[Companies Beyond COVID-19] HMM Sounds the Horn of Revival... Q3 Expectations Rise

Operating Profit Consensus 365 Billion KRW
Five Years of Accumulated Strength Shine During the COVID-19 Era

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] HMM is sounding the "revival ship horn" of Korea's shipping industry. Despite the unprecedented crisis caused by the COVID-19 pandemic, it is forecasting surprising earnings. The strength built through harsh restructuring and national efforts after the Hanjin Shipping incident has translated into practical results in about five years.

According to the securities industry on the 20th, HMM's estimated sales and operating profit for the third quarter are about 1.714 trillion KRW and 365 billion KRW, respectively. Sales increased by 16% compared to the same period last year, and operating profit is expected to turn positive. The operating profit in the 300 billion KRW range is a level comparable to the boom period of the shipping industry in the early 2000s.

◆ The 'revival ship horn' sounded... third quarter also expected to be profitable = The background of this earnings forecast is the continuous surge in freight rates. The Shanghai Containerized Freight Index (SCFI), an indicator of international container shipping rates, reached 1448.87 as of the 16th. This is the highest level in about eight years since 2012.

The freight rate trends by major routes are also positive. For example, the freight rate on the Asia-to-North America West Coast route is $3,841 per FEU (a 12-meter container unit), continuously soaring since it first surpassed $3,000 in July. The Asia-to-North America East Coast route freight rate is also at its highest level in five years at $4,619 per FEU. The North America route is a representative profit source where HMM deploys about 40% of its weekly services, raising expectations for increased related sales in the third and fourth quarters.

Low oil prices have also helped improve HMM's performance. As of the 16th, West Texas Intermediate (WTI) crude oil for November delivery traded on the New York Mercantile Exchange (NYMEX) was at $40.88 per barrel, with international oil prices recently maintaining the $30?40 range. For container shipping companies with a high proportion of fuel costs, a drop in oil prices directly leads to improved earnings.

In fact, at the beginning of this year when the COVID-19 pandemic became full-scale, there were significant concerns about HMM's performance. The sequential deployment of twelve 24,000 TEU (a 6-meter container unit) class world’s largest container ships was scheduled, but due to COVID-19, major countries including China, the world's largest producer, implemented large-scale lockdowns, leading to expectations of a sharp decline in cargo volume.

However, as countries worldwide, starting with China and including the United States, resumed economic activities and consumer sentiment began to recover, these concerns proved unfounded. At the same time, global shipping companies increased vessel idling (mooring or anchoring ships to suspend operations) fearing a recession, which played a significant role in raising freight rates. A Korea Ocean Business Corporation official explained, "In the past, global shipping companies would have engaged in a 'chicken game,' but through various mergers and acquisitions (M&A) in the 2010s, a balance was maintained, resulting in an unintended natural vessel capacity adjustment effect."

◆ Strength accumulated over 5 years... exploded during the COVID-19 era = The industry views the 'strength' HMM built through various investments over the past five years as a decisive factor for the turnaround to profitability. After harsh restructuring, in 2018, under the government's five-year shipping reconstruction plan, HMM ordered twelve 24,000 TEU ultra-large container ships from domestic shipbuilders, embarking on a strategy to increase scale. This was a strategy to initiate 'economies of scale.'

Based on this large vessel strategy, HMM joined THE Alliance, one of the world's three major shipping alliances, as a full member last year. Under the previous 2M system, it was only a 'strategic partnership,' but from this year, as a full member, HMM can pursue synergy effects with member companies on various routes.

After three years of waiting, the twelve large vessels deployed on the Asia-Europe route from April this year set a record by being fully loaded despite the common oversupply of vessel capacity. Among them, vessels 1 to 3 also recorded full loads on the return trips from Europe to Asia. The industry sees this as recognition of the economic efficiency of ultra-large vessels. According to research by the Korea Maritime Institute (KMI), the cargo handling cost of a 23,000 TEU container ship is about 17.5% lower than the previous mainstay 18,000 TEU class.

The high freight rates on the Asia-Europe route also greatly contributed to the turnaround to profitability. An HMM official explained, "Recording full loads for 15 consecutive voyages means that other member companies sharing the vessel capacity also recognized the economic efficiency of these ships."

◆ Even temporary sailings for mutual growth... remarkable change expected to continue = With these good results continuing, HMM is actively promoting mutual growth with shippers. Due to the sharp rise in freight rates on the North America route, HMM plans to temporarily deploy two container ships on the Busan?Los Angeles (LA) route at the end of this month, following deployments in August and September, to help exporters struggling to secure vessel capacity.

The industry expects HMM's strong performance to continue in the future. Although the fourth quarter is the off-season, freight rates remain high due to the supply-demand effects caused by COVID-19. Additionally, next year, HMM is scheduled to receive eight more 15,000 TEU container ships. Although negotiations within the shipping alliance remain, the industry expects these vessels to be deployed on North America or Mediterranean routes.

An industry official said, "Even if COVID-19 resurges, large-scale lockdowns like those at the beginning of the year are unlikely to recur," adding, "Especially, major global shipping companies, including the world's three major shipping alliances, continue to adjust supply and demand, so this freight rate trend is expected to continue for the time being."