assessments had prevailed in mid-2009. Containerised shipment volume, which had grown at least twice as much as the global economy in the past, was down by some 15 per cent globally for the first time in the history of container liner shipping.
At the same time, container slot capacity continued to increase on the back of newbuilding deliveries. However, growth in capacity turned out lower than expected. Contrary to original forecasts, which had predicted capacity growth of about 15 per cent, capacity in the end rose by just 5.6 per cent, an increase significantly below that of previous years. This was caused by the cancellation of newbuilding contracts and the deferment of delivery dates for vessels. The scrapping of containers ships also reached a record level. Vessels with a slot capacity totalling 343,000 TEU were retired in 2009, following a figure of 100,000 TEU in 2008. In addition, idled tonnage showed a sharp rise at the start of 2009, peaking at 572 vessels in December 2009, equivalent to 11.7 per cent of total capacity (in TEU). In the middle of April 2010, 401 ships with a slot capacity share of approximately 7.5 per cent are still laid up. Laying up affects chiefly smaller vessels of up to 3,000 TEU, while the liner companies keep larger ships in service to benefit from unit cost economies of scale.
Container shipping lines also adopted a slow steaming programme on a broad front in 2009, sharply reducing ship speed. To maintain, mostly weekly, schedule frequency at a lower speed, additional vessels have to be deployed. Slow steaming therefore not only contributes to cutting bunker consumption, but also to tying up capacity.
The cited measures were however not sufficient to establish a balance between supply and demand. Consequently, charter rates for container ships, which had fallen back sharply starting in summer 2008, persisted at a level that was not even sufficient to cover operating costs, not to speak of interest payments and amortisation. Charter rates only managed to recover somewhat at the end of the 1st quarter of 2010, albeit only for larger vessels above 4,000 TEU. In addition to a collapse in charter rates, overcapacity in 2009 led to a significant decline in capacity utilisation and substantial pressure on freight rates. Only with the increase in shipment volume in the second half of the year did freight rates stabilise at a low level.
Not only volumes and rates caused problems last year. Having dropped to below 200 US dollars per ton at the beginning of the year as a result of the crisis, the price of bunker more than doubled again in the second half of 2009, to reach roughly 450 US dollars per ton at year-end. However an annual average of 350 US dollars per ton, the bunker price was almost 125 US dollars per ton below that of 2008 and consequently produced a significant cost relief for ship owners. Customers, too, benefited from this development by way of falling fuel surcharges.
Conventional bulk shipping likewise suffered an appreciable collapse in business in the middle of 2008 but recovered significantly in the course of the year. Due chiefly to a resumption of raw material imports to China, time charter equivalents were reached in the second half of the year which, on a long-term average, stood at a reasonable level.
Developments in product tanker shipping, by contrast, were unsatisfactory. The rise in capacity generated by newbuildings is not being utilised because of stagnating demand for shipping space. The result is that charter rates, time charter equivalents and second-hand prices trended lower in the course of the year.
Hamburg Süd's performance at a glance
Hamburg Süd, too, was gripped by the world economic and shipping crisis. At 2.3 million TEU, shipment volume in the liner business was 13 per cent down on the previous year and freight rates dropped significantly. Turnover consequently fell 28 per cent to 3.2 billion euros compared with 2008.
Against the backdrop of declining shipment volume, the container pool was significantly reduced by the return of leased containers and the sale of old owned boxes. In contrast, the slot capacity of deployed vessels, at 304,000 TEU, remained roughly constant. The number of container ships, however, fell by 13 per cent to 96 units. With the replacement of smaller charter vessels by larger newbuildings, the strategy of lowering unit costs is continuing. The fleet operated by the Hamburg Süd Group, with the inclusion of 52 vessels in the tramp division, comprised 148 units, 36 of them Group-owned.
Last year saw the commissioning of a new "Monte" ship (5,500 TEU) and three "Rio" vessels (5,900 TEU), which will be deployed on the Europe and Asia to East Coast South America trade lanes together with the sister ships delivered in previous years. The programme of increasing the owned share of vessels is to be continued in the years ahead. By 2012, twelve ships with a total capacity of some 80,000 TEU will enhance the Group-owned fleet. They include ten vessels of the "Santa" class, which, with a nominal capacity of 7,100 TEU, will be the largest ships in the Hamburg Süd fleet.
In the crisis year 2009, investment volume was limited to a mimimum of 167 million euros (2008: 530 million euros). For the coming three years an increase of over 700 million euros in capital expenditure on ships and containers is planned.
