Hamburg Süd: Pleasing 2010 business year

Hamburg Süd’s performance at a glance

Following the historic crisis year of 2009 and a first-time ever decline in global transports in container liner shipping, 2010 saw an unexpectedly sharp volume rise.

Hamburg Süd, too, benefited from a resurgent world economy along with her Brazilian sister company Aliança as well as the tramp activities operating under Rudolf A. Oetker (RAO) and Furness Withy Chartering. Shipment volume in the container liner services last year came to roughly 2.9 million TEU (1 TEU = 20-foot standard container), equivalent to a gain of 23 per cent on 2009.

As, in addition to volumes, freight rates recorded a moderate recovery, turnover in liner shipping added a good 45 per cent to just under EUR 3.9 billion. With the inclusion of conventional break-bulk and product tanker operations, the shipping group’s total turnover increased to some EUR 4.4 billion, 39 per cent up on 2009.

Even in the difficult year of 2009 employee numbers in the Hamburg Süd Group had seen little reduction, so that the powerful growth in business volume in the reporting year could be handled with a rise in the total workforce of just 1.3 per cent. An average of 4,099 staff were employed in the Group in the 2010 financial year. Taking account of trainees, and the seamen serving on the Group’s vessels under third-party hire, the number of employees totalled 4,870, a rise of 1.6 per cent compared with 2009.

After the shipping division had been forced to accept a slight loss for the first time in 2009, it succeeded in achieving a pleasing result again in 2010. Operational cash flow increased significantly in comparison with the previous year, enabling capital spending – which also enjoyed a powerful boost to EUR 429 million – to be financed from the company’s own resources.

Economic environment

Following the crisis year of 2009, the world economy and world trade recovered faster than many experts had anticipated as recently as a year ago. Global container liner shipping benefited from this development especially. Growth of 12.1 per cent, to a total of 139 million TEU, topped even the record level of 137 million TEU seen in 2008.

Guarantors of speedy recovery were chiefly the Asian economies, especially the People’s Republic of China. Heavy demand for raw materials spurred on bulk shipping. Rising consumption and stock replenishment in the industrialised nations had a positive impact on Chinese exports and helped many Asian container trade lanes to a fast renaissance.

Capacity utilisation of the global merchant fleet rose significantly. This was driven by higher cargo volumes and the policy of almost all shipowners to idle ship capacity in addition to initiating slow-steaming programmes. The proportion of unemployed, laid-up vessels stood at 11.7 per cent (572 ships) as late as December 2009 but dropped to 1.5 per cent (127 ships) by September 2010 due to swiftly rising demand for shipping space. Only towards the end of the year did this figure increase slightly to 2.5 per cent (147 ships). This increase, however, is within the normal range of seasonal fluctuations.

As capacity growth, prompted by an influx of newbuildings and the reactivation of lay-ups, was lower than the rise in cargo volumes, freight rates were also able to recover. This was the case, in particular, on the major East-West routes, which run from Asia to Europe and North America. On Hamburg Süd’s North-South routes, rates also moved higher, but remained significantly below the level of 2008.

Traditionally, rising shipment volumes have a positive effect on the charter market and the corresponding daily rates for vessel charters. In 2010, therefore, significant increases were seen in part, especially in large tonnage (above 3,500 TEU), but they are even now still not sufficient to fully cover vessel running costs in addition to servicing the capital for financing the vessels.

The prices for the fundamental ship fuel, bunker, continued to climb, standing at just under 500 USD/to at year-end. On the annual average, the bunker price almost reached the record high of 2008. Given the USA’s economic problems and the doubts about the financial stability of some eurozone countries, the exchange rate for the US currency fluctuated between 1.43 USD/EUR and 1.22 USD/EUR. As a result, the Group’s key revenue currency displayed high volatility.

Conventional bulk shipping was able to benefit from growth in the BRIC states in 2010, especially China. Added to this, there was a strong grain season in South America, above all in Brazil. However, the bulk sector had to contend with substantial deliveries to a far greater degree than liner shipping, with the result that the charter rates for Panmax bulkers of 35,000 USD a day at times fell back to approximately 20,000 USD a day towards the end of the year.

In view of stagnating shipment volumes and high newbuilding entries, cost-covering employment of the vessels was, as in previous years, hardly possible for most market participants in the product tanker market.

Liner shipping

In 2009, after the first volume decline since the introduction of containers ships had occurred, Hamburg Süd boosted its shipment volume in 2010 by 23 per cent to roughly 2.9 million TEU. This gave the Group significantly stronger growth than the market and exceeded the 2008 level by some 8 per cent.

The trade lanes from Asia, Europe and North America recorded particularly strong gains. By contrast, Brazil’s, Australia’s and New Zealand’s exports were dampened by the strong local currencies.

Freight rates also recovered but, in contrast to volumes, did not reach the levels of 2008 in Hamburg Süd’s trades. This is less than pleasing in so far as increases to a level roughly on a par with 2008 were recorded in the energy-dependent costs (bunker).

In 2010 Hamburg Süd further expanded its liner service network. The service from US West Coast was extended beyond Mexico through the Panama Canal to Cartagena, Colombia. This produced numerous trans-shipment options for the main services from Australia, Europe and South America running through the Caribbean. Furthermore, since March 2010, the shipping group has been providing a connection between East Coast South America and the Middle East with trans-shipment in Tangiers, Morocco. Various services between northern Europe and the Mediterranean were restructured. Moreover, capacities in several trade lanes were adjusted to meet increased volumes by, for instance, the establishment of additional temporary services (peak season slings).

Hamburg Süd’s liner business performed significantly better than planned in 2010. Liner turnover added 45 per cent, to approximately EUR 3.9 billion, a consequence of the volume and rate growth previously described. The result reached a historic peak. However, there were increasing signs of a significant “cooling off” at year-end, especially in rates.

