Month: November 2019

Blanked container services and increased demand ahead of an early Lunar New Year in 2020 look set to support container spot freight rates in the weeks ahead. Indeed, there is already evidence that slot availability at load ports in Asia is tightening.

“We’ve had a lot of service cancellations by lines and, with the holiday season coming followed right after by the Lunar holidays in January, there has been some anxiety from shippers. They want to ship and avoid rollovers,” a Hong Kong-based forwarder told FreightWaves.

Flexport reports that capacity reductions on Asia-Europe services enabled lines to implement General Rate Increases (GRI) on November 1 and space is now tightening, while some cargo is already being rolled on both Asia to U.S. West Coast and Asia to U.S. East Coast services.

Spot freight rates on
Shanghai-Rotterdam services spiked 30% last week to reach $1,560 per forty-foot
equivalent units (FEU) on October 31, according to Drewry. Shanghai-Genoa and
Shanghai-Los Angeles rates also jumped last week, rising 15% and 12%,
respectively, according to the analyst’s assessment of the World Container
Index.

Spot gains sustainable?

However, the latest monthly report from Maritime Strategies International (MSI) questions whether spot rate gains in the early weeks of November will be sustainable through the fourth quarter after a disappointing October for carriers.

“We are somewhat skeptical the higher rates that we expect at the start of November will be maintained over the remainder of Q4 2019,” noted MSI in its latest monthly report.

What is clear is that the introduction of IMO 2020 low sulfur fuels and looming Asia-Europe contract negotiations with shippers will spur carriers to support spot rates on mainline East-West trades by whatever means available.

“Carriers will face the twin
incentives on the Asia-Europe trades of annual contract negotiations and
passing on higher fuel costs in the coming months, both of which will be eased
by a healthier spot market backdrop,” said MSI.

Scrubber fittings limiting supply

Aside from blanked sailings, carriers are also now boosting spot rates by removing vessels from loops to undertake scrubber retrofits to avoid using IMO 2020 low-sulfur fuels that become mandatory under International Maritime Organization rules on January 1. Often these vessels are being replaced temporarily by smaller ships, taking capacity out of the market.

“An early Chinese New Year
should also help spot markets in December,” added MSI.

The analyst expects average
Asia-Europe spot rates of around $820 per twenty-foot equivalent units (TEUs)
in December and Trans-Pacific rates (expressed as a weighted average for West Coast
and East Coast services) of around $1,700 per FEU.

On average in October, Asia-North
Europe spot were rates were $590 per TEU, Asia-Mediterranean rates were $720
per TEU, Asia-U.S. West Coast rates were $1,340 per FEU and Asia-U.S. East
Coast rates $2,370 per FEU, according to MSI.

Lines to speed services?

The wider use of scrubber-fitted
container vessels ahead of the introduction of IMO 2020 prompted one analyst
recently to suggest that some carriers could speed up vessels using lower-cost
high sulfur fuels on scrubber-fitted ships.

“Carriers that deploy scrubber-fitted ships could take advantage of cheaper bunker prices in 2020 and speed up services,” argued Alphaliner.

MSI takes a different view. It
identifies “clear imbalances” between alliances and carriers in terms of
scrubber-fitted units, which it expects will bring new dynamics to container
shipping pricing in 2020.

However, instead of speeding up scrubber-fitted vessels, the analyst expects carriers to support bottom lines with any fuel savings, a sensible strategy given that is unclear how much of the estimated $11 billion bill in extra fuel costs lines will be able to pass on to customers next year.

“We overall expect that the carriers with the highest number of scrubbers will bank the savings from lower fuel costs rather than slash rates in order to steal market share, although predatory pricing cannot be ruled out,” added MSI.

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DHL
Global Forwarding has launched a new rail express service from China to Europe
offering transit times of just 10 to 12 days.

Launched in partnership with
Xi’an International Inland Port Investment & Development Group Co., DHL
said the service from Xi’an in China to Hamburg and Neuss in Germany is now the
fastest available.

The new rail express takes an approximate 9,400-kilometer route through Kazakhstan, Russia, Belarus and Lithuania to Kaliningrad Oblast, a part of the Russian Federation on the southern coast of the Baltic Sea. It then enters the European Union via the Mamonovo-Braniewo crossing between Russia and Poland before continuing on to the port of Hamburg and finally to Neuss on the River Rhine.

“Traversing numerous countries,
the fastest rail service between China and Germany was created with the support
of China Railway, Belintertrans, RTSB Gmbh and UTLC–Eurasian Rail Alliance,”
said a DHL statement.

