Storm clouds darken on Asia-Europe box trade as carriers struggle with rates
The storm clouds on the major east-west container trades continued to darken this week as ...
It is no surprise that Maersk CEO Soren Skou recently urged governments to stop subsidising shipping lines, and it’s pretty obvious why he did that, I reckon: the potential for another Hanjin is there, right?
Taiwan’s Yang Ming posted headline results on Friday that confirmed the industry’s asset-heavy companies with stretched balanced sheets remain a bit troubled, to say the least, and need to do more to become healthy.
In this context, “more” could mean either deal-making or lobbying lawmakers/bankers to make sure the funds the carriers might need eventually are there when the next cash withdrawal is sought in the form of emergency funding, or a fundraising via new equity and/or debt capital.
In all this, while the press points out that “bad weather hit Maersk and Hapag-Lloyd in the first quarter”, we are at a pivotal economic juncture, where the real danger is that the oil price rally continues unabated – up to $100 a barrel and beyond – while new sulphur cap regulations could add more pain than joy to unprepared carriers.
Given the US shale vs OPEC saga, geopolitical risk and oil demand/supply imbalances, it’s easy to speculate that oil prices might have more room to run, which means more pressure on profit and cash flow for all the major box lines in an industry that must hope consumer spending continues to grow well above mean, given the debts most players carry onto their balance sheets.
And that is not to mention a top-down approach, according to which, the bad news for their shares is piling up on the macroeconomic front, with the 10-year US treasury rates climbing 3% – which, of course, could badly harm equities after years of near-zero rates – and mixed signals from oil and US dollar trends.
If you want to understand why these financial trends matter, I invite you to read “Tuesday’s bond bloodbath: you are lucky that wasn’t worse for stocks“… although a glance at the chart below might do as well.
Ahead of APMM results
On Monday, Hapag-Lloyd’s numbers proved that all its main financial metrics – revenue growth, cash flows growth, free cash flow, net debt and net leverage – were in relatively good order, yet almost inevitably bunker prices were under the spotlight.
In Hamburg, the best thing the company could do was to extend the assignment of CEO Rolf Habben Jansen – and so it did, but that positive event was overshadowed by higher bunker prices, at $372 per tonne in the first three months of 2018 (Q1 17: $313).
“Average bunker prices rose significantly, by $59 per tonne, resulting in 34.8% higher expenses for raw materials, supplies and purchased goods,” the group said.
Rather unexpectedly, mid-way through the second quarter, it is getting worse.
Hapag-Lloyd and others can pass on fuel increases over time. Moreover, several carriers use bunker options to hedge fuel price risk. But now I am keen to watch how things have developed this year for APMM, whose interim results are due tomorrow.
Its trading update had better be solid, in terms of cash flows for Maersk Line, if it doesn’t want to give up all those paper gains its shares have accumulated – for no apparent reason other than that opportunistic buys were executed in the wake of share price weakness – over the past few weeks.
APMM stock corrected in February, and then, the bulls might argue, it bottomed in April, some 5% below its mid-March levels highlighted in the chart below.
Notably, its strength is perceived by some cash equity traders I talked to as being a direct function of Hapag-Lloyd’s trading range, which is conceivable if you think investors are bottom-fishing for value, and Hapag stock is not particularly cheap, based on most trading metrics.
Well, this is something the new CFO of ZIM Shipping, Xavier Destriau, might want to keep in mind if he aims for a long-waited IPO, although I am happy to speculate that a trade sale remains a viable option.
Meanwhile, Yang Ming’s results drive other considerations. Firstly, when it informed us last week that the ship was not sinking, I thought there was merit in a bullish view, given its stronger performance than last year. Secondly, however, based on my calculations, its 3% growth rate is still about 15 percentage points away from acceptable levels, if it aims to generate the kind of cash flows that would help it de-lever its balance sheet to more reasonable levels.
“Consolidated revenues of Q1 totalled NT$31.03bn (US$1.07bn), up 2.58% compared with NT$30.25bn ($1.04bn) in revenue the previous year. The company’s net loss, after tax, was NT$1.95bn ($67m), EPS NT$-0.75. Volumes in 2018 Q1 also increased to 1.22m teu, up 9% year on year.”
I would be disappointed, but only if it wasn’t a strategic asset, and then consider “the typical first-quarter slack season”, as the group points out.
Blessing in disguise?
Talking of real distress, Bloomberg earlier this year wrote that elsewhere in the supply chain, “South Korean shipbuilders aren’t out of the woods yet, even as orders begin recovering, with the smaller ones facing collapse in the absence of government support”.
Yet South Korea’s largest surviving carrier, Hyundai Merchant Marine (HMM), has recently confirmed plans to order new vessels and add meaningful capacity to its existing fleet.
Broadly, I don’t know what to make of that announcement, but whether it makes sense or not it doesn’t matter because South Korea will always need one large domestic carrier, and the government chose in the summer of 2016 the one it wanted to bail out.
The Hanjin bankruptcy was a blessing for HMM. Its holdings have recovered in value from their lows but remain highly volatile (today the shares were down over 7%)…
…at a time when the share price action and quarterly results of the most powerful container line in Asia, China’s state-owned COSCO Shipping Holdings, leave little to the imagination.
Just as we expected at the turn of the year…