News / After a poor first quarter, container lines are on course for a profitable year

15/06/2017

After a very disappointing first quarter for the liner industry, attributed mainly to higher bunker prices, container lines are busy counting the dollars in what is expected to be a highly profitable second quarter.

Investment banker Jefferies yesterday issued notes to investors with “buy” ratings for both Maersk and Hapag-Lloyd, based on “improving industry fundamentals”.

It said: “Industry consolidation has led to a 16% higher share of the top six carriers at 67%, with only three east-west shipping alliances. This has led to better capacity management, with increased scrapping levels and limited new vessel ordering.”

It also said better-than-expected demand growth of 5% should rebalance supply and demand by absorbing excess capacity faster than anticipated.

“As a result,” said Jefferies, “spot rates out of China have more than doubled, while contract rates on east–west trades have been renegotiated at 70-140% higher rates. Furthermore, container rates on north–south trades have recently also started to show signs of recovery.”

Jeffries is particularly bullish about improved profitability for Maersk Line, which posted a $66m net loss in the first quarter, and projected that the Danish carrier would recover to a full-year NOPAT (net operating profit after tax) of $1.6bn – 32% ahead of consensus.

Indeed, Maersk’s own outlook at its first-quarter results on 11 May for its container line was for an improvement of $1bn on the result for 2016, when a loss of $384m was recorded.

Jeffries also gave a thumbs up to the group’s strategy of closer collaboration between APM Terminals, Damco and Maersk Line in the newly-formed Transport & Logistics (T&L) division, which it said would “uniquely position Maersk as the global integrator of container logistics”.

Synergies of $600m a year are expected to be achieved from T&L by improved utilisation at AMPT and cross-selling of freight forwarding between Damco and Maersk Line.

Meanwhile, Jefferies is also positive about the full-year performance of Hapag-Lloyd, which posted a $47m first-quarter net loss, and expected the German carrier to “more than triple” its adjusted EBIT, including a “limited” positive contribution from its merger with UASC. Cost synergies from the merger are predicted to be some $435m a year from 2019.

However, Jefferies cautioned its clients of two potential downsides for Hapag-Lloyd shares: acquisition integration risk and increased political risk following the UASC merger.

CMA CGM substantially outperformed its peers in the first quarter, with a net income of $86m, but there seems little doubt that most ocean carrier chiefs will be smiling when they announce their first-half results in August – if off-record comments of liner sources to The Loadstar recently are anything to go by.

One executive said it was “looking like our best quarter for a long time”, explaining that his line had not only benefited from the hike in headhaul spot and contract rates from Asia to North Europe, but had also “made a fortune” from the backhaul capacity crunch, which had seen rates treble on the route.