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HMM: Passing Through a Long Dark Tunnel

HMM’s earnings fundamentals have improved thanks to its aggressive fleet expansion (supported by the government). In addition, the firm’s decision to join The Alliance has helped to ease its cost burden. HMM is set to enjoy strong earnings improvement in line with soaring container freight rates.

Fleet expansion and The Alliance membership to boost fundamentals

HMM is the largest domestic container shipping company. Under the support of the government, the firm has been aggressively expanding its fleet since 2018. Going forward, its fleet capacity should grow from 580,000TEU in 2Q20 to 850,000TEU at end-2021, when its 12 new 24,000TEU and 8 new 16,000TEU containerships are delivered. HMM’s quarterly basic slot allocation (BSA) is to expand 33% over the period from 1.24mn TEU to 1.65mn TEU.

HMM became a member of The Alliance in 2Q20. Prior to HMM’s participation, The Alliance was losing M/S due to a lack of fleet expansion plans by its members. However, the addition of HMM’s large-scale containership fleet capacity has helped to boost The Alliance’s overall fleet supply. As for HMM, demand from other members has resulted in rising a loading rate and subsequent margin improvement. Also, the membership allows HMM to secure other companies’ slots at lower costs, thus helping to reduce overall port cargo expenses.

Container freight rates soaring sharply on short fleet supply

Global container traffic has been recovering after hitting a bottom in April, with the figure for August up 0.4% y-y. The recovering Chinese economy and strong North American demand have led to the normalization of container traffic on Asia-North America routes, thus driving up overall container freight rates.

The SCFI grew 53% y-y in 3Q20. HMM’s 3Q20 OP likely rose to W365.0bn on low fuel costs, reduced port cargo expenses, expanded fleet capacity, and soaring freight rates. In 4Q20, container freight rates are to correct due to the arrival of the low season and likely government intervention (due to the sharp rate hikes), but the extent of the correction should be limited. We forecast 4Q20 OP of W295.0bn.
Source: NH Investment & Securities

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