Hamburg Süd 2012: Better, but Not yet Good Enough

Hamburg Süd’s performance in brief
Following the powerful recovery of the world economy in 2010 and a weaker 2011, global growth continued in the past financial year, albeit at a slower pace. Against this backdrop, container shipments increased once again, but at a weaker rate than vessel capacity. As a result, freight rates remained under pressure, especially on the Asia-Europe trade lanes, despite a significant but temporary recovery. Given still high fuel costs, the earnings level of almost all shipping companies remains unsatisfactory.

The Hamburg Süd Group was unable to escape this development. At some 3.3 million TEU (1 TEU = 20-foot container), it transported around 4% more containers than in the previous year, roughly in line with market growth.

Driven by a U.S. dollar significantly stronger on the average for the year, the sales revenue from Hamburg Süd’s liner operations grew over-proportionally to carryings volume by roughly 16%, to approximately €4.8 billion. With the inclusion of break-bulk and product tanker activities, the shipping division’s sales total rose by about 15% to approximately €5.5 billion.

At 4,512, the Hamburg Süd Group employed around 1% more staff in 2012 than in the previous year. Including crew under third-party hire, the number of employees deployed at Hamburg Süd came to 5,134.

On the back of constant freight rates and continuing cost pressure in the operational area in the last financial year, the Hamburg Süd Group’s result was marginally in excess of plan. An improvement on the previous year was also achieved, due mainly to successful capacity management. However, it is as yet not possible to speak of a satisfactory earnings level.

Capital spending, for the most part in the form of deposits and final payments on ship newbuildings, was roughly 48% lower in 2012 than in the previous year and was financed entirely from operational cash flow.

Economic environment
2012 was characterized by the European sovereign debt crisis, the sluggish recovery of the U.S. economy, muted economic development in China, and very low growth in the Brazilian national economy. Global economic output (GDP) increased by around 3.2% (2011: 4%).
Container shipments worldwide grew by roughly 3.3% to around 156 million TEU (2011: 7.2%).

Global slot capacity rose by some 6% due to newbuildings entering service and despite increasing, but still far too low, scrappings. Above all, vessels were put into service whose delivery ship owners during the crisis of 2008/2009 had deferred to a later date, or which were ordered in light of the market recovery in 2010/2011.

Particularly high influxes of large container ships with a slot capacity upwards of 10,000 TEU were recorded. These vessels are deployed chiefly on the routes between Asia and Europe, increasingly supplanting mid-sized tonnage, which then migrates to the North-South trade lanes and there contributes to overcapacity and downward pressure on revenue.

Given the widening gap between the supply of vessel capacity and demand for transport services, freight rates were under pressure, especially at the beginning of the year. Following a period of extremely intense competition in 2011, a more sensible approach gained momentum in the industry at the start of 2012. Shipping companies increasingly put capacity management before volume and market share ambitions. Freight rates were raised as a result, by up to $1,000/TEU in the Asia-Europe trade, for instance. However, because of the widespread absence of the peak season, freight rates came under renewed pressure from June onwards, but without reverting to the low starting point.

Accompanied by considerable price fluctuations, fuel costs stood at a very high level. The price of a ton of heavy marine diesel in March reached an all-time high of around $730 dollars (spot Rotterdam). In the course of the year the price of bunker fell back to around 600 US dollars. At an average for the year of $641 dollars per ton, the price in 2012 was a good 4% up on the previous year. In view of the heavy pressure on revenue, the additional costs, as in the previous year, could only partially be passed on to customers by way of bunker surcharges. Prices for key insourced services, especially for cargo handling in the ports as well as for container transport inland, continued to increase. 

The factors described resulted in many shipping companies having to take serious losses, especially at the start of the year. Only with the freight rate increases towards the middle of the year could this development be temporarily halted. However, industry experts assume that, following losses of some $6 billion in 2011, the liner shipping companies earned a marginal surplus at most.

Like container shipping, the bulk shipping sector also suffered from severe over-capacity last year. Newbuilding deliveries produced capacity growth far in excess of demand. The already low charter rates therefore declined even further in 2012. This put the Panamax Index Rate in September at a record low of approximately $3,500/day, a disastrous development compared with the all-time high of around $93,00/day in October 2007. At the present level of spot rates, a cost-covering employment of ships was scarcely possible in 2012.

Liner shipping (Hamburg Süd, Aliança)
In a challenging market environment characterized by overcapacity, Hamburg Süd succeeded in increasing cargo volume, with a gain of 4% to around 3.3 million TEU. The Europe-America and Far East services contributed in particular to this growth. Pleasing performance was seen, too, in some of the Inter-America services. By contrast, Mediterranean operations, and in part the Pacific services, fell below expectations.

Freight rates in the mix of all services were held on a par with the previous year. Bunker costs and other operational costs went on rising. Only the chartering-in of vessels afforded some relief given the depressed charter market.

