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The debate surrounding bunker costs has a familiar ring – more than a few distressed shippers are telling me the carriers should bear the brunt of a difficult situation to which they have contributed in their quest for market share.

Bunkers (Source: shipandbunker.com)

Bunkers (Source: shipandbunker.com)

But are rising oil prices a sign of worse things to come for the container shipping industry? Let’s look at what lies beneath the surface of what I think was a predictable scenario for all the majors.


Of course, the future direction of oil prices is unknown, but what if my crystal ball can at last be trusted and the rally continues, with oil prices up 50% or so to the 2011-2014 levels in the next couple of years, before global recessionary forces take their toll?

Oil prices (Source: Investing.com)

Oil prices (Source: Investing.com)

What if, subsequently, the P&L of the major container shipping companies had to carry much higher bunker and consumption expenses than last year, just as net leverage levels are much higher than previously, following debt-funded M&A in recent years?

And there could be further downside, given widespread uncertainty in global trades, which could harm sales and where the big tickets in certain industries – automotive is a case in point – have recently been targeted by the world’s politicians.

EBS, BAF and so forth

A great deal of disappointment ensued among shippers after emergency bunker surcharges (EBSs) began to be levied.

About a month ago, MSC was the first carrier to react to diminishing returns caused by soaring fuel costs, announcing an EBS across its services. The situation, far from being critical, was nonetheless serious, and “no longer sustainable without emergency action”.

What have been labelled as controversial bunker surcharges have always been a predictable issue, yet as The Loadstar recently wrote, some shippers which recently signed new contracts with built-in mechanisms for BAF, are refusing to accept the charge.

Let’s keep it very simple by looking at CMA CGM, which is very possibly the best performer, financially, in the past 12 months.

As a side note, I was tempted to put Hapag-Lloyd under the microscope, but CMA CGM’s financials are neater and the German carrier has changed a lot more with the consolidation of CSAV and UASC since 2013, so a straight comparison is much more time-consuming, and likely less effective, based on like-for-like figures, than for the French carrier, notwithstanding its own takeover activity.

Good proxy

CMA CGM is easily a proxy for an industry where debt levels and other costs could dictate future pricing strategy, including EBSs. While everybody blames oil prices and this OPEC-led surge, the French carrier has always been open about pricing adjustment mechanisms, as the table below shows.

Macro trends (Source: CMA CGM)

Macro trends (Source: CMA CGM)

In terms of oil price trends, we are still well below the levels witnessed in 2014 and 2013, whether we go with WTI or Brent.

Macro trends (Source: CMA CGM)

Macro trends (Source: CMA CGM)

Let’s look at where the problem lies by sifting through the financials of CMA CGM.

Based on fuel consumption for 2017, the carrier says a $10 (in $ per tonne) increase in fuel prices would have had a negative impact on its P&L of approximately “$78m, excluding any effect on the BAF mechanism mentioned above, as well as any other correlation with freight prices”.

So, adjusted by its current and projected fleet size, about $300m-$500m of added expenses each year could be a base-case scenario (this is likely a conservative estimate), although the impact from combined bunkers and consumables expenses could be more damaging.

Consider that, applying 2016 lower bunker and consumables expenses to its 2017 numbers, the bottom line of CMA CGM would have been well over $1bn, rather than about $700m, despite rising combined container capacity in the wake of the NOL takeover, which contributed to add billions of dollars in sales to its consolidated numbers.

Now, without focusing on how significantly better consumption/utilisation rates and efficiency measures could affect these numbers, on a comparable basis we can deduce that CMA CGM’s financials would look much worse if its P&L was hit by bunker and consumables expenses of $3.5bn, just as it happened a few years ago (of course, they could be even higher in 2019 and beyond).

What gives?

Under this hypothetical scenario, according to which we add $1bn of costs to fuel the ships and in related items, its core operating income line last year would have been about $574m, worryingly close to interest expenses on borrowings of $495m.

CMA CGM P&L 2017/2016 (Source: CMA CGM)

CMA CGM P&L 2017/2016 (Source: CMA CGM)

That compares with $310m of interest in 2014.

CMA CGM P&L 2014/2013 (Source: CMA CGM)

CMA CGM P&L 2014/2013 (Source: CMA CGM)

Between 2013 and 2014, the much smaller CMA CGM was a different beast, of course, and certain costs weighed more than others.

Here is the development of bunkers and consumables expenses as a percentage of total expenses: 13.5% in 2017; 11% in 2016; 22.6% in 2014; and 23.7% in 2013.

As expected, these ordinary items now count for a smaller slice of the expense cake, but other operating costs could easily make us feel as if we hit peak free cash flow in 2017.