Despite economic pressure, any substantial reduction in staff was avoided in order to preserve employee expertise and motivation. The number of employees ashore was reduced by 14 to 3,597. At sea this figure rose by 31 to 1,194 seamen as a result of the delivery of newbuildings. Overall, employee numbers increased by 17 to 4,791.
Given the significant decline in earnings, Hamburg Süd made considerable efforts to cut costs, which amounted to approximately 300 million euros. To lower ship system costs, liner services were rationalised - largely with partners - and slow steaming programmes instituted. In the case of cargo-related costs, a wide range of individual measures were taken in the area of cargo handling, intermodal and depot costs. In this context, the lower fuel surcharges levied by the haulage contractors and rail companies we use had a positive affect. Finally, administrative expenses also had to make a contribution, though without resulting in any substantial redundancies.
The exchange rates of the currencies important to Hamburg Süd had a positive impact. In the light of a structural surplus, this applied to the stronger US dollar as well as the weaker rates of the cost currencies, like the Brazilian real and Australian dollar.
The sharp fall in bunker prices, by contrast, relieved the pressure on costs and results. Fuel expenditure fell to roughly 700 million US dollars, 400 million US dollars less than in the previous year. Of this figure, approximately three-quarters was attributable to lower bunker prices, and one quarter to reduced consumption as a result of slow steaming and the restructuring of the fleet to larger and fewer units.
Despite the comparatively positive performance of dry tramp shipping, Hamburg Süd was not able to post a positive result in 2009. Considering the historic crisis in liner shipping, however, the fact that the Group overall recorded a positive operational cash flow sufficient to cover the - albeit reduced - investment budget can be viewed as a success.
The financial crisis reached the real economy in the second half of 2008. Hamburg Süd's liner business felt the full impact in the fourth quarter of 2008 - especially from mid-November on. Volumes in individual trades were as much as 40 per cent below that of the comparable period in the previous year. The trough of the decline was reached in February 2009. Following the extremely weak start to the year, however, shipment volumes recovered significantly, to finish 2009 above the comparable period of the previous year. In the 1st quarter of 2010, carryings recovered to the pre-crisis level of the equivalent period in 2008.
In contrast to the relatively rapid recovery of cargo volumes, the decline in freight rates was more sustained. Freight revenues were in decline up to August, rallying slightly in the second half of the year. While the trade lanes between Asia and South America were hit especially hard by the fall in volumes and rates, they made the biggest contribution to relative recovery in the second half of the year. The slight rally in freight rates continued in the 1st quarter of 2010, although they failed to reach the level of the previous year and to narrow the gap to the comparable period of the pre-crisis year of 2008.
Due to the collapse in volumes in the last quarter of 2008, the capacity of the network of ship systems was oversized at the start of the reporting year. To reduce overcapacity, ship systems were withdrawn from routes in six trades in collaboration with partners. In all, 36 vessels - including those of partners - with a slot capacity of roughly 90,000 TEU were removed from the trade lanes. In addition, Hamburg Süd laid up a small number of ships. Efforts to tie up capacity focused on slow steaming, which considerably lowered bunker consumption and pollutant emissions. In 2009 slow steaming involved nine ship systems at Hamburg Süd with an estimated reduction in bunker consumption of 200,000 tons a year. These measures tie up capacity of just below 26,000 TEU, at the same time shaving some 10 per cent off Hamburg Süd's usable slot capacity.
In this economic crisis the previously well-established communication forums of the liner conferences were no longer available to ship owners as, with effect from October 2008 - at the start of the crisis - the exemption of conferences from the competition law had been repealed by the EU. This has, if anything, accelerated the process of rate reduction, especially as dialogue and bilateral partnerships between ship owners and customers have been heavily curtailed. The positive aspect, however, is the fast reaction of ship owners to falling demand with the deferment/cancellation of deliveries, the intensification of scrapping, service rationalisation, tonnage idling and slow steaming. For the future it is to be hoped that the industry will focus on improving its services and earning a reasonable return, and less on boosting market share.
Hamburg Süd's tramp operations are managed in Hamburg under the subsidiary Rudolf A. Oetker KG.
The container department chartered in around 78 container vessels, the majority of which are deployed in Hamburg Süd liner services. This represents a reduction of 15 ships compared to the previous year. Since, however, the average size of chartered-in vessels rose at the same time, shipment capacity remained virtually unchanged. With its sister companies Furness Withy Chartering and Aliança Bulk, Rudolf A. Oetker operates between 30 and 40 bulk carriers of the Handymax and Panmax classes with a capacity of between 38,000 and 77,000 dwt. Finally, Rudolf A. Oetker currently operates and charters nine product tankers.
