Date: Monday, October 11, 2021
Congested ports. Clogged supply chains. Capacity shortages.
Much of Hapag-Lloyd CEO Rolf Habben Jansen’s third-quarter overview had a familiar refrain, one likely to be heard again after the fourth quarter.
But there were two topics Habben Jansen did not expound upon: the buckets of money the ocean carrier likely raked in during the third quarter and the recent investment in a German port.
Hapag-Lloyd is scheduled to release its third-quarter figures Nov. 12, and Habben Jansen did not open the ledger during a virtual chat with the media last week. His only reference to Q3 financials came when addressing supply chain bottlenecks.
“Once the data come out for the third quarter of 2021, I do not think that we will see massive growth compared to [Q2 year-over-year] simply because the supply chains at the moment are so much clogged up and we have so many ships waiting outside of the ports,” he said.
Hapag-Lloyd did experience massive second-quarter growth year-over-year. Q2 earnings before interest, taxes, depreciation and amortization was $2.3 billion, an eye-popping $1.5 billion gain from the $770 million reported in the second quarter of 2020. Revenue shot up 70%, from $3.3 billion in Q2 2020 to $5.6 billion this year.
Habben Jansen did touch on the ocean carrier’s stellar financial performance in the first half of 2021.
“On the back of higher transportation volumes and rates, we’ve seen a significant increase in results for the first half of the year. Contract rates are up, but of course very significantly below what we have seen in the spot market. We’re still loading, though, quite a few boxes at 2020 rate levels, especially medium- and long-term contracts,” he said.
“If you look at our overall numbers, then you will see that our average freight rate in the first half [of the] year was up compared to last year by about $500 per TEU. Of course, that’s quite a lot of money, but $500 a TEU is nowhere near the increases that we have seen in the spot market,” Habben Jansen continued. “That clearly illustrates that we’ve been moving a lot of cargo on contracts that were closed earlier.”
Hapag-Lloyd reported first-half 2021 EBITDA of $4.2 billion, a giant leap from $1.2 billion in 2020, and group profit of $3.3 billion, up from $2.9 billion the year before.
“Revenues increased in the first-half year of 2021 by approximately 51%, to $10.6 billion, mainly because of a 46% higher average freight rate of $1,1612/TEU. The freight rate development was the result of high demand combined with scarce transport capacities and severe infrastructural bottlenecks,” Hapag-Lloyd said in the August release.
“While demand remains high in the current congested market environment, it is leading to a shortage of available weekly transportation capacity. For this reason, Hapag-Lloyd expects earnings to remain strong in the second half of the financial year,” it said.
Full-year EBITDA is forecast in the range of $9.2 billion to $11.2 billion.
‘It’s very important to have a robust network’
Habben Jansen was asked several times to elaborate on Hapag-Lloyd’s investment in JadeWeserPort. Late last month, Hapag-Lloyd issued a brief statement in which it said it was acquiring a 30% stake in Container Terminal Wilhelmshaven and 50% of the shares of Rail Terminal Wilhelmshaven at JadeWeserPort in Germany for an undisclosed price.
More than once Habben Jansen was asked about the price, and more than once he said the parties involved had agreed not to disclose that information.
“I think we have given a number of arguments on why we believe that investing in Wilhelmshaven makes sense, I think the main argument being that we think that it will strengthen the position of the German ports … and hopefully over time will lead to more cargo coming in to the German ports,” he said.
Habben Jansen also declined to name other port investments Hapag-Lloyd may be eyeing.
“We won’t comment on specific locations, but the logic behind this is I think we have also learned over the last year and a half that it’s very important to have a robust network and that means you should concentrate, especially in transshipment, in a limited number of places. In those places, it’s then important to have control over terminal capacity,” he said, adding that Hapag-Lloyd “will probably consolidate all of our transshipment volume in … 12 or 15 locations around the globe, and it would not be illogical if we do investments in, say, half of those locations or so.”
‘The already congested supply chain is getting congested even further’
Habben Jansen did talk about the continuing high demand for ocean shipping.