Hamburg Süd continued to optimise its liner network in 2012. Via key transhipment hubs in Cartagena (Colombia) and Tanger (Morocco), customers are offered additional connections between South America, Europe and the Middle East.

The Mediterranean services were restructured. Working with a consortium partner, Hamburg Süd deployed larger and more efficient tonnage, though the shipping group’s slot capacity declined slightly. In addition, tonnage was upgraded on the strategically important and burgeoning trade lane from Europe to India/Pakistan.

Sales in liner operations recorded a gain of 16% to €4.8 billion. However, this increase is accounted for largely by the performance of the U.S. dollar exchange rate. The growth in revenue was accompanied by substantial cost increases. Although the result of the liner division rose in 2012, it still remained unsatisfactory and was well below that of the record year 2010.

Tramp shipping (Rudolf A. Oetker, Furness Withy Chartering, Aliança Bulk)

Bulk shipping in 2012 was marked by serious overcapacity, even though ship tonnage was tied up as a result of continuing excessive strain on port infrastructure (in Brazil, China and Australia, for example). The segment failed to produce a satisfactory result for the first time in many years. The product tanker operation held its ground in an equally difficult market environment, yet without offsetting the loss from the bunker business.

Ships and containers
The fleet operated by Hamburg Süd as at 31 December 2012 totaled 153 vessels, 42 of them Group-owned. The liner services employed 104 ships and the tramp sector 49. While the number of container ships declined by three units compared with the previous year, the slot capacity deployed in the liner services increased by some 9% to around 430,000 TEU. Due to the higher average capacity of the vessels, costs per slot were further reduced.

In the reporting year the final three ships of the “Santa” series entered service with Hamburg Süd. With a capacity of 7,100 TEU, they are the Hamburg Süd Group’s largest units to date and are deployed on the routes between Northern Europe and South America East Coast, as well as between Asia and South America East Coast.

In parallel with the growth of cargo volume, the container pool was increased to 458,000 units. Newbuilding prices for containers remained largely stable over the course of the year.

Hamburg Süd is continuing to pursue its strategy of raising the owned share of ships and containers. The six 9,600 TEU “Cap San” vessels ordered in early 2011 will be delivered in 2013/2014. All of these outsized ships are to be deployed on the trade lanes between Asia and South America as well as between Europe and South America. Additionally, in the course of this year delivery will be taken of four 3,800 TEU newbuildings that are to be deployed in Aliança’s Brazilian cabotage service.

Hamburg Süd’s current order volume covers the anticipated capacity needs of the Group for the time being as regards the owned share sought.

Outlook for 2013
Only isolated positive signals can be discerned in the current financial year. A fundamental change in the shipping industry’s poor earnings situation is not to be expected in 2013 from today’s perspective.

In the estimation of the International Monetary Fund, global economic output (GDP) in 2013 will grow by approximately 3.3%. Global shipment volume in the container liner sector is set to add around 6%, industry experts estimate. Risks exist, in particular, with regard to China’s exports as well as to North America’s and Europe’s imports, which, given a continued financial and economic crisis, might not be able to recover as quickly as hoped.

The shipping companies’ global order book currently runs to some 20% of the tonnage in operation, whereas this figure still stood at over 40% in late 2008. Nonetheless, global slot capacity will rise by about 7%, even though increased scrappings are expected because the ships ordered before 2010 have significantly higher fuel consumption than newer units. The trend to very large tonnage is continuing.

It is to be assumed that freight rates will remain under pressure in the current year and liner shipping be characterized by further intense earnings volatility. Crucial to the course of the financial year ahead will be the extent to which the liner shipping companies – largely forgoing gains in market share – operate a forward-looking capacity management policy and so ensure freight rate stabilization.

With a moderately positive development of the global economy, an equalization of capacity and cargo volume can be expected in 2015 at the earliest. The prerequisite for this, however, is the absence of any sizeable ship newbuilding order activity.

In the area of bulk shipping, no fundamental recovery in the market can be expected in 2013 given the serious overcapacity situation. Similarly, there is no turnaround yet in sight in 2013 for the product tankers.

Hamburg Süd intends to continue along the path it has pursued in recent years and grow in line with the market.

Staffing numbers will scarcely rise in 2013 and for the foreseeable future, despite the planned growth in cargo. In the years ahead, the aim is to ensure continuous efficiency gains in the organization through high capita In December 2012 it was announced that the owners of Hamburg Süd and Hapag-Lloyd AG had tasked the management of both companies with investigating the potential benefits of a merger of the two companies. After these examinations had been brought to a positive conclusion, the owners conducted negotiations on the prerequisites for such a merger and the form it might take. No agreement has been reached on important points to date. Negotiations were broken off in late March. Resumption is unforeseeable at this time.

Based on the assumption that the global economy and global trade will see only moderate growth in 2013, Hamburg Süd is continuing its service optimization measures. The liner result is set to be improved compared with the previous year. Tramp shipping, however, is likely to produce a similarly unsatisfactory result as in the previous year; the first quarter closed roughly in line with plan.

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