Alleged higher rates raising ocean carrier profits yet some see them holding for the remainder of 2017

June 20, 2017 – is reporting that Maersk Line and Hapag-Lloyd will post sharply higher earnings this year as they benefit from improving container industry fundamentals, including better capacity management and rising demand, according to investment bank Jefferies.

Maersk Jumbo vessel

Rick Held, President of Held & Associates, said, “This year has been a roller coaster with ups and downs in both air and ocean bookings. Despite reports of import increases, we hope air and ocean export rates continue to hold as we’ve been seeing. Ocean export rates to direct ports of call are holding while rates increasing to outbound and feeder ports as a result of three new carrier Alliances. We are optimistic bookings will increase and export rates will hold through the year.”

Jefferies estimates Hapag-Lloyd’s adjusted earnings before interest and tax (EBIT) will more than triple to 395 million euros ($442 million) due to the higher freight rates, with a limited positive contribution from the German carrier’s merger with United Arab Shipping Company.

A relatively small increase in the container freight rate of 5 percent would boost Maersk’s NOPAT by $800 million and increase Hapag-Lloyd’s EBIT by $400 million, Jefferies forecasts. Accelerating container demand growth to 5 percent this year, increased scrapping of 3.5 percent, and limited new vessel ordering, is expected to absorb overcapacity relatively faster, by 2020, Jefferies says.

“As a result, spot container freight rates out of China have more than doubled, contracts on east-west trades have been renegotiated at 70 to 140 percent higher rates and north-south trades have recently also started to show signs of recovery.”
Trans-Pacific service contract rates to the West Coast have been settling in at about $1,200 to $1,300 per FEU. The East Coast service contract rates this year are estimated to be about $2,200 per FEU, with a variance of about $100 to $200 from the average, either higher or lower, depending upon the size of the shippers.

Maersk’s average freight rate would be 36 percent higher this year assuming spot rates are stable on north-south and intra-regional trades.

Mr. Held’s comment, “All remains to be seen. I will keep you posted.”

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