Container line Zim hit by exposure to falling spot rates

Trans-Pacific spot container shipping rates continue to head lower. Zim appears more at risk than some of its rivals.

a photo of a zim container ship

Niche ocean carrier Zim has been one of the great success stories of the container shipping boom. It expanded its fleet faster than larger rivals off a smaller base, focused only on the highest-paying lanes — like the trans-Pacific — and kept spot exposure high at 50%. As earnings skyrocketed, it became the largest U.S.-listed shipping company by market cap.

Freight rates for the second quarter of 2022 disclosed by Zim (NYSE: ZIM) on Wednesday show that it’s still outperforming larger carriers on rates. Yet the numbers reveal a rising risk: Zim is more exposed to weakening spot rates than liner giants like Maersk and Hapag-Lloyd. And those spot rates are continuing to fall.

Zim reported net income of $1.3 billion for Q2 2022, up 50% from the year before but down 22% from net income of $1.7 billion Q1 2022. Adjusted earnings per share of $11.07 fell short of the consensus forecast for $13.37. Zim’s stock price decline 6% Wednesday despite a dividend boost.

Adjusted earnings before interest, taxes, depreciation and amortization of $2.1 billion came in 15% below analyst consensus and down 17% from the first quarter.

Hapag-Lloyd raised its full-year guidance on July 28. Maersk followed suit on Aug. 2. On Wednesday, Zim kept its guidance unchanged, for full-year EBITDA of $7.8 billion-$8.2 billion.

The good news: This is up 18-24% from Zim’s record year of 2021. The bad news: It implies Zim’s second-half EBITDA will decline 32-36% versus the first half.

Spot rate exposure

In contrast to Zim, Maersk expects its second-half EBITDA to fall 9% versus the first half. Hapag-Lloyd anticipates a drop of 3-21%.

Ocean carrier earnings are highly leveraged to average freight rates. Maersk’s spot exposure is down to 29%, while Hapag-Lloyd boasts a much more diversified service footprint than Zim. 

Despite spot rates falling double digits between the first and second quarters, Maersk’s average rate (including both spot and contract) actually increased 9.4% to $2,492 per twenty-foot equivalent unit in Q2 2022. Hapag-Lloyd’s average rate increased 5.8%, to $2,935 per TEU.

Not so with Zim. Its average Q2 2022 rate was $3,596 per TEU, much higher than Maersk’s or Hapag-Lloyd’s, but unlike those carriers, Zim’s second-quarter average decreased 6.5% from the first quarter.

(Chart: American Shipper based on data from Maersk, Hapag-Lloyd, Zim)

Zim had previously stated that rates on its annual trans-Pacific contracts that began in Q2 had more than doubled year on year. The fact that its average rate still fell compared to Q1, even with the higher contract rates included, underscores Zim’s exposure to trans-Pacific spot rates.

Spot rates continue to decline

Indexes measuring Asia-U.S. spot rates have shown a continued decline throughout this year.

The Freightos Baltic Daily Index (FBX) assessment for the China-West Coast route is down 57% year to date. The FBX China-East Coast assessment is down 44%.

Blue line: China-West Coast, green line: China-East Coast (Chart: FreightWaves SONAR)

The FBX incorporates the effect of premium surcharges in its calculations. This has resulted in a steeper decline than shown by other indexes that don’t include premiums in their assessments.

Zim CFO Xavier Destriau said during the conference call the surcharges “had been a significant feature toward the end of 2021 and during the first quarter of 2022, [but] these have clearly faded over the [second] quarter. And we are not assuming we will generate significant additional surcharges going forward.”

On spot rate trends, Zim CEO Eli Glickman said, “Over the past several weeks, we’ve seen a decline in freight rates, particularly in the trans-Pacific. We recognize that the trades may have peaked, however, rates remain elevated and therefore very profitable.”

Destriau predicted that spot rates will continue to gradually decrease, with third-quarter averages below the second quarter, and fourth-quarter averages below the third.

Asked why trans-Pacific spot rates are falling despite high U.S. port congestion — particularly on the East and Gulf coasts — Destriau replied, “Demand is still strong, but it’s not as strong as it used to be. Let’s be clear: There are signs of weakening. That may be … why rates are starting to normalize.”

Zim’s fleet capacity and throughput

Zim’s focus on spot upside in targeted trade lanes was one reason its earnings rose so fast during the COVID era. Another reason, particularly in the earlier stages of the pandemic demand surge, was its decision to rapidly grow its throughput by adding more ships to its fleet.  

Its fleet has risen from 96 vessels at the time of its January 2021 initial public offering to 149 currently. Almost all of the additions are from the charter market, with Zim paying premium rates for multiyear leases. By agreeing to high-priced charters, it increased its upside exposure to the record-high freight market — at the expense of downside commitments to pay high charter rates in years ahead when freight rates will almost certainly be lower.

By paying steep charter prices to add more ships, Zim was able to grow its fleet, and thus its quarterly throughput, faster than larger liners that kept their fleet size steady off much larger bases. 