“We’ve certainly seen strong demand on the back of the economic upturn and in the course of the first half. As far as we can see right now, we do expect that to continue. We still see today that demand is very strong on most trades, even if it’s definitely driven still very much by the U.S., because that’s where we see the strongest increases, on the trans-Pacific. And if we look at the last couple of months, also the Atlantic has been very strong,” Habben Jansen said.
“The difficulty that we of course all face at this point in time — and that’s not a secret — this strong demand, combined with a whole bunch of COVID-related restrictions and unexpected surge in volume, has led to quite a lot of difficulties in the supply chain.”
Those difficulties include the lack of available containers.
“The worst numbers we have seen so far were in the month of August, where the time that it takes us to get a container back is up about 20%, which also means that we need 20% more containers than we normally need to transport the same amount of volume.
“The same goes for voyage delays,” Habben Jansen said. “We also have seen these delays go up, and if we look at the situation today, we are probably in the peak of the problems. … The already congested supply chain is getting congested even further.”
The Ever Given blockage of the Suez Canal, COVID-caused port shutdowns in China and an earlier-than-usual peak season all have “put a lot of pressure on global supply chains and capacity. In many ports at the moment, capacity remains strained. This is the case in Asia, where we have significant delays when we look at Korea, we have significant delays when we look at China, also Singapore [is] not as smooth as it normally runs. If you go to Europe, especially in the north, [there are] definitely a number of ports where we have very significant waiting times,” he said.
“If we look at the United States, that’s probably where we still have most of the difficulties, not only in LA/Long Beach but also in other ports on the West Coast, but also increasingly at ports on the East Coast, where places like Savannah and New York are heavily congested.”
Habben Jansen said, “On average it takes us today 10 to 15 days longer before we get the box back. That in reality also means that there are quite a few TEUs globally that are currently somewhere in the supply chain that actually should already be at the warehouses of many of the customers.”
He reiterated that port congestion is not limited to the United States. “On a global basis, we see that pretty much every ship in the Hapag-Lloyd network needs to wait longer before it gets into any port. Those are significant effects.”
The supply chain problems extend beyond ports, Habben Jansen noted. “Let’s not forget that these difficulties are in many cases not limited to the ports only, but we also have bottlenecks on inland transportation. The most obvious bottlenecks, they’re definitely in the U.S., but also in places like the U.K., and in some places in Europe we also see that shortage of available inland capacity [is] prominent.”
He said Hapag-Lloyd has “implemented quite a lot of countermeasures to try and limit the impact on our customers and also to improve service quality.”
“We tried to move capacity to those places where it is needed the most. We’ve also tried to reroute cargo to alternative gateways because sometimes it is better to go to another port if you can berth there upon arrival rather than wait outside for a couple of days. We bought secondhand tonnage, we chartered extra ships, we deployed extra loaders. And we have ordered, in particular, a large number of additional containers,” Habben Jansen said.
This past spring Hapag-Lloyd ordered standard and refrigerated boxes to carry 210,000 twenty-foot equivalent units to combat “severe imbalances” caused by the shortage of containers around the world.
“We have been out to outinvest that problem, if you want. We have added several [hundred] thousand TEUs to our fleet, and I would say that today … that situation around the boxes is pretty much back to normal,” Habben Jansen said.
“In addition to that, we’ve also added people. We’ve added IT capacity. We’ve also developed a number of new digital services that have been launched over the last couple of months [to] allow customers to have better visibility where they actually can and cannot book, and it also allows us to get quicker feedback to our customers on things that are possible and not possible,” he said.
Spot rates and surcharges
Hapag-Lloyd is among the ocean carriers that have agreed “given where the market is today, we should not, even if capacity is very tight and supply and demand would allow us to do that, not raise spot rates any further, which we will abide by until further notice. The same goes for new surcharges,” Habben Jansen said.
Surcharges will come back into play, “but that will not be done today or tomorrow,” he said, advocating a change in the way fees are levied.
“They should be related to enforcing better behavior. If you have a very high no-show ratio, you should probably pay something like a cancellation fee. We at some point need to go and do our utmost to simplify those things,” Habben Jansen said. “Or if you always deliver us higher weight than you declare, then I think it’s fair that you have to pay extra for that. So I think our charges need to go more in the way we drive the right behavior between us.”
