Analysis: the container shipping industry

and its major players in 2018

17-01-2018

Whatever your instinct might tell you about container shipping’s prospects this year – and you
might well think they have been looking pretty good in recent months – I believe headwinds are
becoming increasingly apparent, posing another set of major challenges for the industry.

As these factors gather steam and combine, they leave carriers in a race against time to prepare
for what is shaping up to be a perfect storm, principally comprised of rising oil prices and surging
debt levels, which have come alongside a recent fall in share prices for all carriers. All of which
could end up being very bad news for stakeholders if the largest players, which have chased
improved operational efficiency and size via M&A, do not achieve coveted cost synergies within
the next couple of years, or possibly earlier.

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Risks

Will talk of largescale redundancies return, for example? You might want to click here and here
to determine yourself whether this is a remote possibility or a serious threat for staff.

And how about the possible push-back of deliveries of new containerships, which are worth
several billions, on an aggregate basis?

Drewry

Drewry Shipping Consultants wrote this week that “the collapse of freight rates during the
second half of last year, far out of line with the underlying supply and demand fundamentals,
suggests that carriers have not yet rid themselves of certain self-sabotaging traits and that talk
of a new golden age for carriers was perhaps exaggerated”, adding that “the latest consolidation
wave has barely become operational, with most transactions either just concluded or still
pending”.

It concluded: “Moreover, even after all of the latest deals are finalised, they alone do not have
sufficient weight to move the industry all the way to being a non-collusive oligopoly, which we
previously outlined as being necessary to herald a new era of ‘liner paradise’.

“If anything, we perhaps overlooked the risk that the merger activity would make some
predators more aggressive with their pricing, to minimise customer attrition.”

So now what?

Oil price trends since South Korea’s Hanjin Shipping went belly up are revealing (they actually
bottomed earlier that year), given that ocean carriers are mostly price-takers, although they can
use bunker options, as Hapag-Lloyd and others do, to hedge fuel price risk.

On the one hand, the recent oil price rise to multi-year highs is bad for carriers, and analysts at
Citi now expect even an additional 20% surge in fuel costs; while on the other, pressure on
operating earnings is building for most and comes as some of the major players (take Maersk)
have already cut their dividend payout to save cash, while all have record debt loads that have
not passed unnoticed.

“From billions of losses over the last few years (…) to billions of profits in 2017” was a recent
headline story for a sector that remains highly deregulated, and thus faces little scrutiny and
heightened transmission effect risk, but also where the amount of additional debt taken on via
acquisition since 2016 is at least equal to – based on my estimates – an additional global player
of Hapag-Lloyd’s €6bn market cap.

The top five – Maersk, MSC, CMA CGM, Cosco and Hapag – are what a banker in a good state of
mind would label as systemically important entities, and their financial health doesn’t concern
me this year, but it could drive corporate strategy if overcapacity seriously returns to haunt the
market leaders.

So what?

Maersk’s debt was on the up at the end of the third quarter, and I doubt fourth-quarter and
annual results, due to be released on 9 February, will be materially better in that regard.

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 MAERSK DEBT (SOURCE MAERSK)

Its gross cash position fell, as the table below shows, and that came despite a dividend cut that
halved the payout to more conservative levels.

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 MAERSK CASH (SOURCE MAERSK)

While trends for core operating cash flows have improved significantly, consider that the implied
rise in borrowings still doesn’t take into account the amount of debt used to acquire Hamburg
Süd, which could add at least $3bn of additional debt obligations onto the combined entity’s
balance sheet.

As far as bunker prices are concerned, Maersk said in its last trading update that “total unit cost
of $2,135 per 40ft was 7.3% higher than the third quarter of 2016 ($1,991 per 40ft) while unit
cost at fixed bunker price was 3.9% above same period last year. Unit cost at fixed bunker was
negatively impacted by lower utilisation, reduced backhaul volumes, impacts from exchange
rates and impacts from the cyber-attack.”

