Hapag-Lloyd's CEO states that the global economy and trade demand outlook have shifted.

• Hapag-Lloyd's CEO reveals that inventories are low in several instances and the company has experienced a rebound following Chinese New Year.
• The escalating conflict in the Red Sea and the prolonged drought in the Panama Canal are causing U.S. companies to pay significantly higher prices for ocean freight, with rates on major routes increasing by 75% to 150% year-to-date.

Rolf Habben Jansen, CEO of Hapag-Lloyd, the world's fifth-largest ocean carrier, has a more optimistic view on demand in the second half of 2024 after conversations with clients and other logistics companies.

"Jansen stated that inventories have been depleted in many cases, but there has been a good recovery after Chinese New Year, making them fairly happy with the situation."

The company's 2023 net profit dropped sharply, causing it to cut its dividend and resulting in a decline in stock prices. Although it was the third-best profit in company history, it was significantly lower than 2022, which was driven by container congestion and high freight rates.

"Jansen stated that the last quarter of 23 was challenging due to unsustainable rates. "I believe everyone recognized this," he said. "We observed rates increasing towards the end of the quarter, and then the Red Sea crisis occurred, further altering the market.""

Added climate costs from Red Sea diversions

The Red Sea shipping container rate increase has led to a decrease in Hapag-Lloyd's earnings forecast for this year, as costs rise due to trade diversions from the Red Sea.

The price of 40-foot containers in the U.S. increased from $3,063-$3,763 to a peak of $5,353-$7,329 from Jan 3 to Feb 9. Although rates have decreased, U.S. companies are still paying more, with year-to-date increases of 155% for Asia to West Coast ports, 129% for Asia to East Coast, and 71.2% for Asia to the Gulf Coast.

The Houthis have been attacking commercial shipping interests in the Red Sea, with a tanker being attacked on Friday while it was underway northbound. Despite being empty, the tanker continued on its journey with no crew injuries reported. The day before, the tanker was assessed to have narrowly avoided a collision 47 miles southeast of Aden, Yemen.

"Jansen stated that the situation is concerning and the outlook for the [Red Sea] is very difficult. He hopes it will be over in a couple of months, but some believe it may last longer. Despite the efforts of many countries, transit times may be longer to keep people safe."

The longer route around the Horn of Africa is causing container vessels to burn more fuel, resulting in increased costs and potentially higher carbon dioxide emissions due to Red Sea diversions.

Hapag Lloyd's long voyages are posing a difficult and expensive challenge to its goal of achieving net-zero carbon emissions by 2045.

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The ocean carrier industry has increased vessel capacity by approximately 8%-10% by sailing faster than normal, according to Hansen.

New ocean alliance with Maersk

To combat the challenges of reduced global freight and schedule reliability, ocean carriers can reduce operational costs and enhance customer satisfaction through the use of ocean alliances.

In January, Maersk and Hapag-Lloyd announced the Gemini alliance, set to take effect early next year. Both carriers aim to achieve a schedule of reliability exceeding 90% once the new network is fully implemented, representing a significant improvement, as Sea-Intelligence estimates global reliability at approximately 51.6%.

The Gemini alliance will consist of Maersk and Hapag-Lloyd jointly managing approximately 290 ships. It will operate using a spoke and hub system, similar to other transportation systems.

"Jansen stated that the hub and spoke system is effective in various transportation modes, including the express industry and air freight. The network is more resilient than a traditional end-to-end system."

"To run a bus rotation, you require more than one bus, and the same applies to ships, as Maersk's vice president of operations for the Americas, Lars Østergaard Nielsen, explained. It is crucial to ensure that these vehicles go to the correct ports at the appropriate times and in the proper sequence worldwide."

"Nielsen stated that with their new partner, Hapag, they have a clear focus on delivering a new level of reliability to their customers. For many years, it has been challenging to achieve reliability above 50%, meaning that every other shipment would have been delayed."

Peak shipping season outlook

Hansen stated that U.S. shippers, particularly retailers, are preparing for peak shipping season this year in anticipation of potential strikes at East Coast and Gulf ports, as logistics decision makers revealed at the TPM conference in California last week.

"Hansen stated that he anticipates peak season beginning slightly earlier and expects a significant number of individuals to attempt to bring in their goods between June and August."