Rail services between Asia and Europe have increased in popularity in recent years with shippers attracted by improved reliability, faster transit times when compared to ocean shipping options and lower prices than air cargo

The Northern Eurasian corridor
used by DHL via China, Kazakhstan, Russia, Belarus and Poland has emerged as
the fastest and most reliable route, carrying 325,000 twenty-foot equivalent
units (TEUs) in 2018, according to a report earlier this year from the European
Commission (EC). This predicted traffic would rise to at least 437,000 TEU by
2030 but could rise to over 4 million TEU if sufficient capacity and funding
became available.

“Two significant factors will
affect this development – rail transport subsidies by Chinese local governments and the
infrastructure capacity along main railway routes and border crossings,
especially between Poland and Belarus,” added the report.

DHL recently opened two Rail
Competence Centers in Le Havre, France and Felixstowe, U.K., in response to
growing demand for rail freight services between Europe and China.

The company said the
Xi’an-Germany express rail connection would offer customers real-time milestone
visibility using GPS tracking of shipments via the iSee software platform.

Xi’an is at the heart of the New
Silk Road economic belt and has developed into a significant manufacturing and
digital hub, added Steve Huang, CEO, DHL Global Forwarding China.

“A foreign investment and
manufacturing hub that has seen exports increase in 2018 by 29% year-on-year,
the city today is a thriving international center with high-quality production
capabilities in pillar industries like mechanicals, electronics, bio-pharmaceuticals
and automobile manufacturing,” he said.

“By boosting greater agility
whilst offering the express rail service at reasonable costs, DHL Global
Forwarding seeks to connect these fast-evolving industries to rising demand and
market opportunities in Europe.”

Qu Jinwei, General Manager of Xi’an International Inland Port Investment & Development Group Co., said the service would help attract more investment to the region.

“As next steps, we will strive to
make this express rail freight a success,” he said. “This would attract more
industries to our region, fortifying their capabilities to gather resources
from international supply chains and sharpening their competitive edges.”

Saudi Aramco, believed to be the world’s largest integrated oil and gas company, received approval Sunday from the Saudi Capital Markets Authority to carry out an initial public offering on the local stock exchange.

“Today marks a significant milestone in the history of the Company and important progress towards delivering Saudi Vision 2030, the Kingdom’s blueprint for sustained economic diversification and growth,” Yasir Othman Al-Rumayyan, chairman of the Board of Directors of Saudi Aramco, said regarding the announcement of the listing.

Many of the details of the float on Tadawul (Saudi Arabia’s stock market) do not yet appear to have been decided.

The price, volume and percentage of the shares of Aramco to be sold will be determined at the end of “book-building” — the process by which salespeople visit institutional investors to gauge appetite and pricing for the stock.

Those investors, including banks, pension funds and the like, can subscribe for Aramco shares, as can qualified individuals. The latter group includes Saudi nationals, any non-Saudi natural person residing in the Kingdom and any national of the Gulf Cooperation Council. Other members of the council are Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates. Saudi nationals will also be entitled to one bonus share, up to a cap of 100 bonus shares, for every 10 allotted shares.

An over-allotment option of up to 15% of the total number of shares sold will be granted to one of the banks involved in the IPO.

Key financial and operating metrics

For the year ended Dec. 31, 2018, the company reported an operating cash flow of $121 billion, free cash flow of $85.8 billion and net income of $111.billion. As of June 30, 2019, it had gearing of 2.4%. On Nov. 1, 2019, Saudi Aramco declared an ordinary dividend of $13.4 billion for the quarter ending Sept. 30, 2019.

Saudi Aramco produced 13.6 million barrels per day of oil equivalent, including crude oil, condensate and natural gas liquids, for the year ended Dec. 31, 2018.

“The Company’s crude oil production accounted for approximately one in every eight barrels of crude oil produced globally from 2016G to 2018G,” the company said in a statement. 

Proven liquid reserves as of Dec. 31 were 226.8 billion barrels, “the largest amount of conventional proved liquids reserves of any company in the world and approximately five times larger than the combined proved liquids reserves of the Five Major IOCs [international oil companies]. Further, the company believes that its portfolio includes the world’s largest discovered conventional onshore oil field (Ghawar) and largest conventional offshore oil field (Safaniyah).”

Saudi Aramco added that it believes its proven oil reserves are sufficient for the next 52 years.

As of Dec. 31, 2018, Saudi Aramco had 185.7 trillion standard cubic feet of proven natural gas reserves. In 2018 it was producing about 8.9 billion standard cubic feet of natural gas per day and 1 billion standard cubic feet of ethane daily.

In the previous calendar year, Saudi Aramco’s lifting cost averaged about $2.8 per barrel of oil equivalent produced, and its capital expenditure was about $4.7 per barrel of oil equivalent produced.

