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Hamburg Süd 2011: Another challenging year in global shipping

Hamburg Süd’s performance at a glance

Following the powerful recovery of the world economy in 2010, the reporting year saw global growth continuing with slightly lower dynamics. Shipping reaped the benefit in the shape of rising volumes. However, the downward pressure on revenue as a result of increasing overcapacity and a significant rise in costs, especially of fuel, posed problems for ship operators.

Hamburg Süd, which, together with the Brazilian shipping company Aliança as well as the tramp activities operating under Rudolf A. Oetker and Furness Withy Chartering, forms the Shipping Division of the Oetker Group, was unable to escape this development entirely.

At some 3.1 million TEU (1 TEU = 20-foot container), roughly 9 per cent more containers were transported in 2011 than in the previous year (2010: + 23 per cent).

Freight rates held stable compared with 2010. Due to the somewhat weaker US dollar on the average for the year, the turnover from Hamburg Süd’s liner operations added roughly 6 per cent to approximately EUR 4.2 billion, a gain slightly out of proportion to shipment volume. With the inclusion of break-bulk and product tanker activities, the shipping group’s total turnover increased to EUR 4.8 billion, roughly 7 per cent up on the previous year.

In the 140th year of its existence, the Hamburg Süd Group employed an average of 4,468 staff, about 9 per cent more than in the previous period.

Given stagnating freight rates in tandem with a sharp rise in operating costs, the Hamburg Süd Group’s result in 2011 remained below budget and fell short of the previous year. Significantly higher capital spending, in the form of deposits and final payments on ship newbuildings for the most part, could not be covered entirely from operational cash flow.

Economic environment

2011 was marked by the debt crisis in Europe, the weakness of the US economy, various natural disasters in the Pacific region and political upheavals in North Africa. Nonetheless, global economic output (GDP) grew by some 4 per cent (2010: + 5 per cent).

Against this backdrop, container shipments worldwide rose by approximately 8 per cent to around 150 million TEU. While the major East-West trade lanes, especially from Asia, showed below-average development, shipments on Intra-Asia and a number of North-South routes posted double-digit growth rates.

Driven by an influx of newbuildings and minimal scrappings, global slot capacity increased by roughly 8 per cent. Making themselves felt here were the adjustments with which many ship owners had attempted to reduce the inflow of capacity during the global economic and financial crisis of 2008/09.

The overcapacity building up since mid-2008 and only slackening for a brief period in the first half of 2010 exerted strong downward pressure on freight rates in the past year. Between Asia and Northern Europe, spot rates at times plummeted by more than 60 per cent compared with the highs of 2010. Most carriers were unable to push through peak season charges, or did so for only an unusually short time. The trade lanes from Asia to South America and Australia / New Zealand were also seriously impacted, with freight rates here falling by up to 50 per cent compared with the peak values of 2010.

Particularly high influxes of large ships with a slot capacity of more than 10,000 TEU were recorded. These vessels are deployed almost exclusively on the routes between Asia and Europe, displacing mid-sized tonnage, which then migrates to the North-South trade lanes – such as from and to South America – and there contributes to overcapacity and downward pressure on revenue.

At the same time, shipping had to contend with significant increases in fuel costs in 2011. The price of a ton of heavy diesel in Rotterdam, the world’s largest bunker market, was still below 500 US dollars at the start of the year. By the end of the first quarter it climbed to and remained at a very high level, ranging between 600 and 675 US dollars per ton, until the end of 2011. In view of the high pressure on revenue, the additional costs could effectively not be passed on to customers by way of bunker surcharges. But other cost categories, too, especially for cargo handling in the ports as well as for container transport inland, experienced a broad-based increase on the previous year. Further strain was imposed by the appreciation of the currencies of Brazil, Australian and New Zealand against the euro.

These developments ensured that many carriers were back to posting losses following the recovery in 2010. Industry experts estimate that the liner operators overall had to accept a loss of some 5-6 billion US dollars in 2011 after profits of around 14 billion US dollars in the previous year.

Like container liner shipping, the bulk shipping sector also suffered from overcapacity last year. While spot rates for a Panamax bulker in 2010 stood at between 20,000 and 35,000 USD/day, this value fell to just about 10,000 USD/day in part at the beginning of 2011 and has remained flat at a low level ever since. At the present level of spot rates, cost-covering employment of bulkers as well as of product tankers is hardly possible.

Liner shipping

With the significant increase in global container shipment volume and the stabilisation of the economic situation of many carriers, 2010 turned out to be but a brief recovery phase. In the face of a flagging global economic dynamic, Hamburg Süd managed nonetheless to increase its cargo volume by 9 per cent to approximately 3.1 million TEU in 2011. Exhibiting particular strength yet again were the trade lanes from Asia. Pleasing performance was seen, too, in the Inter-America and Pacific services. Mediterranean operations, by contrast, fell below expectations as much as did Brazil’s exports, which were dampened by the strong national currency.

Hamburg Süd succeeded in holding freight rates overall on a par with the previous year. Nonetheless, revenues in many trades were not sufficient to achieve surpluses against the background of a sharp rise in operational costs. The average bunker price alone (basis Rotterdam), at approximately 620 USD/ton, was some 37 per cent higher on average than the previous year. Additionally, there were significant increases in variable costs, especially for cargo handling in the ports and for pre- and post-carriage transportation on land. Service providers who had made price concessions during the 2008/09 crisis were able to push through better terms given growing transport volumes.