Zim’s Q2 2022 throughput was up 23% since Q4 2019, the last quarter before the pandemic. In contrast, Hapag-Lloyd’s quarterly throughput was down 1% over the same timeframe, and Maersk’s was 8% lower.

(Chart: American Shipper based on data from Maersk, Hapag-Lloyd, Zim)

Zim’s quarterly throughput peaked a year ago. It handled 856,00 TEUs in Q2 2022, down 7% from Q2 2021. The charter market has been largely sold out, providing less opportunities to grow the fleet with leased tonnage, while port congestion continues to limit throughput.

In other words, an earlier driver of Zim’s earnings boom — fleet growth — had already stalled and now another driver — rates —  is headed down.

Zim’s future charter exposure

Asked about the company’s ability to unwind charter exposure should there be a recession, Destriau pointed out that Zim has 28 charters come up for renewal in 2023 and 34 in 2024. Meanwhile, it has 46 long-term-chartered newbuildings due for delivery in 2023-24.

Destriau maintained that this mix gives Zim flexibility to manage its fleet size based on market conditions. 

If freight rates are strong enough, it will renew expiring charters and add new service strings as newbuilds are delivered. “But if the global economy enters a prolonged recession and demand significantly drops, then obviously, we would not renew those charters.”

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Yang Ming: Revenue up nearly 50% — end of story

Yang Ming summed up its second quarter and the first half of 2022 in about 150 words.

Yang Ming Marine Transport Corp. released a brief financial statement Thursday in which it announced net profit for the first six months of 2022 totaled $4.04 billion. 

Yang Ming does not typically share wordy earnings reports, but Thursday’s news release was even briefer than usual — only one paragraph long, about 150 words and numbers. 

The Taiwanese ocean carrier said Q2 consolidated revenue, converted to U.S. dollars, totaled $3.8 billion. It said that represented a 49.4% improvement from the second quarter of 2022 but did not provide last year’s revenue total.

Yang Ming said Q2 net profit was $1.9 billion but did not disclose how that compared to 2021. It did say consolidated revenue for the first half of 2022 was up 59.5% year over year to $7.5 billion. 

The company said it handled 2.27 million twenty-foot equivalent units in the first six months of the year, a 2% increase from the same period in 2021. 

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Click here for more American Shipper/FreightWaves stories by Senior Editor Kim Link-Wills.

Hapag-Lloyd CEO: US consumer still ‘holding up,’ demand not collapsing

Hapag-Lloyd bookings point to a gradual unwind of the container shipping boom, not a crash.

photo of a container ship

The container shipping outlook from Hapag-Lloyd, the world’s fifth-largest liner company: Demand is moderating, spot freight rates should keep ticking lower, and congestion — currently very high — should abate. But demand is not collapsing. Congestion in some regions, such as the U.S. East Coast, is more stubborn than in others. And higher contract rates will offset spot rate declines, leading to near-record second-half profits.

Container shipping demand

“The U.S. consumer seems to be holding up reasonably well,” Hapag-Lloyd CEO Rolf Habben Jansen said during a conference call on Thursday. “If you look at the first half, trans-Pacific volumes were growing [year on year], which is remarkable given the steep increases we saw in 2021 versus 2020.”

According to CFO Mark Frese, “Currently, markets are talking intensively about weakening demand. But despite all the bad news, demand remained robust in the reporting period [Q2].”

Commenting on import demand as of today, halfway through Q3, Habben Jansen said: “We see U.S. demand holding up, whereas certainly in Europe and some other places there’s probably more nervousness and uncertainty. We don’t see demand falling off a cliff — anywhere.”

Blue line: 2022 imports, green line: 2021 imports (Chart: FreightWaves SONAR)

However, he does see “a fairly material easing of demand” compared with the peak. “We definitely see signs of the economy cooling down, which will help markets normalize in the months and quarters to come.

“We used to be multiple times oversubscribed on every ship system; we are still oversubscribed today but not as strongly anymore. That’s why you see the spot rates coming down. It’s not like there is no tension whatsoever. But there are certainly signs that the market is easing somewhat. We see that in the bookings and quotations being requested.”

Container shipping spot rates

Hapag-Lloyd secured an average rate of $5,870 per forty-foot equivalent unit in Q2 2022, up 71% from the year before and its highest quarterly average ever.

Its average rates rose 6% sequentially versus the first quarter, during a time when the Shanghai Containerized Freight Index, which measures spot rates, dropped 26%. The rise in Hapag-Lloyd’s average rates was driven by higher annual and multiyear contract rates, said Frese.

According to Habben Jansen, 45%-50% of Hapag-Lloyd’s business is under contract. He expects spot rates on the remaining 50%-55% to continue their decline through the second half, although he noted that “by historical standards, spot rates are still at very high levels.”

The company’s full-year guidance implies contract rates will continue to support average rates. Hapag-Lloyd expects earnings before interest, taxes, depreciation and amortization of $8.6 billion-$10.6 billion in the second half, with Q3 stronger than Q4. The upper end of its second-half guidance is close to the $10.9 billion in EBITDA in the record-breaking first half, implying ongoing market strength.

“The exceptional freight rate environment continues to be the main driver of our financial performance,” said Frese.