“The Company’s low cost position is due to the unique nature of the Kingdom’s geological formations, favourable onshore and shallow water offshore environments in which the Company’s reservoirs are located, synergies available from the Company’s use of its large infrastructure and logistics networks, its low depletion rate operational model and its scaled application of technology,” the company said in the statement.

As of Dec. 31 last year, Saudi Aramco had a net refining capacity of 3.1 million barrels a day.

Lead manager: Samba Capital & Investment Management

Joint financial advisers: Citigroup Saudi Arabia, Credit Suisse Saudi Arabia, Goldman Sachs Saudi Arabia, HSBC Saudi Arabia, J.P. Morgan Saudi Arabia, Merrill Lynch Kingdom of Saudi Arabia, Morgan Stanley Saudi Arabia, NCB Capital, and Samba Capital & Investment Management

Joint global coordinators: Citigroup Global Markets Limited, Credit Suisse Securities (Europe) Limited, Goldman Sachs International, HSBC Saudi Arabia, J.P. Morgan Securities, Merrill Lynch Kingdom of Saudi Arabia, Morgan Stanley, NCB Capital, and Samba Capital & Investment Management

Joint Bookrunners: Banco Santander, BNP Paribas, BOCI Asia Limited, Crédit Agricole Corporate and Investment Bank, Deutsche Bank, First Abu Dhabi Bank, Mizuho International, RBC Europe, SMBC Nikko Capital Markets, Société Générale and UBS

A long-standing complaint against the logistics industry, and the maritime sector in particular, concerns the sluggish efforts undertaken to phase out legacy operational processes that have kept visibility across the horizon to a bare minimum and have left supply chains wanting in terms of efficiency. 

Several startups have launched in the space, promising to disrupt the way logistics is done. However, Martin Landgraf, co-founder of German-based technology startup ItsMyCargo, believes disruption is not the only way forward for logistics startups; they can also be about helping the industry evolve into a better version of itself. 

True to that, ItsMyCargo calls itself a technology company rather than a logistics company. The startup’s intent is to sell software to incumbent logistics companies and help them leverage technology to take their business online, thereby competing with digital freight forwarding startups that have grown to exert dominance in the niche. 

Just before ItsMyCargo materialized, the three founders had two options to choose from. “We could either try to disrupt the industry like the rest, or we can acknowledge that the industry won’t be disrupted, but will only have to change as a whole. We decided with the latter and started working on enabling existing players in the industry,” said Landgraf. 

For ItsMyCargo, this characteristic doubles up as its defining trait as the startup does not take over customer ownership from its clients, but rather look at ways to retain their customers via digitalization. 

“It means that if we have a client who is a freight forwarder with a web page, we let them continue selling their freight service directly from their own web page. We actually host their services on their web page, and their customers will continue seeing their brand,” said Landgraf. “We help our clients digitalize without losing customer ownership, which is extremely important if you see how the industry operates.”

It has been over a year since ItsMyCargo took its product to the market, and it has since then expanded across eight countries, with a special focus on the Benelux and Nordic regions. The company aims to concentrate its resources across the four biggest container ports in Europe –  Rotterdam, Antwerp, Hamburg and Amsterdam. Though the startup does see traffic from the U.S. and Asia, it has remained a tiny fraction of its business. 

“The feedback for our product has been good so far. Obviously, in the beginning, you do a lot of iterations and fine-tuning. We’ve now reached a point where the system is incredibly stable and customers that use it in the market continue to see growth in terms of their users, which is the main KPI that we’re looking at,” said Landgraf. 

Landgraf explained that the complexities behind price quotations were not easy to untangle as for a specific price quote to materialize, about 30-40 price components would need consideration. “These price components also fluctuate with time, and thus makes it quite difficult for companies to automate the process of calculating a freight quotation,” he said. “Now, on top of that, consider that every customer might have a unique negotiated price. That adds a third layer of complexity into the equation.”

ItsMyCargo has charted an interesting route to its finances as well, with the company being funded in full by its own customers. “We weren’t interested in institutionalized money from venture capital firms at the time we started because we wanted to work with someone who knew how freight quotations work and how we could customize our product for the market,” said Landgraf. 

The company ended up accepting an offer from one of its customers who became its investor during the industry seed round in 2017. Two years hence, the company has built on its product and has developed all the features it believes are necessary for it to succeed commercially. ItsMyCargo also had another investment round this July, which was again fully funded by its own customers. 

Landgraf concluded with ItsMyCargo’s perspectives on the industry’s push towards digitalization. “We believe that this industry will digitalize over time. We don’t find it attractive to disrupt the market, but rather sell the software that will help digitalize the market,” said Landgraf. “We are turning traditional freight forwarding companies and NVOCCs into their own version of a digital freight forwarder. We are elevating the market by offering it technology to keep up with modern times.”