“Total unit cost was further negatively impacted by a 26% increase in bunker price.” (Emphasis
mine)

Recent trends were also less than reassuring because container shipping players have been
looking to keep a lid on other operating costs, but they continue to struggle elsewhere where
costs are heavy.

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“Compared with the second quarter 2017, total unit cost increased 4.1% and unit cost at fixed
bunker price increased 4.2%. Bunker cost was $809m (compared with $591m), while bunker
efficiency deteriorated by 11.4% to 1,002kg per 40ft (compared with 900kg per 40ft in third-
quarter 2016), driven by slot purchase agreements signed with Hamburg Süd and Hyundai
Merchant Marine in the first quarter of 2017, lower headhaul utilisation and less backhaul
volumes.”

The emerging contender for global leadership of the industry, Cosco Shipping, is also reshuffling
its assets portfolio, and similarly its net debt position and cash balances were affected lately –
although the figures that are to follow still do not include the $6.3bn debt-funded purchase of
OOCL.

And even before the purchase of OOCL, its assets grew, and so did its debts, which are shown in
the tables below.

COSCO BALANCE SHEET (SOURCE COSCO)

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 COSCO DEBT (SOURCE COSCO)

Rising oil prices in recent months will unlikely force Cosco to change its ambitious industrial plan,
although the latest numbers deserve some reflection.

The total US rig count, which is one indicator of supply/demand dynamics, rose by 15 to 939
following a minor decline in the previous week, according to Baker Hughes – which was the
largest increase since the second quarter of 2017, while year-on-year, the rise is a mighty 280!

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 RIG COUNT (SOURCE BAKER HUGES)

BUNKER PRICES (SOURCE COSCO)

Of course, there is no disclosure for MSC; but Hapag and CMA CGM are executing very similar
strategies (witness the M&A activity involving UASC and APL), although the French carrier makes
me feel more bullish than Hapag.

But rising bunker pricing are biting into operating earnings, as the chart below shows…

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 CMA CGM EXPENSES (SOURCE CMA CGM)

…although the company is carefully managing its net debt position.

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 CMA CGM DEBTS (SOURCE CMA CGM)

By comparison, Hapag is feeling the pinch of surging bunker prices…

HAPAG BUNKER (SOURCE HAPAG)

…but its balance sheet shows significantly higher liabilities than one year earlier, and it remains
a bet on flawless execution for stock traders.

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 HAPAG BALANCE SHEET SNAPSHOT (SOURCE HAPAG)

Financial markets overview

Maersk’s slide on the stock exchange continues, as its ability to make sense of the Hamburg Süd
acquisition (regulatory hurdles were significant) has yet to be tested – and this could well yield
lower benefits than initially envisaged.

Hapag has come out stronger operationally after the takeover of UASC (it consolidated a pile of
much-needed cash of the target), but it is arguably the weakest in the big five in terms of fleet
size and surely is also the weakest financially, although Standard & Poor’s recently revised its
rating outlook to stable (we can all agree this is a lagging indicator).

CMA CGM can manage deliveries of new vessels and Cosco – the next market leader, according
to many observers – is harder to judge than most given the poor financial disclosure by
international standards.

Elsewhere, the sector’s turmoil is reflected in the share price of a rather small carrier such as
Taiwan’s Yang Ming, while the world’s largest non-operating owner, Seaspan, recently got away
with a warrant deal that gives it more power financially but screams of desperation.

Seaspan previously had already surprised investors following reports, later confirmed, that a
cash call had to be executed, presumably to reassure its lenders. Its stock has bounced back
since late 2017, but it’s still too early to know how it might cope with a worst-case scenario.

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 MAERSK, HAPAG, YANG MING, SEASPAN, AND COSCO (HK LISTING), SOURCE YAHOO FINANCE

After all, it is way too early to suggest recessionary forces might prevail this year, but the mild
steepening of the yield curve offers only part-comfort to an industry like container shipping
where rising oil prices seem to be passed on to customers with greater reluctance than they
were before the Great Recession.

Source: https://theloadstar.co.uk/analysis-container-shipping-industry-major-players-2018/

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