Take big cost items such as handling and stevedoring, as well as inland and feeder transport, where trends are the result of an expanding assets base: from 25% and 11% as a percentage of total expense in 2014, respectively, they stood at 29% and 15% last year.

operating expenses (Source: CMA CGM)

Operating expenses (Source: CMA CGM)

Between 2014 and 2017, CMA CGM has added $4.3bn of (organic and inorganic) revenue and $3.5bn of operating costs (+22%), but combined handling and stevedoring, plus inland and feeder transport expenses, have skyrocketed (+49%) during the period.

operating expenses (Source: CMA CGM)

Operating expenses (Source: CMA CGM)

Now consider that this year CMA CGM could easily report revenue of over $22bn, but how about its cost base? Well, we can expect to know more in the second quarter.

For the time being, just consider that net leverage is slightly outside of the comfort zone, at 3.2x on a trailing leverage, given its track record (and barring 2016 numbers, which were awful). But if we tweak down CMA CGM’s cash flows, assuming the mid-point my base-case scenario, its net leverage surges above 4x.

Ocean carriers are a frightening lot, despite their more dominant position following the last round of M&A, simply because their assets have been financed by rising debt, and nobody knows if it will work out or not.

While higher bunker and consumption expenses are the easier to offload to their clients, higher volumes will likely remain more difficult to manage profitably. It is thus unsurprising that they want to mitigate their first-quarter losses ahead of likely challenging second-quarter comparisons.

But this is the landscape: shippers do not want to pay for transport services that could further dilute their margins, and the freight forwarders are squeezed in the middle, although admittedly they are holding up well, given the circumstances and healthier balance sheets. Who is ultimately the hostages? The bankers.


Leave a Reply


    June 28, 2018 at 3:27 pm

    The article on bunker surcharges and who should bear the burden —-.
    The analysis is interesting but — CMA is not a publicly traded company and their
    financial reports may not be the best to use to relate to the industry as a whole.
    Try looking at the Alphaliner report with analysis showing that adjusted for inflation,
    including fuel price fluctuation, the average rates in the industry have fallen 50% in the past 20 years. The carriers, for the most part, have themselves to blame. Their pursuit of market share and volume create the environment; the lack of capacity management, last seen in late 2009 and 2010, plus the pursuit of market share has created the environment leading to these results. The industry lost $20. Billion between 2011 and 2016 (maybe even 2017), and 2018 looks like a return to consecutive years of losses. The increases to fuel, charter rates, inland transport, all add to the results being negative. To say that the carriers must bear the burden
    is proof that cargo interests want lower and lower rates forever, never mind the consequences. If there is another Hanjin, so be it. History tells us that carriers come and go – used to be 7 Japanese carriers, now ONE. 9 US Flag carriers, now none. 7 South American flagged carriers, now none. Numerous other European and Asian firms, gone. The average rate of return for the industry for several decades is 3%. Mostly their own doing, but those who complain about a fuel surcharge simply want never ending lower rates.

    • a.pasetti@yahoo.co.uk

      June 28, 2018 at 4:43 pm

      Thank you, GFERRULLI. Much appreciated feedback.

      Let me say, I disagree with your take on CMA CGM, because the point here was to show the impact that a certain scenario could have on the carrier that has delivered the best performance in the past 12 months so. Spare a thought for all the others, public and private companies. Also, The standards of CMA’s reported numbers are also well above those all most public companies, which reinforces the view that if there’s a proxy in the industry, that must be CMA CGM, all aspects considered.

      Re: “Try looking at the Alphaliner report with analysis showing that adjusted for inflation, including fuel price fluctuation, the average rates in the industry have fallen 50% in the past 20 years.”

      I think we agree this confirms my take, and it is part of the problem. How do you think that the above contradicts what I said? If anything, it is a very nice add-on, but I approached this story bottom up from the P&L, rather than the other way around.

      Makes sense?



      • Jaybond

        July 03, 2018 at 6:56 am

        Mr. Pasetti, thanks for your article. I do agree that CMA is a good case in point to make. While I also agree that hapag may see worse in the years to come, the short term the UASC deal will allow it to mitigate earnings decline, while for CMa it may not be the case; so based on Hapag’s profit warning (-12-15% yoy worst case), I would argue that the decline for CMA may be worse still.

        We have also not yet talked of the IMO 2020 here!

        Any thoughts?


        • a.pasetti@yahoo.co.uk

          July 03, 2018 at 7:59 am

          Hi Jaybond,

          Thanks for your comment. Very good points.

          You are right, there are few adjustments that must be made for UASC with Hapag, but also consider that CMA CGM’s numbers were markedly better last year following the acquisition of NOL, and there is residual value there, IMO. In race to earnings estimates downgrades (next up is APMM), Hapag vs CMA is too close to call, I think.

          Btw, do you think the two could look for some synergies as soon as next year and put more pressure on APMM?

          IMO 2020? I am monitoring it closely, but it’s likely, in my view, that the 1 Jan 2020 deadline will be pushed back by a year or two. Thoughts?

          Best regards,