The full might of the DSV Panalpina (CPH: DSV) transport and logistics behemoth was unveiled earlier today when the Denmark-headquartered company reported its first quarterly results since DSV completed the $5 billion purchase of Panalpina in August.

Group revenue rose 21.2% to DKK24,521 million ($2.548 billion; 1DKK = $0.10) in the third quarter ended 30 September. Earnings before interest and taxes (EBIT) of DKK1,682 million represented a gain of 11.6%, while operating margin fell from 7.4% in the third quarter of 2018 to 6.9% in the third quarter of 2019.

“The closing of the Panalpina transaction on 19 August was the all-important event in the third quarter,” said Jens Bjørn Andersen, Group CEO. “We have had a good start to the integration and the first operational integrations have already started. Meanwhile, we are pleased to report strong results for the third quarter, despite challenging market conditions, especially in the air freight market.”

Given that around 90% of Panalpina’s revenue was generated from its air and ocean forwarding activities, the most striking third quarter year-on-year changes were evident in the integrated company’s DSV Air & Sea unit.

This saw ocean freight volumes measured in twenty-foot equivalent units (TEUs) rise 41% in the third quarter compared to a year earlier. Excluding Panalpina volumes, growth of 7% was reported.

The picture for air freight was even more stark. Volumes rose 63% year-on-year in the the third quarter of 2019 despite negative organic growth of 6%.

On an annual basis, DSV Panalpina now expects to handle around 3 million TEU and 1.5 million tons of air freight, making it one of the world’s top five freight forwarders with a presence in around 90 countries and a total of 61,799 employees, up from 48,182 employees at the end of the third quarter of 2018.

However, Panalpina’s troubled state before its purchase was evident in the third quarter financials, with the large volume gains failing to translate into profits.

DSV Air & Sea reported EBIT of DKK3,311 million for the first nine months of 2019, up from DKK2,796 million, yet Panalpina contributed just DKK39 million.

Jens H. Lund, chief financial officer, told FreightWaves by telephone this morning that turning Panalpina’s volumes into profits was a priority. “We have much higher productivity than Panalpina has,” he said. “We are historically more efficient and that is where the synergies are going to come from.”

Lund added, “We have to make sure we produce Panalpina volumes in the same way we have done with DSV volumes historically. If we manage to do that, we’re going to increase the earnings on the Panalpina volume and that’s going to pay for the transaction and hopefully give a return to our shareholders.”

DSV’s track record of successfully integrating major acquisitions is a good one. It has acquired DFDS Dan Transport Group, Frans Maas, ABX and UTi Worldwide since 2000. Generating cost synergies after making major acquisitions has proven fruitful in the past and will pay a key role in paying the Panalpina tab.

The company announced today (1 November) that it now expects to achieve annual cost synergies of around DKK2,300 million when Panalpina is fully integrated, up from its previous forecast of DKK2,200 million.

Around 5% of the cost synergies are expected to impact the firm’s income statement in 2019, around 60% in 2020 and the remaining 35% in 2021.

“Total transaction and integration costs are expected in the level of DKK 2,300 million,” reported the company. “These costs will be charged to the income statement under Special Items. We expect that approximately 30% of the transaction and integration costs will materialize in 2019, 55% in 2020 and 15% in 2021.”

Some of the savings will come from corporate functions as the company relocates the former Panalpina headquarters in Basel, Switzerland, to its headquarters in Denmark, a move expected to result in up to 165 job losses.

DSV Panalpina forecasts full-year EBIT before special items for 2019 of DKK6,600 million including amortization of customer relationships of approximately DKK100 million, of which DKK80 million are related to Panalpina. Transaction and integration costs (reported as special items) for 2019 are expected to amount to approximately 30% of total expected restructuring costs of DKK2,300 million.

DSV Road, a market leader in Europe but with extensive operations in North America and South Africa, posted revenue of DKK7,698 million in the third quarter, down from DKK7,812 in the same quarter of 2018, with EBIT declining 2.2% from DKK345m to DKK343m over the period.

“Revenue was impacted positively by the acquisition of Panalpina, but negatively by the divestment of the U.S.-based Market Transport (and revenue of approximately DKK600 million) as per April 1,” the company reported.

The acquisition of Panalpina delivered 500,000-square meters and annual revenue of around DKK2 billion to DSV Solutions, the company’s warehouse, logistics and e-commerce arm. The division’s EBIT in the third quarter of 2019 was DKK239 million, up from DKK184 million a year earlier.

“The general economic slowdown continued and especially the weak development in the automotive industry impacted market growth in the third quarter of 2019,” reported the company.

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