Congestion easing at some ports, but not on East Coast

Port congestion is helping to support rates by tying up ships, removing effective transport capacity from the freight market.

Clarksons’ container shipping congestion index is now close to its all-time high. According to Hapag-Lloyd, the index jumped 53% for the U.S. East Coast in Q2 2022 versus Q1 2022, with China up 28%, Northern Europe up 26% and the U.S. West Coast down 14%.

chart showing container shipping congestion
Container congestion in million TEUs; 7-day moving average (Chart: Hapag-Lloyd. Data source: Clarkson SIN)

“I don’t think this shows the entire picture,” said Habben Jansen of the Clarksons index.

“We do see some signs of things easing. The U.S. West Coast has clearly improved. The Med is running fairly smoothly. Asia has clearly improved compared to a couple of months ago. Container availability is clearly better than it was some months ago. So, I would expect this congestion index is going to show an improvement over the months to come.

“The real issues now are on the U.S. East Coast and in [Northern] Europe,” he said. On the East Coast, “things are not deteriorating but they are not improving.” In Europe, congestion “is being driven by labor tensions at a number of big ports. Once that’s behind us, I’d expect to see further easing there.”

Advantage goes to cargo shippers in 2023-2024

The wind-down of congestion — when it finally happens — will release more ships into the market. A wave of newbuild deliveries will inject even more capacity in 2023-2024.

“We have seen the orderbook going up further,” said the Hapag-Lloyd CEO. “Right now it’s at about 28% of the global fleet [the percentage of capacity on order versus capacity on the water]. That’s quite high. It’s a very significant orderbook, which means we will get quite a lot of new vessels in the fleet going forward.

“How much of that will be absorbed by demand or by new environmental regulations or [offset] by increased scrapping remains to be seen,” he said. New environmental rules that might effectively require lower speeds could reduce capacity by 5%-10% in 2023-24, he said. (Competitor Maersk estimates a higher potential: 5%-15%.)

In addition, ships kept in extended service by boom-era rates will be put into drydock for maintenance when more capacity is available. “It will create more space to catch up on some of the drydockings that need to be done,” said Habben Jansen.

But overall, Hapag-Lloyd expects container shipping’s future market balance to tip in favor of cargo shippers. After several years of import demand outpacing transport supply, it cited estimates that global fleet capacity will grow 7% in 2023, more than twice the 3% growth rate for demand.

“We clearly see that over the coming 24 months, supply growth will outpace demand growth,” said Habben Jansen.

chart showing Hapag-Lloyd results

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HMM cautious in short term despite Q2 profit long jump

South Korean ocean carrier HMM expects “downward pressure” on demand growth in the second half of 2022.

HMM reported Wednesday its operating profit shot up by 153% year over year, but the South Korean ocean carrier isn’t counting on revenue figures to be quite as impressive in the second half of 2022.

Seoul-headquartered HMM said the operating profit for the first half of 2022 was KRW 6.08 trillion ($4.68 billion), up from KRW 2.4 trillion ($1.8 billion) in the first six months of 2021. 

First-half revenue leapt by 87% year over year from KRW 5.33 trillion ($4.1 billion) to KRW 9.95 trillion ($7.66 billion). 

HMM provided year-over-year comparisons between the first six months of 2022 and 2021.

Net profit was the most impressive figure of all — up 1,560% from KRW 365 billion ($281 million) in 2021 to KRW 6.06 trillion ($4.65 billion) this year.

HMM significantly improved earnings in H1 2022, mainly led by high freight rates and efficient fleet operations,” the company said in an earnings statement. “The Shanghai Containerized Freight Index (SCFI) in H1 2022 was 4,504 points, up 49% from 3,029 points in H1 2021.” 

Second-quarter earnings also significantly improved year over year. Revenue was up 73% from KRW 2.9 trillion ($2.23 billion) to KRW 5.03 trillion ($3.85 billion). Operating profit increased 111% from KRW 1.38 trillion ($1.06 billion) in Q2 2021 to KRW 2.937 trillion ($2.264 billion) this year. Net profit leapt 1,290% from KRW 211 billion ($162 million) to KRW 2.933 trillion ($2.261 billion).

HMM said it was able to attain record results despite fuel costs rising 35% from the first to the second quarter of this year. 

HMM said its second-quarter net profit skyrocketed by 1,290% year over year. (Chart: HMM)

“The financial structure has remained strong,” it added. “HMM’s debt-to-equity ratio has improved to 46% in June 2022 from 73% in December 2021.” 

HMM provided only three points in the “outlook and plans” section of its earnings release, which hint that results for the second half of 2022 might not be as astounding as those for the first six months of the year.

“Demand growth is expected to be under downward pressure due to considerable uncertainties mainly related to widespread inflation, rising oil prices and [a] recurrent coronavirus situation, in addition to geopolitical tensions,” HMM said. 

It added that the “global supply chain is forecast to remain strained in the coming months” and port congestion at locations around the world is “still pervasive.”

HMM said it unveiled a mid- to long-term strategy in July and “will spearhead an effort to address the full range of future challenges and lay a solid foundation for sustainable growth.” 

