Originally Published in the Journal of Commerce (JOC.com)
The liner carriers Hyundai Merchant Marine (HMM) and Yang Ming Marine Transport both reported narrower operating losses in the first quarter of 2019, aided by unexpectedly higher volumes.
Seoul-based HMM’s performance is particularly noteworthy as it continues an unbroken string of quarterly operating losses dating back to 2012, results that compelled its primary shareholder to force a shift in leadership, with former LG and Pantos Logistics veteran Jae-hoon Bae taking over as CEO in March.
In operational updates, both HMM and Taiwan-based Yang Ming said volumes rose in the first quarter, but freight rates were down due to the “traditional slack season” after the lunar new year and, as HMM noted, “intensified competition in the Asia-North America trade lane.” That stands in contrast to Hamburg-based Hapag Lloyd, which in its first quarter financials announced on May 9 said its rates globally were up 5 percent on a year over year basis and were up 7 percent in the trans-Pacific. Hapag-Lloyd announced a net profit of 96 million Euro versus a loss of 34 million Euros in the first quarter of 2018.
Both painted rosier pictures for the second quarter, a view that is shared by Hapag-Lloyd CEO Rolf Habben Jansen, who has predicted that global container volume will grow in line with market expectations of 4 percent and be supported by rising rates. According to the latest IHS Markit Trends in the World Economy and Trade report, overall container volume growth is expected to accelerate from 4 percent in 2018 to 4.8 percent this year and 5.1 percent in 2020.
In HMM’s case, the line said it “will maximize its efforts to strengthen profitability by successfully securing service contracts with valued customers, rationalize its service network, [and] attract high-value cargoes.” But the carrier added the “continuous US-China trade conflict” is obstructing a trans-Pacific market recovery.
HMM narrowed its operating losses 37.9 percent in the first quarter, to $88.9 million, on an 18 percent increase in revenue. Volumes for the quarter increased 11 percent year over year to 1.09 million TEU.
Average bunker cost for HMM rose 13.4 percent year over year to $423 per metric ton. The carrier said the pressure of higher fuel costs is expected to increase on vessel operators “due to the US sanctions against Iran, OPEC agreeing to cut oil production, and increased demand of low sulfur fuel oil in preparation for [the International Maritime Organization’s 2020 low-sulfur fuel regulation].” HMM said it has “put its efforts into collecting the bunker surcharge to recover the higher fuel prices.”
State-owned Korea Development Bank (KDB), HMM’s primary shareholder and lender, hardened its attitude towards the carrier in late 2018, threatening to fire non-performing staff after 14 consecutive loss-making quarters. Bae’s predecessor Chang Keun Yoo announced his resignation in early 2019 after five years at the helm.
The new CEO in April embarked on a European tour that included include stops at Maersk Line’s Copenhagen headquarters and Mediterranean Shipping Co.’s (MSC) Geneva office to “consolidate the relationship with 2M” alliance carriers. HMM has a vessel sharing agreement with Maersk and MSC on 2M services, but is not part of the formal alliance. The carrier has 12 mega-ships of 23,000 TEU capacity coming online in 2020, the same time as its agreement with the 2M carriers expires. Being able to improve utilization by adding those vessels to Maersk and MSC’s Asia-North Europe strings will be crucial as volume growth declines on the trade and fuel prices rise.
Despite globally carrying 428,000 TEU more in 2018 than during the previous year, an increase of 10 percent, HMM reported an operating loss of $451 million.
Yang Ming said in its financial update that first-quarter net losses were cut by 65 percent year over year to $22.1 million thanks to a 13 percent increase in revenue and a 5 percent increase in volume handled to 1.29 million TEU.
Carriers in the trans-Pacific will generally benefit in 2019 and into the first half of 2020 from service contract rates that were reported to be $200-$300 per container higher than in the 2018-2019 contract year. That result was achieved by carriers due to a number of factors including tight capacity and higher spot rates in the first quarter following a surge of US import volumes ahead of threatened tariffs on exports from China on Jan. 1, 2019. But at the same time, newly imposed tariffs on China as of May 10 and China’s swift retaliation will undermine growth in the trans-Pacific and globally.