Germany’s largest shipping company Hapag-Lloyd has been navigating troubled waters for some time now. Its financial results plummeted by €300 million ($330 million) in the first half of 2016 compared to the same period last year, resulting in a net loss of €142 million.
But the insolvency of rival South Korean shipping company Hanjin in September was something of a stroke of luck. If it had happened six months later, Hanjin would have been in a planned alliance with Hapag, and the German firm might have been faced with liabilities as a result.
But now, with 80 of Hanjin’s 140 vessels out of action, there’s a shortage of capacity on international waters which has finally led to an increase in freight rates. They jumped 50 percent immediately after Hanjin collapsed, and have held at that level since then. That enabled Hapag-Lloyd to post a surprise net profit of €8 million in the third quarter, after losses in the first and second quarters.
“Really, even a second one would have to go to reduce the overcapacity and let the sea freight rates recover,” German investor Klaus-Michael Kühne, a 20 percent shareholder in Hapag, told Handelsblatt in an interview. “The rate war makes no sense. Hanjin dropping out has stabilized income — at least in the short term.”
“Only the shipping lines that are big enough and have the corresponding economies of scale will survive the rates war.”
Still, Hanjin’s exit hasn’t solved the chronic problem of low freight rates. Transporting a container between the Mediterranean ports and Shanghai currently costs $738, which is $14 less than a year ago. Analysts said container shipping is only profitable above rates of around $1,400.
Hapag-Lloyd is trying to hedge its bets with a planned takeover of United Arab Shipping Company (UASC). Mr. Kühne called it a risky move but “the lesser evil” in a difficult global market.
“With it Hapag-Lloyd will reach a market position that will allow it to play a role in international shipping,” the 79-year-old billionaire, who became chief executive of his grandfather’s transport and logistics company Kühne & Nagel in 1966, said. “The merger will also create major synergies, and UASC has major assets with its ships.”
Hapag-Lloyd’s shares jumped in April when it announced it was in merger talks with UASC.
UASC posted a loss of $384 million last year and has $4 billion in debt. Asked if it wouldn’t have been cheaper simply to buy more ships, Mr. Kühne said: “Basically, yes. But it would have required major capital hikes at Hapag-Lloyd which none of the existing shareholders were prepared to support. By taking over UASC we can simply transfer the existing financing agreements for the ships to the new shipping company.”
Mr. Kühne has invested around €1 billion, or $1.08 billion, in Hapag-Lloyd. That stake is worth just half that amount based on the current share price – and Mr. Kühne has previously called the purchase “a big disappointment.”
He said he had agreed to invest a further €100 million if necessary, but that depends on how the stakes in the merged group would be apportioned among the shareholders.
“I committed myself to inject this amount if it’s necessary,” Mr. Kühne said. Asked why, he said Chilean shareholder CSAV, with whom Hapag-Lloyd joined forces in 2014 to create the world’s fourth-largest container shipping fleet, insisted on retaining a majority stake in the merged group together with him and the city of Hamburg, which have pooled their shareholdings.
“CSAV may take a bigger share in the capital hike than announced so far,” Mr. Kühne said. “Then I wouldn’t do it myself.”
He said the stake of his shareholder pool with CSAV’s 31.4 percent stake and the city of Hamburg with 20.6 percent may fall below 50 percent in the course of the UASC tie-up. “But that wouldn’t be so bad with a bourse-listed company. The pool would continue to determine the direction of Hapag below this level.”
The merger with UASC will deprive Hapag Lloyd’s competitor Hamburg Süd of its only cooperation partner. Asked if that was revenge after Hamburg Süd pulled out of merger talks with Hapag-Lloyd four years ago, Mr. Kühne said: “Hamburg Süd didn’t play a role, either emotionally or in economic terms. The shipping line has always been hostile to partnership — including with us. That’s why it’s now hanging in the air.”
He said a merger with Hamburg Süd would make no sense now because Hapag’s merger with CSAV in 2014 had strengthened its South America routes. “As this is also the focus of Hamburg Süd we might even get cartel problems. If Hamburg Süd were to approach us of its own accord one could think about it. But we have no ambitions in this direction.”
Asked if further bankruptcies such as Hanjin’s were likely in container shipping, he said South Korea’s Hyundai Merchant Marine was having problems but that the government appeared determined to ensure that South Korea had at least one shipping line in the wake of Hanjin’s collapse.
“Japan’s K-Line, which now wants to merge with the domestic competitors MOL and NYK, is seen as failing. Only the shipping lines that are big enough and have the corresponding economies of scale will survive the rates war,” Mr. Kühne said. “Further bankruptcies aren’t directly on the horizon but can’t be ruled out.”
He said Hapag-Lloyd could resume dividend payments quickly if the market stabilized. “But as long as the over-capacities are there it’s barely feasible. At the moment the Chinese are attacking the market aggressively in order to conquer a leading position. The state economy appears to have a lot of stamina to offset losses. But the pricing behavior of the market leaders Maersk, MSC and CMA CGM is also virtually impossible to explain rationally.”