HMM will spend more than $11.3 billion as part of the growth strategy that includes expanding its container ship fleet from 820,000 twenty-foot equivalent units to 1.2 million TEUs by 2026. 

HMM growing container ship fleet as part of $11B investment

HMM making change at helm

12 HMM container ships’ sticker price $1.57 billion

Click here for more American Shipper/FreightWaves stories by Senior Editor Kim Link-Wills.

War effect on crude trade: Long-lasting and just beginning

It appears increasingly likely that war-driven changes to global crude flows will persist — and grow — through 2023.

photo of a crude oil tanker

Is the shift in global crude flows due to the Ukraine-Russia war a fleeting event or a more lasting, structural change?

At first, many market watchers and investors viewed it as short-lived. It now seems like something to count on for at least the medium term. More Russian crude will likely head to India and China for a longer period of time, and more Atlantic Basin and Middle East crude will head to Europe to replace Russian barrels.

“Oil supply chain disruptions related to Russia’s invasion of Ukraine are proving to be durable and marked by significantly longer average voyages,” said Steward Andrade, CFO of Teekay Tankers (NYSE: TNK), during Thursday’s quarterly conference call. “These trade pattern changes are likely to be long-lasting.”

Executives of Euronav (NYSE: EURN) highlighted the same point on their quarterly call on Thursday. According to Brian Gallagher, Euronav’s head of investor relations, “This isn’t some event that happens over a few weeks. There’s a longevity to the structural change.”

Only the beginning

The EU ban on crude oil and petroleum product imports doesn’t take effect until Dec. 5 for seaborne shipments and Feb. 5, 2023, for pipeline imports.

As of now, Europe is still importing large quantities of Russian crude. Pre-invasion, volumes were around 4 million barrels per day (b/d). Various estimates put the reduction to date at around 700,000 to 1 million b/d. Tanker effects are already significant despite the transition being just one-quarter complete.

“We are only seeing the beginning of a story that will have a long tail,” said Euronav CEO Hugo De Stoop.

Upside for smaller and midsize tankers

War-driven trade changes have mainly impacted smaller tankers known as Aframaxes (with capacity of 750,000 barrels) and midsize Suezmaxes (1 million barrels). Larger tankers known as very large crude carriers (VLCCs, with capacity of 2 million barrels) are too big to call at Russian terminals.

Andrade explained, “Short-haul exports of Russian crude oil to Europe have fallen by around 700,000 b/d compared to pre-invasion levels, with Russian crude oil increasingly being diverted to destinations east of Suez, particularly to India and China.

“Europe is having to replace short-haul Russian barrels with imports from other regions, most notably from the U.S. Gulf, Latin America, West Africa and the Middle East. These changes are primarily benefiting Aframax and Suezmax tankers due to the load and discharge regions involved.”

Compares average seaborne crude oil flows in three months prior to invasion versus three months after (Chart: Teekay Tankers earnings presentation based on data from Kpler)

“When oil imported into Europe previously came five days from the Baltic and now comes approximately 20 days from the Middle East on a Suezmax or approximately 20 days from the U.S. Gulf on an Aframax, that is obviously helpful for ton-mile demand.”

Tanker demand is measured in ton-miles: volume multiplied by distance. The longer the average distance, the more tankers you need to carry the same volume.

“When China imports oil from the Baltic on Aframaxes — which we’ve seen recently — it’s another example of increased ton-mile demand due to changing trade patterns,” added Andrade.

More ship-to-ship transfers to VLCCs?

Euronav expects the war effect to benefit VLCCs as well, for two reasons: because of ship-to-ship transfers in the Russia-to-Asia trade and because of the strong interconnection between Suezmax and VLCC markets.

“The most efficient way to transport crude oil over long distances is obviously on a VLCC. So ideally, they would do transshipment,” said De Stoop, referring to Aframaxes or Suezmaxes loading in Russia and transferring cargo to VLCCs. 

“We’ve already seen a few of those, largely off Africa. We’ve also seen cargo being discharged in Libya and Egypt for relatively short periods then lifted again on bigger ships. The part of the industry that can do that [carry Russian oil] is trying to find the most efficient way to carry that oil to the Far East.”

Suezmax-VLCC connection

Meanwhile, if Suezmax rates rise too high versus VLCC rates, oil shippers traditionally combine two Suezmax cargoes into one lot and use a VLCC instead.

“There are a lot of markets where two Suezmax cargoes can go into one VLCC, so you have this push-pull effect,” said De Stoop. “When the Suezmax market is doing very well, and is seeing many more cargoes, that would naturally have a knock-on effect on the VLCC market. Those two markets are really, really interconnected.

“When we speak to the chartering desks of our clients, it’s usually the same people [booking Suezmaxes and VLCCs] and they monitor the price of one versus the other. In the last two or three weeks, we have seen a lot of cargoes that were shown to our Suezmax desk and then they disappeared and popped up in the [VLCC] pool. Two cargoes were being combined in order to be carried by a VLCC.