Tramp shipping

The result in bulk shipping was also well above target, rising strongly in comparison with the previous year. Employed largely in the spot market, Panmax bulkers benefited from the unexpectedly rapid recovery of China and India in particular. Supramax bulkers, which operate chiefly in the contract business, likewise stood up well. Expiring cargo contracts were renewed and new contracts added. The chartering-in of new tonnage and the renewal of existing charters enabled the fleet to be successfully modernised and expanded. Product tankers more than held their own in a very challenging market environment and also made a positive contribution to the Group’s overall result.

Vessels and containers

As of 31 December 2010 the fleet operated by the Hamburg Süd Group comprised a total of 169 vessels, 40 of them Group owned, with 113 employed in the liner services and 56 in the tramp division. As a result of strong cargo growth and very favourable charter rates, above all at the start of the year, additional ships were chartered in and owned capacities further built up as planned. Slot capacity of the container ships deployed in the liner services rose by 22 per cent, to around 371,000 TEU, in comparison with the previous year.

Last year the shipping group put four new owned ships into service: the “Cap Jackson” and the “Cap Jervis”, two 4,600 TEU container vessels, were phased into the liner services from Asia via Mexico to South America West Coast. In the shape of the 7,100 TEU “Santa Clara”, in October 2010 Hamburg Süd put the largest ever ship in its history into service. She is deployed in the trade between Asia and South America East Coast, as is the identical “Santa Isabel”, which joined her at the end of the year.

Powerful cargo growth and the procurement of sufficient container capacity presented logistics with major challenges. In late 2009 Hamburg Süd was the first liner shipping company to begin ordering new containers in China. In all, 77,000 units were added. This increased the container pool by 17 per cent, to some 396,000 units as of 31 December 2010, with a disproportionate growth in reefer containers being recorded.

Outlook

The continuing financial crisis in important European countries, the but slow recovery of the US economy, as well as the associated effects on export nations like China, but Germany too, make any forecast for 2011 difficult. This uncertainty is aggravated by local crises, such as the unrest in Egypt, the civil war in Libya and natural disasters like the floods in Australia and the earthquake in Japan, with the ensuing damage to the nuclear power station in Fukushima. Worldwide shipping does not depend solely on the development of trade flows, but also on efficient infrastructure in the ports, the hinterland and on canals. Disruptions, like the nuclear accident in Japan, result not just in danger to seamen and vessels, but also in loss of revenue and additional operational costs due to unplanned rerouting, schedule disruption and additional safety measures.

In the first quarter of 2011, cargo volumes in most trades matched expectations, despite the disruptive factors described. Freight rates, in contrast, are under pressure almost everywhere, and this against the backdrop of continuing rises in bunker prices, which cannot be passed on to customers sufficiently by way of corresponding surcharges. An added factor is that the discounts or improvements in terms negotiated between shipping companies and service providers during the 2008/2009 crisis cannot be held, leaving lines with additional cost increases to absorb.

During the shipping crisis many vessel owners negotiated order cancellations or the deferment of newbuilding deliveries with the yards. The ships that were delivered, mostly in the size class in excess of 10,000 TEU, are now deployed on the major East-West trade lanes, where they displace smaller vessels which are positioned in the East-West trades instead and are currently leading to capacity overhangs here and there. Although financially strong shipping companies have been ordering ships again since mid-2010, there is at present no reason to assume that continuing overcapacity will occur in the medium term. As the requirements of the financing banks, both in relation to equity capitalisation and the preconditions for granting outside capital, have risen considerably, speculative orders of the type seen prior to the crisis are unlikely. Additionally, many shipping companies ran down their container inventories in the crisis through sell-offs or scrapping. The absence of ready funding opportunities and a hesitant build-up of production capacity by the container manufacturers in China are leading to occasional bottlenecks in equipment supply.

Hamburg Süd intends to grow further in its core business fields. Impetus is expected again in the second half of the year from, above all, the Asian region as well as from Europe. The outstanding domestic economy and the strong currency are buttressing Brazil’s demand for commodities and, with it, the economic development of South America overall.

The growth of the Hamburg Süd Group will also lead to additional jobs, whose number is expected to rise by more than 10 per cent in the current year.

Hamburg Süd will continue to pursue its strategy of increasing the owned share of ships and containers in the years ahead. Up to and including 2012, eight more “Santa” class vessels and four smaller (3,800 TEU) ships are to be delivered. In total, this is equivalent to a capacity gain of a good 20 per cent of the existing fleet. Moreover, to safeguard the growth planned for the years to come, Hamburg Süd ordered six 9,600 TEU ships in March 2011, with an option on a further four. They are due to be delivered in 2013/2014 and deployed in the South America services.

Apart from the prime goal of continuing profitable business growth, further implementation phases of the worldwide EDP project GLOBE are pending in 2011. Additionally, the Hamburg Süd Group will continue to direct close attention to measures for efficiency increases in ship operation and to conserving natural resources. Common rail engines with direct injection, for instance, as well as pre-swirl solutions, which minimise turbulence in front of the ships’ screws and consequently reduce bunker consumption, are being used on the new vessels of the “Santa” class for the first time. As part of environmental monitoring, since the start of 2011 customers have had the possibility of calculating the CO2 output of their shipments on the company’s website with the aid of a carbon footprint calculator.

Against the backdrop of what has proved a more unsatisfactory revenue development in the first quarter and the continuing pressure on freight rates, it is currently to be assumed that Hamburg Süd will not be able to achieve last year’s very good liner result again in 2011. As bulk carriers’ revenues are also trending weaker and overcapacity in product tankers is persisting, the shipping group’s result and cash flow this year will presumably fall short of last year’s levels.
Source: Hamburg Süd