Following the dramatic collapse experienced from the middle of the second half of 2008, the bulk markets recovered faster and more sustainably than anticipated. This recovery is based chiefly on resurgent demand in the Chinese economy for coal and iron ore. While bulk carriers obtained time charter equivalents of below 5,000 US dollars a day on the spot market in January 2009, the market climbed in the course of the year to daily rates of up to 30,000 US dollars at times. This pleasing development has continued to the present day.
After second-hand prices regained their "normal" level, both in absolute terms and in relation to newbuilding prices, a repeat of developments in 2007/2008 - albeit considerably more moderate - has begun to emerge in recent months, to the extent that second-hand prices for modern, immediately available bulk carriers exceed those for newbuildings in some cases.
The order book for bulk carriers continues to be well filled. It is, however, to be expected that a not inconsiderable number of ships will not reach the point of delivery, despite the positive trend on the bulk markets. The principal reason for this is the lack of financing for ships ordered at prices well above current levels for newbuildings. Nevertheless, newbuildings in the bulk sector have been the subject of an increasing number of enquiries at the yards in recent months.
Due to the positive development of cargo growth and continuing port congestion, Hamburg Süd is reckoning with continued stability in the freight markets overall, despite the fleet growth expected for 2010.
Notwithstanding the substantial increase in prices for crude oil and oil derivatives since January 2009, charter rates for product tankers have fallen further in recent months and business has slowed down once more. In spite of the very slight upturn in past weeks, we are not anticipating a rapid recovery in the freight markets for the rest of 2010.
Of concern is the well-filled order book for product tankers. Deliveries on a substantial scale are to be expected in the years ahead, although they must be seen alongside an increasing number of scrapping of older, especially single-hulled, vessels.
The downturn in charter rates for container ships in 2009 proved the most sustained. Whereas a standard 4,400 TEU class vessel at the beginning of 2008 commanded a rate of over 35,000 US dollars for a one-year charter, this dropped to only around 10,000 US dollars by the end of 2008. In 2009 the charter rate for a ship of this kind fell further, to 8,000 US dollars a day. This market has meanwhile recovered to time charter rates of around 12,000 US dollars, although improved, this level nowhere near covers costs for the bulk of ship owners.
Notwithstanding cancellations, deferments and conversions of newbuilding orders, the still high number of expected deliveries will keep charter rates for container ships at a very low level for some time to come. This, however, is true to a varying degree for the different size classes.
Although the global economy and world trade will, according to the most recent forecasts, grow again in 2010, with an estimated increase in container shipments of seven to eight per cent, it would still fall well short of 2008's global shipment volume. Currently, about 7.5% of globally available container ship capacity is lying idle. Even if, due to further postponements of deliveries and the cancellation of construction orders, fewer newbuildings come on stream than could previously be foreseen, a growth of slot capacity in the region of 10 per cent in 2010 can be expected. As a result, overcapacity will presumably rise again. The earnings and financial position of most liner shipping companies will only stabilise in the current year when overcapacity is further reduced by the continued idling of vessels and by slow steaming. A balance between cargo volume and capacity on the liner routes at a global level will probably not come about until 2012/2013, and then only if the global economy continues along the road to recovery.
Hamburg Süd intends to return to growth in its core business fields in 2010. Special attention is being paid to expansion of the reefer business, which is growing worldwide. The first encouraging indicators are becoming evident in the volumes trend of the first quarter of 2010. However, freight rates are still well below the level of 2008. It is all the more important to pursue consistent cost management without jeopardising the high quality of service to the customer. Even then, however, a satisfactory result is unlikely to be achieved.
In 2010 a continuation of business at the current level is expected for conventional operations. While bulk shipping continues to perform positively, product tankers will continue to be weak as improvements are not yet in sight.
The shipping group's activities to economise resources are focused essentially on reducing fuel consumption and ship emissions. Aside from measures to optimise route planning and schedules overall, technical improvements are being tested and implemented on board the ships. In this context it must be stressed that main engine output, and with it speed, consumption and emissions, has been reduced more than was considered technically possible only recently. In the container field, measures aimed at using environmental friendly materials are being implemented, as well as the use of technologies enabling the transport of perishable commodities with a short shelf life.
Overall, the shipping group is expecting a revival of business activity in 2010 and a significant improvement in performance and cash flow compared with last year. Given the uncertainties outlined, however, the further development is very fragile. Besides continued economic growth, a responsible approach by all market participants is necessary.