Higher bunker costs hurt Hapag-Lloyd’s earnings

  • Business & Finance

German shipping major Hapag-Lloyd felt a negative impact of higher bunker prices in the first quarter of this year as it reported lower earnings.

Hapag-Lloyd
Afif containership. Image Courtesy: Hapag-Lloyd

In the first quarter of 2020, Hapag-Lloyd’s bunker costs increased by $98 to $523 per tonne as a result of the transition to low-sulphur fuel oil (LSFO). Consequently, the company’s transport expenses rose by almost 10 per cent.

As explained, this had a negative impact on earnings, as did a devaluation of bunker inventories of around $64 million due to the rapid decline in crude oil prices that began at the end of the first quarter.

The International Maritime Organization’s (IMO) new rule mandating lower sulphur emissions from the shipping sector went into effect on 1 January 2020. In order to comply with the new regulation aimed at reducing marine pollution, shipping companies around the world either switched to LSFO or installed scrubbers on board their vessels.

The majority of Hapag-Lloyd’s vessels started sailing with the new low-sulphur fuel oil, resulting in higher fuel prices. In order to cope with the additional costs projected at around $1 billion per year, the carrier introduced an IMO 2020 Transition Charge (ITC) in December last year.

Hapag-Lloyd gets 2020 off to a decent start despite COVID-19

For Q1 2020, Hapag-Lloyd recorded earnings before interest and taxes (EBIT) of $176 million, which is a drop of 67 per cent compared to the corresponding prior-year figure of $243 million.

The group net result declined by 82 per cent to approximately $27 million in Q1 2020 from $109 million seen in Q1 2019.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) decreased by 38 per cent to $517 million in Q1 2020 from $556 million posted in the corresponding three-month period a year earlier. 

On the other hand, revenues in the first quarter of 2020 increased by around 6 per cent to $3.7 billion from $3.5 billion reported in Q1 2019. This can primarily be attributed to a 4.3 per cent increase in transport volumes to more than 3 million TEU, and an improved average freight rate of $1,094 per TEU, according to the company.

“Despite the coronavirus pandemic, we have gotten the year off to a good start. Higher transport volumes and better freight rates have boosted our revenues,” Rolf Habben Jansen, Chief Executive Officer of Hapag-Lloyd AG, commented.

“The financial result is below the first quarter of the previous year as we faced higher bunker prices after the new IMO 2020 rules on 1 January and we had a significant negative bunker stock valuation after the decline in crude oil prices at the end of the first quarter,” he added.

Cost-saving measures and the corona crisis

“Although we were able to pick up a bit of tailwind at the beginning of the year, we anticipate that the coronavirus pandemic will have very significant impacts in 2020, beginning in the second quarter,” Hapag-Lloyd CEO added.

He revealed that the company would launch cost-saving measures in order to stay afloat during the coronavirus pandemic. 

“We have taken a wide range of measures designed to save an amount in the mid-triple-digit million range to safeguard our profitability and liquidity.”

“We adjust our service network to the lower demand and seek savings in all cost categories, from terminal, transport, equipment and network costs to overhead.”

Outlook for 2020

Taking into account the prevailing uncertainties and building on the planned cost-cutting measures as well as based on the premise that the pandemic will peak in the second quarter and give way to a gradual recovery in the global economy in the second half of the year, the company’s executive board has substantiated its earnings forecast from the start of the year.

This means that Hapag-Lloyd still continues to expect EBITDA of €1.7 (about $1.8 billion) to 2.2 billion and EBIT of €0.5 to 1.0 billion for the current financial year.

However, unless there is a recovery in demand for container transport services earlier and stronger than expected in the market studies cited in the financial report for the first quarter 2020, the upper end of the forecast ranges is barely achievable from today’s perspective, the company concluded.

Hapag-Lloyd has a fleet of 248 containerships with a total transport capacity of 1.7 million TEU. In addition, Hapag-Lloyd has a container capacity of approximately 2.6 million TEU.

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