“Normally, it’s the VLCC segment that is doing the heavy lifting for all the other segments. This time around — because the disruption is coming from Russia and Russia is not a VLCC market — the pushing is coming from the smaller sizes.

“The Aframaxes are pushing the Suezmaxes and the Suezmaxes are now pushing the VLCCs. Simply because when you compare rates of Suezmaxes to VLCCs, it’s a lot cheaper to use VLCCs. [According to Clarksons, Suezmax rates are currently 30% higher.] 

“And that’s what we have seen in recent weeks. That’s the main reason why we believe the VLCC market improved after the Suezmax had already improved.”

Tanker earnings roundup

The VLCC market may be improving, but it was extremely weak in the second quarter and the early part of the third quarter.

Euronav, which owns VLCCs and Suezmaxes, reported a net loss of $4.9 million for Q2 2022 compared to a net loss of $89.7 million in Q2 2021. Its adjusted loss of 12 cents per share was just shy of the consensus outlook for a loss of 11 cents.

Euronav’s VLCCs earned an average of $17,000 per day in Q2 2022. So far in the third quarter, the company has 47% of available VLCC days booked at a significantly lower rate: only $12,700 per day. De Stoop attributed this to longer-haul voyages booked during a period of weak rates and VLCCs employed on lower-earning repositioning voyages.

Teekay Tankers — which owns a fleet of Suezmaxes, Aframaxes and product tankers — reported net income of $28.5 million for Q2 2022 versus a net loss of $129.1 million in Q2 2021. Adjusted earnings per share of 76 cents topped the consensus forecast for 61 cents.

Teekay’s spot-trading Suezmaxes earned $25,310 per day in Q2 2022. So far in the third quarter, the company has 43% of its available Suezmax days booked at an even higher average rate: $29,600 per day.

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Maersk: Shipping profits stay ‘super strong’ as supply chain pain persists

Container shipping giant Maersk sees continued strength in U.S. imports and ongoing supply chain disruptions globally.

photo of a Maersk container ship

The container shipping boom refuses to end on its predicted schedule. Maersk previously guided for a sharp slowdown starting in July. That didn’t happen. Now it sees a gradual pullback toward the end of the year.

On Tuesday, the world’s second-largest container liner operator pre-reported an all-time high $10.3 billion in earnings before interest, taxes, depreciation and amortization for Q2 2022. During a conference call on Wednesday, Maersk CEO Soren Skou said that Q3 2022 will be “equally good,” i.e., around $10 billion.

Maersk has pushed back expectations for a “normalization” of its ocean business until Q4 2022. Even then, it doesn’t see a collapse. Its new guidance calls for full-year EBITDA of $37 billion, implying Q4 2022 EBITDA of around $7 billion. If so, Q4 2022 would be the fourth- or fifth-best quarter in the company’s history.

What has kept the container boom going longer than expected? Maersk executives cited three causes: ongoing supply chain congestion, continued U.S. import demand strength and higher long-term contract pricing.

‘No quick resolution’ to congestion

According to Maersk CFO Patrick Jany, “Q2 saw a continuation of global congestion, with several disruptions offsetting the weakening demand and lower economic outlook and [supporting a] still very high level of freight rates. Although spot rates softened, they remain high in absolute terms.

“While the demand outlook is certainly down, various disruptions preempted a wider erosion of freight rates, which led to an overall market development that was very similar to that of the first quarter, with both higher rates and lower [year-on-year] volumes.”

Skou said he has been frequently confronted with questions from investors on the development of global congestion. He explained, “Congestion really ramped up last year on the U.S. West Coast as import volumes jumped at the same time labor supply dropped due to COVID. We had expected congestion to ease by the middle of this year.

“The situation on the ground is that while congestion has eased a bit on the West Coast, congestion has spread to the East Coast and to Europe.

“Containers are just not moving off the terminals fast enough. On the West Coast, we have a massive problem getting rail cars. Yesterday, we had 8,500 containers in our L.A. terminal waiting for rail cars. That is three or four times the average from a few years ago.

“Across the West Coast, East Coast and Europe, we see issues with customers not picking up containers because of full inventories. This picture means that a quick resolution of the global supply chain issue is increasingly unlikely.”

US imports remain at ‘very high levels’

“Import volumes into the U.S. remain at very high levels,” said Skou. In contrast, he noted, imports to Europe are back to pre-pandemic levels.

Imports in millions of forty-foot equivalent units. Charts: Maersk. Data source: Maersk estimates including CTS data

An analyst asked Skou why U.S. imports have remained strong despite U.S. retailers reporting excess inventories and slowing demand for some products.

He responded: “Some of the [excess] inventory, particularly in the U.S., is the ‘wrong’ inventory. So, our customers are complaining that they have the wrong inventory and they still have to import the ‘right’ inventory.

“There are certain product categories, especially in durable goods, where pretty much everybody has bought [what they needed]. Everybody has bought a new couch, a new set of lounge furniture, a new TV screen — all the things we spent our money on during the pandemic.

“You cannot go on buying things like another TV screen. But there is still actually very strong demand for faster-moving stuff, especially in lifestyle and retail goods.

