Coronavirus concerns weigh on carriers’ earnings outlook

March 27, 2020

The first signs of the damaging effect of the coronavirus disease 2019 (COVID-19) on container shipping earnings has emerged.

A.P. Møller-Maersk has suspended its financial guidance for 2020, Hapag-Lloyd is expecting a negative impact on earnings for at least the first half of the year, and OOCL has warned of a possible medium- to long-term decline in demand. 

 

The pessimistic carrier predictions reflect concerns that even as China begins to recover from the impact of the coronavirus on demand and factories edge closer to full production, the US and European economies are falling into recession.

 

As IHS Markit chief economist Nariman Behravesh put it on Thursday during the JOC webcast, TPM20: What We Missed — The Economic, Trade and Container Shipping Outlook, “The virus itself isn’t killing the economy, but the response to it is sending us into recession.”

 

It is a frustrating situation for the carriers. Maersk and Hapag-Lloyd reported a strong start to the year despite increased operating costs tied to the IMO 2020 low-sulfur fuel mandate that went into force in January.

 

But Maersk told investors Friday the coronavirus has severely impacted global transport markets and supply chains, leading to a decision to suspend the carrier’s $5.5 billion guidance on earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2020.

 

“Because of the current situation with high uncertainties related to global container demand due to the coronavirus pandemic and the measures being taken by governments to contain the outbreak, we have chosen to suspend our 2020 full year guidance on earnings, but will as soon as we have more clarity return with an outlook for 2020,” Søren Skou, CEO of A.P. Møller-Maersk, said in a statement.

 

Hapag-Lloyd also highlighted “considerably higher uncertainties than normal” affecting its 2020 forecast as the carrier released its annual report in Hamburg Friday. Hapag-Lloyd improved its profitability last year despite a difficult fourth quarter, with average freight rates up 2.7 percent year over year, and volume rising 1.4 percent to 12 million TEU. Revenue rose 9 percent to $13 billion, the operating result improved 48 percent to $775 million, and the carrier reported net profit of $400 million compared with a $50 million profit in 2018.

 

But the look ahead was likely to be far less positive. CEO Rolf Habben Jansen said 2020 would be “a very unusual year,” with the coronavirus outbreak changing market conditions rapidly over the past few weeks.

 

“After the initial shock, markets in China and other Asian countries have started to recover, probably faster than many feared. But now also the other continents are impacted, and the effects of that will be significant,” Habben Jansen warned in a statement. “The extent of the coronavirus outbreak cannot be accurately predicted, but Hapag-Lloyd expects that it will have an impact on the development of earnings at least in the first half of 2020.”

 

According to the annual report, the majority of the earnings are expected to be generated in the second half, and particularly in the third quarter during the peak season. For 2020, Hapag-Lloyd has predicted an EBITDA of $1.8 to $2.4 billion and an EBIT of $540 million to $1.1 billion, but said the forecast remained uncertain because of the coronavirus.

 

“We will in the upcoming weeks and months mainly focus on the three things that matter most to us: the safety and health of our people, keeping the supply chains of our customers flowing, and taking precautionary financial measures to weather the storm if it lasts longer than anticipated,” said Habben Jansen.

 

While Maersk and Hapag-Lloyd are among the more consistently profitable container shipping companies, a comparison of the stock price of the two carriers shows the Hapag-Lloyd shares have held up better than those of Maersk over the past month. Hapag-Lloyd shares lost almost 11 percent of their value since Feb. 20 while Maersk stock was down 35 percent over the same period. This suggests investors believe Hapag-Lloyd is in a better position to ride out the coronavirus crisis, at least in the short term.

 

Source: JOC

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