He believes there should be a clear understanding of what is expected from both carrier and shipper.
“For an example, if we ask people to bring their containers into the terminal 24 or 48 hours before departure of the ship, if the documentation is not complete before that time, then we will not load that cargo anymore. This all fits into becoming more professional between carrier and shipper. That’s probably, if we look back two or three years from today, that’s probably a good thing that this crisis will have brought,” Habben Jansen said.
Big ships and sustainability
Habben Jansen said “better results” have enabled Hapag-Lloyd to modernize its fleet.
“We have placed a number of orders to renew our fleet and also that’s where Hapag-Lloyd is not an exception. The global orderbook is currently I think a little bit north of 20%. It will take some time, though, before all those ships are going to be delivered,” he said.
Hapag-Lloyd has ordered 12 ships, each with a capacity of more than 23,500 TEUs, at a total cost of $852 million.
“Apart from investing in our fleet, we have also invested in other key areas of our business,” he said. “We’ve done quite a lot of things to boost our digital capabilities with the idea that we do try to provide better transparency on vessel departures and arrivals. We’ve opened up a number of new offices in places like Ukraine, Kenya, Senegal, Morocco, [with] a few more in the pipeline. And of course we’ve also closed on the acquisition of [African carrier] NileDutch.”
Habben Jansen said Hapag-Lloyd remains committed to reducing its carbon dioxide emissions by 60%, compared to 2008, by 2030.
“We have to invest in new ships, phase out older ones, try to see what we can do to use alternative fuels, whether that’s biofuel or synthetic fuel or liquid gas or other things. And yes, we want to achieve becoming carbon-neutral or net-zero carbon-neutral, but that will take time. The key thing here will be to get access to alternative fuels,” he said.
“The reality is, though, that the scaling of the production of those vessels will not be all that easy and that will take time. That’s also why we need to continue to invest in R&D, ideally industrywide. For now, we are making a shift to liquid gas as we believe that currently will be quite a good transitional solution, but more importantly, those ships can also, when you look at their machines and their engines, they will allow us to switch to other greener alternatives, and that could be various fuels,” Habben Jansen said.
He was asked if Hapag-Lloyd had a negative outlook on liquefied natural gas as a long-term fuel.
“For the time being, we do not intend to convert more [ships to LNG] because that conversion turned out to be significantly more expensive than we originally had hoped. It doesn’t mean that if we find another way to do it, we might still consider it, but for the time being, there’s nothing specifically planned there. In terms of the outlook of LNG, I mean, that has certainly changed over the last couple of quarters. There’s all kinds of reports coming out on that,” Habben Jansen said.
“There was a lot of support for LNG as a transition fuel. And I’d also emphasize that the engines we have in those ships cannot only use LNG but also a number of other liquid fuels, even if some of them we might need to do a little bit of modification,” he continued. “How long LNG will be around, I personally think it’s going to be around for quite a lot longer than many people think, simply because the scaling of production of alternative fuel is going to take quite a lot of time.”
Hapag-Lloyd had said in June that it was focusing on LNG “as a medium-term solution as it reduces CO2 emissions by around 15 to 25% and emissions of sulfur dioxide and particulate matter by more than 90%. Fossil LNG is currently the most promising fuel on the path toward zero emissions.”
Habben Jansen said the supply chain crisis has taught a number of lessons.
“First of all, trying to stay close to the customer is very important. Also I think we’ve learned that trying to be as transparent as possible is important. Be as digital as you can because that allows people to do more and more things themselves. Make sure that we remain agile and flexible,” he said.
He also gave a tip of the hat to the long-suffering seafarers, “the backbone of global shipping,” and said that the crew change crisis brought to the forefront at the height of the COVID-19 pandemic remains a “very, very tough” situation.
“If we look at the operational challenges that we have, they are currently still very, very significant, and we do not expect to see any normalization until Chinese New Year ’22,” he said. “I would seriously hope that after that, we will see a gradual normalization — until we go into the next peak season of 2022.”