Belated diversification may ease woes at Hapag Lloyd

The cyclical nature of the sea freight industry has hit shipping giant Hapag Lloyd hard with an 87.9% y-o-y fall in EBITDA to €679m, on revenues dropping 57.9% to €4,099m. Volumes being broadly the same, this means that for the same job the company has seen profits plummet. CEO Rolf Habben Jansen warned, “If spot rates do not recover, we could see some challenging quarters in this subdued market environment.”

Terminals Division for Consistent Profits?

Hapag Lloyd is already in the process of setting up a separate Terminals division that in time should insulate it from future downward cycles. Combining the operations from its 10 existing terminals and 10 more from recently closed acquisition of South America based SAAM S.A., the CEO pointed that in the first nine months of the year it had an EBITDA of €80m. 

At the time of the announcement of the acquisition, Jansen said, “Investing in terminal infrastructure is a key part of our strategic agenda… [It] will help further strengthen our business”. The CEO said of the acquisition in October this year, “Looking ahead, we will focus on developing our business,” that could well save it from such recent highs and lows. 

The cyclical nature of the sea freight industry is such that for the same volumes the company is taking less than half of the revenues, and just 12% of the profits for the same job it did last year. The same number of ships are hitting the same ports that in turn charge broadly similar berthing fees year on year. In running a Terminals division, so the business should even out Hapag Lloyd’s income in years to come, avoiding the troubled waters the company is in now.

Freight Rates Tumble

 Globally, too many ships are competing for the same business. This has led average rates per TEU of container to fall an average of 45.4% y-o-y for the company, with the Far East container trade seeing container freight rates just over a third of what they were in 2022. This has led to the collapse in profits and revenues for the company, which is in the process of a cost cutting exercise. Jensen said, “In response, we are working to reduce our expenses even more such as achieving savings on the procurement side and making adjustments to our service network.”

 Where ordering fewer ships and having blank sailings on certain routes will save cash in the medium term, the move to diversifying is a strong long term move. Rivals such as Maersk and CMA CGM have interests in logistics and other businesses that have gone some way to dealing with the cyclical nature of the sea freight trade. Even so they have been hit hard by the current dip in spot rates, as we reported last week with Maersk.