Hamburg Süd’s liner network was further optimised. Via key transhipment hubs in Cartagena (Colombia) or Tangiers (Morocco), customers are offered additional connections between South America and Europe as well as the Middle East.

On the routes from Europe to the eastern Mediterranean, a new vessel sharing agreement was implemented with another shipping company and this is to be expanded in 2012 with, amongst other things, the deployment of larger and more efficient vessels. Moreover, additional capacity is being provided in the burgeoning trade lanes from Europe to India and Pakistan.

The second half-year also saw rationalisation measures undertaken with partner lines on many routes and capacity adjusted to reflect lower seasonal cargo volume. This concerns, amongst others, the service from the western Mediterranean to the east coast of South America and also various services from Asia to South America and Australia / New Zealand.

Overall, Hamburg Süd’s liner business was not satisfactory in 2011. Turnover may have been raised by around 6 per cent to EUR 4.2 billion. However, the price increases already mentioned were well in excess of the gain in revenue. As a consequence, the result of the liner sector in 2011 fell significantly below that of the record year of 2010.

Tramp shipping

Given the equally substantial overcapacity in the marketplace, bulk shipping was unable to build on the good previous years and managed to generate only a slight surplus. The result from product tanker operations, which saw a significant decline in volumes, must be regarded as quite pleasing in the light of challenging market conditions.

Ships and containers

The fleet operated by the Hamburg Süd Group as at 31 December 2011 totalled 160 vessels, 43 of them Group-owned. The liner services employed 107 ships and the tramp sector 53. While the number of container ships declined by six units compared with the previous year, the slot capacity deployed in the liner services increased by some 6 per cent to around 395,000 TEU. With the fleet’s rising average capacity, costs per slot were continuously reduced.

A total of five ships of the Santa series entered service in the reporting year. The largest container ships of the Hamburg Süd Group to date, they have a capacity of 7,100 TEU and are capable of taking up to 1,600 reefer containers on board. In terms of their reefer capacity, these vessels rank among the world’s largest. At the end of 2011 the Hamburg Süd Group owned seven Santa ships in total and they are deployed on the trade lanes between Asia or Northern Europe and South America East Coast.

In line with the development of cargo volume, the container pool was increased by some 9 per cent to approximately 430,000 units. The delivery bottlenecks feared at the start of the year among the manufacturers in China failed to materialise. In the face of falling orders, the sharp rise in newbuilding prices for containers seen in the first half-year eased again in the second half.

Hamburg Süd intends to continue to pursue its strategy of raising the owned share of ships and containers in the years ahead. The final three Santa class ships, as well as four smaller (3,800 TEU) vessels, will be delivered in 2012. In addition, taking advantage of the steep fall in newbuilding prices, Hamburg Süd placed orders for six 9,600 TEU ships in March 2011, which are due to be delivered in 2013/14 and see deployment in the South America services.

The existing order volume covers the estimated capacity requirements of the Group given growth in line with the market and as regards the owned share sought, so that no further orders are currently planned.

Outlook

Only very isolated positive signals can be detected for 2012. Whether a sustainable turnaround in the fortunes of container liner shipping will come about in the current year, however, cannot yet be said with any certainty.

At present, the carriers’ global order book amounts to only about 26 per cent of the tonnage in operation; at the end of 2008 it was more than 60 per cent. Additionally, it can be observed that carriers are proceeding to abandon uneconomic routes and idling capacity. The share of laid-up tonnage has therefore been rising constantly for months. Industry watchers consider it possible that 6-7 per cent of the global container ship fleet will be laid up towards the end of the year. Given continued high fuel costs, expectations in the medium term are for high-consumption older tonnage to be scrapped earlier than has hitherto been customary. Should liner shipping companies generally have their ships sail even more slowly (“super-slow steaming”), this would likewise contribute to a reduction in overcapacity.

Even with a moderately positive development of the world economy and world trade, however, it will still be one or two years before global cargo volume and slot capacity regain equilibrium, a pre-condition being the absence of further sizeable new orders.

It remains to be seen whether the recovery of freight rates noted in a number of trades since late 2011 will be lasting, or whether drops will recur in the course of 2012, especially with the end of seasonal trade on the Asia routes.

A low rate level continues to be expected in the bulk shipping sector, as the yards’ order books are well filled and thus overcapacity is to be reckoned with in the foreseeable future. Nor is any fundamental recovery in charter rates and earnings in sight from the product tanker sector in the current year.

Despite the challenging environment, Hamburg Süd intends to continue to pursue its growth course, albeit with a reduced dynamic. Overall, the Group wants to grow with the market and further expand its core trades and the reefer business in the process.

While an increase in jobs was necessary to be able to cope with the cargo growth of 2010 and 2011, a further substantial rise in staff numbers is not to be expected in the foreseeable future. In the years ahead, continuous efficiency gains of the organisation are to be secured by making substantial investments in EDP while still maintaining high service quality.

Hamburg Süd will continue to forcefully pursue its ambitious ecological objectives in 2012. One highlight among others in this connection is the development of the Emission Manager System operated in association Germanischer Lloyd.

On the assumption that the world economy and world trade will grow moderately in 2012, Hamburg Süd anticipates a result that is an improvement on the previous year but not yet satisfactory.