“With inflation being rampant in the U.S., people are able to afford less than they were a few months ago. At some point, that should have an effect on U.S. imports. The only caveat there is that savings are also very, very high. Many wise people have said that we should always be careful not to count out the U.S. consumer.”

Blue line: 2022 TEU import volumes. Green line: 2021. Chart: FreightWaves SONAR

Maersk contract rates exceed expectations

Yet another reason why the container shipping boom is lasting longer than some expected: long-term freight contract coverage. Spot rates get more attention and spot rates are falling. But contract rates are up sharply year on year.

Contract rates have been even higher than Maersk previously thought, one of the key reasons why it just hiked full-year guidance.

“The conclusion of our 2022 contracting season was very strong,” said Skou. Maersk now expects 2022 contract rates to be $1,900 per forty-foot equivalent unit higher than 2021 contract rates. That’s $500 more per FEU than it predicted just three months ago. “That reflects much better performance, compared to our expectations, in the latter part of Q2 and over the summer,” said Skou.

Maersk now has 71% of its long-haul business on contracts, mostly with beneficial cargo owners as opposed to freight forwarders.

The company’s average freight rate, including both contract and spot, came in at $4,983 per FEU in Q2 2022, up 64% year on year and up 9% from the first quarter. It was the highest quarterly average rate ever reported by Maersk — and the current quarter looks like more of the same.

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Expeditors’ volumes down, costs up but so are profits in Q2

Air and ocean freight company saw its volumes slump but managed to be more profitable as it held the line on expenses.

Expeditors International moved a lot less air and ocean freight in the second quarter than last year, bringing in more revenue anyway but paying more for capacity.

The end result is Expeditors (NASDAQ: EXPD) managed to boost its operating income by 23% in part because it held salaries and other employment expenses in check.

Revenues for the ocean and air freight company climbed 28% compared to the corresponding quarter of 2021. But the cost of transportation rose 32%. 

That transportation spend was directed at a significantly lower amount of volume. For the quarter, air freight tonnage was down 17% from Q2 of 2021, while ocean freight tonnage declined 11%.

However, salaries and other operating expenses climbed just 9%, helping to bring about the 23% increase in operating income to $505.9 million, up from $410.6 million.

Net income measured in earnings per share rose to $2.29 from $1.87, an increase of 22%.

Expeditors does not conduct an earnings call with analysts. However, in an earnings news release, President and CEO Jeffrey Musser does discuss the state of the company’s market in greater detail than in most releases, though most of those other companies also hold analyst calls.

In the release, Musser said the second quarter was the strongest in the company’s history, “even while our air and ocean volumes were soft compared to a year ago,” 

Expeditors operations also were hit by the lingering impact from the cyberattack the company experienced in the first quarter, Musser said. The company “re-established digital connections with many of our customers, which limited our ability to move cargo through our systems.”

“We believe the volume changes are primarily related to timing of our recovery from the cyberattack, our significant market presence in China, as well as a slowing economy and an overall drop in demand,” Musser said in a summation of the decline in the tonnage Expeditors handled. 

Musser’s outlook saw a mix of softening and continued tightness. Airfreight and ocean rates are “elevated and out of balance by historical standards,” he said, even after declining. Capacity is “no longer severely restrained,” said Musser, noting capacity in the air hasn’t risen to adequate levels. As a result, he said the company still needs to “access additional capacity by using air charters to meet shipper demand.”

“Ocean transit times continued to be stretched by port congestion and many ongoing shortages of equipment, labor and warehousing space,” Musser said in the statement. “Various onshore bottlenecks further impacted many of our ocean and air lanes, in addition to affecting our customs business due to record high drayage, storage, delivery, demurrage and detention costs at destination.”

Expeditors Senior Vice President and CFO Bradley Powell said the rates the company pays to acquire capacity “will continue to be highly volatile at least through the end of the year, while generally continuing to trend downward from their highs over the longer term.”

The company’s earnings per share of $2.27 on a GAAP basis were 13 cents better than forecasts, according to SeekingAlpha. But the revenue of $4.6 billion fell below estimates by $100 million, and that may have contributed to a slight sell-off Tuesday in the company’s stock price. 

At approximately 12:15 p.m. EDT, Expeditors shares were down $4.09, or 3.85%, to $102.39. The company’s stock price Tuesday was down about 26.3% from its 52-week high of $137.80. But it is up a little more than 4% in the last month.

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Container shipping boom continues: Hapag-Lloyd hikes outlook (again)

Shipping lines are still racking up extraordinary profits. Hapag-Lloyd forecasts continued strength in the second half.

photo of a Hapag-Lloyd ship

As great as 2021 was for container shipping lines, this year is turning out better. Germany’s Hapag-Lloyd has just raised its earnings outlook again.

The world’s fifth-largest liner operator said Thursday that it will post earnings before interest, taxes, depreciation and amortization of $10.9 billion for the first half of this year.

This translates into EBITDA of $5.6 billion for Q2 2022, the best quarterly result in the company’s history and up 145% year on year. Hapag-Lloyd reported EBITDA of $5.3 billion in the first quarter.

