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Hapag-Lloyd CEO: ‘We Don’t See Demand Falling Off a Cliff’

Spot rates are falling and port congestion is playing a game of musical chairs, prompting Hapag-Lloyd to cautiously reiterate its increased guidance for the current fiscal year.

The company cited the war in Ukraine, higher costs and continued supply chain congestion as challenges for the remainder of the year.

Even with the headwinds, CEO Rolf Habben Jansen said the company expects “a strong second half of the year,” on the tails of the carrier ending the first half with revenue surging 94 percent from a year ago to $17.5 billion. Its profit for the six-month period rose to $9.5 billion.

Hapag-Lloyd raised its guidance for the year late last month to earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of 18.2 billion euros ($18.8 billion) to 20.1 billion euros ($20.7 billion), but said this week in its half-year update the guidance is now “subject to considerable uncertainty” given geopolitical events and overall continued disruptions to global supply chains.

While ports on the West Coast and in China get their bearings, the traffic is now being noted elsewhere causing the same set of headaches in new locations.

“When we look at the situation today, the first half of the year, we still saw quite a lot of supply chain disruptions,” Jansen told analysts Thursday. “I think they’ve moved a little bit around the globe. Whereas, in the beginning of the year it was the West Coast of the U.S. and then we had the COVID lockdowns in China, I think right now most of the pressure is on the East Coast, U.S., and particularly also in Northern Europe.”

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Jansen added he wouldn’t describe the situation at East Coast ports as “deteriorating,” but rather it is “not improving rapidly.”

In the case of European congestion, he pointed to labor issues that have caused work stoppages, mostly driven by contract disputes over pay and benefits.

Nearly 2,000 workers at the Port of Felixstowe in Britain are expected to begin an eight-day strike on Aug. 21. Members of the Unite union are in the midst of a vote that runs through Aug. 15 on whether to strike in Liverpool. And, in July, members of the Ver.di labor group participated in a 48-hour strike at German ports after labor and employers couldn’t reach an agreement on wage increases for some 12,000 workers.

The market circumstances have tamped down growth in volume and retrenched spot rates, which have been noted by others in the container market. Ocean freight rates are negotiated on either a long-term contract basis, or in the spot market in which capacity on a ship is paid for cargo that’s ready to move in the near term.

The continued downward movement of spot rates is likely to persist through the rest of this year, Jansen said.

Part of that decline is also occurring due to a pullback in demand, the CEO noted.

“We used to be multiple times oversubscribed on every ship. We are still oversubscribed today, but not as strong anymore as it was. And that’s also why you see the spot rates indeed coming down something like 27 percent or so,” Jansen said, going on to say, even with the softening, spot rates are still at higher levels than where they have been historically.

It’s also a study in contrasts between the U.S. and Europe when it comes to consumer demand.

For now, “the U.S. consumer seems to be holding up reasonably well,” Jansen said. “I mean, even if you look at volumes in the first half of the year, we still see the Transpacific volumes have been growing, which is quite remarkable if you look at the steep increase that we saw in ’21 versus ’20. So, from all we see, U.S. consumer demand seems to be holding up reasonably well, whereas, certainly in Europe and some other places, there’s probably more nervousness and uncertainty, even if we don’t see demand falling off a cliff anywhere.”

Jansen agreed with the sentiment held by some in the market of the need to invest in port infrastructure to hedge against future bottlenecks and, as he put it, gain “controlled access to infrastructure.” ‘

The carrier has been making moves on the infrastructure front as it looks to harness greater control in port infrastructure. Hapag-Lloyd last year scooped up a 30 percent stake in Container Terminal Wilhelmshaven, along with 50 percent of Rail Terminal Wilhelmshaven in Germany. A joint venture, in which Hapag-Lloyd holds the largest stake at 39 percent, said earlier this year they would build a new container terminal at the Damietta port in Egypt. The new terminal is expected to become operational by 2024.

“One can certainly not rule out that we’re going to do a bit more on that [infrastructure front], because in order to run a good network we have also learned again, over the last two years, that having control over transshipment ports and some of your hubs and also over a number of the main gateways is critical,” the CEO said. “And that is something that we are working on and we’ll probably do more on that over the upcoming couple of years.”