For the first half, volume came in at 6 million twenty-foot equivalent units, flat year on year. The average freight rate increased 80%, implying a rate of $2,902 per TEU for the first half.

Hapag-Lloyd’s average freight rate was $2,774 per TEU in the first quarter, meaning that rates in the second quarter — including both contract and spot rates — rose even higher.

For full-year 2021, Hapag-Lloyd reported EBTIDA of $12.8 billion. In March, it projected this year’s EBITDA would be $12 billion-$14 billion. In May, it pushed its outlook up to $14.5 billion-$16.5 billion.

On Thursday, it raised it significantly, to $19.5 billion-$21.5 billion, 52%-68% above last year’s result. Hapag-Lloyd’s outlook implies very strong results for the second half of the year of $8.6 billion-$10.6 billion.

According to Deutsche Bank analyst Andy Chu, “Even though our forecasts are significantly ahead of the market, today’s new guidance — especially at the top of the range [with] management very conservative — is materially ahead of expectations. The company is making extraordinary profits.”

Kuehne+Nagel Q2 profits rise 78% on lower shipping volumes

Kuehne + Nagel continued its profit growth in Q2 by passing on higher freight transport costs to customers.

Kuehne + Nagel sign on building

Second-quarter earnings for Kuehne + Nagel, the world’s second-largest logistics provider, underscore how supply chain disruptions that hurt the bottom line of goods’ owners can drive profits as customers seek extra help navigating shipping complexity and uncertainty.

Elevated yields continue to exceed exceptionally high freight transportation and warehousing costs, pushing up revenue 45% to 10.4 billion Swiss francs ($10.9 billion) and operating profit 78% to $1.1 billion versus the 2021 June quarter, Kuehne + Nagel (OTCUS: KHNGY) said Monday. Quarterly and first-half revenue was nearly double the same periods prior to the pandemic, and pretax income quadrupled from 2019.

It was the third consecutive quarter with operating profit in excess of $1 billion. The company’s freight networks are operating at full capacity, which is furthering customer interest in digital tools to increase efficiency.

The logistics service provider achieved strong results, led by its ocean and air segments, despite headwinds from COVID lockdowns in China, the invasion of Ukraine, soaring fuel prices, high inflation and port congestion.

Switzerland-based Kuehne + Nagel said it has been able to pass on higher expenses to customers, much like airlines have done for fuel expense, but high yields also reflect the level and intensity of service required to keep shipments flowing.

CEO Detlef Trefzger suggested this year’s dip in freight volumes was mostly due to supply constraints than weak demand and that second-half demand is picking up, downplaying reports that large retailers have cut back orders because inventories are too high.

“We don’t see a major difference because small-and-medium size accounts are starting to build up their inventory. So we see a positive outlook,” he told analysts during a web briefing.

Despite a 2.4% dip in ocean volumes to 1.1 million twenty-foot equivalent container units (TEU), Kuehne + Nagel’s revenue increased 76% to $5.2 billion, while operating profit jumped 97% to $610 million during the second quarter versus last year. Organic volumes — eliminating extra business from acquisitions in 2021 — fell 4%. The decline in TEUs was less than the 5% experienced by the overall ocean market. Operating costs are much higher than usual because ongoing supply chain disruptions minimize the effectiveness of automated tools and require extensive manual interventions to ensure cargo isn’t stuck or delayed, Trefzger said.

“The bottleneck in the market is logistics experts. We have a lot of vacant jobs and we see it’s getting better month over month with our recruiting initiatives and with our industry being more and more attractive, especially for young people who want to grow into a cool industry,” he said.

Kuehne + Nagel has been holding back on adding customers because of transport shortfalls, but will strive for volume growth as soon as more vessel and equipment capacity becomes available, something it doesn’t expect to happen for at least six to 12 months, the chief executive said.

Air cargo adds to bottom line

Slower demand, the closure of Russian airspace in response to Western sanctions over Ukraine and the May lockdown of Shanghai that forced rescheduling and diversion of many shipments dragged down organic airfreight volumes by 7% in the second quarter versus a marketwide decline of about 5%. Comparisons are skewed by the May 2021 acquisition of 88% of Apex Logistics, a major airfreight management company in the Asia-Pacific market, which nominally boosted the air division’s tonnage by  3% and pretax earnings by $181 million. Second quarter air cargo revenue increased 37% to $3.3 billion, with operating profit up 65% to $417 million, reflecting the high-yield environment influenced by a shortage of air capacity and the positive influence of the Apex acquisition. More than 50% of K + N’s gross air profit turned into total operating profit, up 9% from the first half of 2021 because of the added efficiencies gained through the Apex deal.

The lingering impact of China’s mass quarantine in Shanghai resulted in a 19% drop in air cargo volume during June, but volumes are recovering now, led by double-digit growth in pharmaceutical and aerospace throughput, said Trefzger.

K + N said its workflow digitization transformation for automating documentation, quotation, booking and status updates saved 10% in man-hours since the end of 2021, with an estimated cost savings of 20% and  1.7% contribution to operating profit in the air logistics unit alone. The e-Touch initiative could soon deliver 5% to profitability, said CFO Markus Blanka-Graff.

Operating costs have stopped increasing in the air cargo unit thanks to the workflow digitization transformation for automating documentation, quotation, booking and status updates. The e-Touch initiative saved 10% in man-hours since the end of 2021 with an estimated cost savings of 20% in the air logistics unit alone, management said.

Kuehne + Nagel currently moves 65% of shipments on dedicated freighters and only 35% in the lower hold of passenger aircraft, in line with the market’s overall capacity distribution. Trefzger said the balance isn’t expected to change this year because airlines will dial back peak-season travel offerings for the slower winter season and some major markets, such as China, still don’t allow unrestricted foreign travel, further limiting capacity.

Kuehne + Nagel said trucking volumes increased significantly, leading to a 12% increase in revenues and record $83 million operating profit for the January-June period.

Since June, the company has been using biofuel for road transport of Moderna’s COVID-19 vaccines from the production site in Spain to a distribution center in Belgium, eliminating most carbon dioxide emissions in the process.

Contract logistics revenues increased 9% in the second quarter, as the company continued to expand service offerings in the e-commerce and pharmaceutical sectors. Business in North America and Asia is growing at twice the speed of Europe, in line with the company’s strategy, and 80% of lease commitments are backed by customer contracts. Warehouse utilization is 98%, meaning buildings are essentially full. 

In May, K + N began construction of a 1.4 million-square-foot regional distribution center for Adidas in Mantova, Italy.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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Container shipping jackpot continues: CMA CGM profits soar

CMA CGM container shipping vessel arriving in New YorkCMA CGM, the world’s third largest liner company, froze spot rates in September-January, yet its revenue per container kept rising.

CMA CGM container shipping vessel arriving in New York

On Sept. 9, 2021, French container shipping giant CMA CGM announced an unusual step for a profit-focused enterprise with listed bonds: It put all increases in spot rates on hold until Feb. 1, 2022. The decision was made to “prioritize its long-term relationship with customers in the face of an unprecedented situation in the shipping industry.”

Even so, CMA CGM’s profits and revenue per container carried have increased ever since.

CMA CGM is the world’s third largest shipping company by capacity, according to Alphaliner. On Friday, CMA CGM reported Q1 2022 net income of $7.2 billion, 3.5 times net income in Q1 2021, topping its previous record quarterly results in Q4 2021 ($6.7 billion).

CMA CGM doesn’t release fleet capacity figures but Alphaliner calculates these numbers. A year ago, Alphaliner reported that CMA CGM’s fleet of owned and chartered ships had capacity of 3,012,168 twenty-foot equivalent units. It currently puts CMA CGM’s fleet size at 3,300,522 TEUs, a year-on-year increase of 9.6%.

Despite a larger fleet, the French liner company’s quarterly throughput has been ebbing. A year ago, in Q2 2021, CMA CGM moved 5.69 million TEUs. In the latest quarter, it moved 5.3 million TEUs. The company attributes volume headwinds to “port and inland congestion which has led to longer transit times for vessels.”

CMA CGM revenue per container kept rising

As with other ocean carriers, CMA CGM’s massive surge in revenues and profits in the face of constrained throughput was driven by increased freight rates.

While CMA CGM does not report its average quarterly freight rate, it does report shipping revenues. Its shipping revenue in Q3 2021 — prior to the spot rate freeze — was $2,292 per TEU. Since then, revenues per TEU increased 22% to $2,802 per TEU in Q1 2022.

Chart: American Shipper based on data from CMA CGM

How have shipping revenues per TEU increased during a spot rate freeze?

One reason could be increased contract rates and increased contract coverage. At the time of the spot rate cap, Vespucci Maritime CEO Lars Jensen commented, “The development indicated by CMA CGM would appear to lead in a direction where the prioritization will lean more towards contractual customers and customers with stronger pre-existing relationships.”

Xeneta, which tracks contract rates, said on May 31 that long-term rates are up 151% year on year.

Another possible driver of CMA CGM’s revenue-per-TEU growth during the spot-rate cap period: A sizable portion of the spot capacity for the freeze period may have already been booked when the cap was announced and/or more spot volumes may have been booked at the cap rate.

Randy Giveans, formerly the shipping analyst of Jefferies, speculated at the time of the CMA CGM rate freeze: “This is only from September to February and I would assume that CMA CGM capacity is already almost full from September to February. They don’t say how much capacity this applies to or how impactful this will be. It could be like a gas station after Hurricane Ida telling people it’s not going to increase gas prices when it only has 8 gallons left in its tank.” 

Macro risks ahead

Looking forward, the French carrier expressed the same macro concerns as many other ocean carriers.

“The group is closely monitoring the evolution of the current geopolitical situation and its consequences on the macroeconomic outlook.

“Even if the group remains confident about its financial performance prospects for 2022, the current environment and its medium and long-term consequences remain uncertain. The sharp rise in energy prices, combined with price inflation of many raw materials, is weighing on retail consumption and could have a negative impact on the economic situation and the outlook for global trade.”

Click for more articles by Greg Miller 

Chart showing CMA CGM container shipping KPIs