Logistics players sail past supply-chain challenge to face macroeconomic headwinds
25 Apr 2023
THE dust from the supply chain crisis in the past three years has barely settled, but logistics players are already bracing themselves for a tougher business environment amid macroeconomic headwinds. Some are worried that the situation, compounded by rising inflation, higher interest rates, the US-China trade war and the crisis in Russia and Ukraine — both one of the world’s main sources of grain, fertilisers or energy — will put a damper on global trade.
RHB Investment Bank head of regional equity research Alexander Chia points to a projection from the International Monetary Fund, which is expecting global economic growth to slow down to 2.9% this year, from 3.4% last year, because of the simultaneous slowdown of the three big economies of the US, the European Union (EU) and China.
“Our [in-house] economists project Malaysia’s 2023 current account balance at 2.7% of gross domestic product, with a moderation in exports and imports in the first half of 2023. At this juncture, we are cautious on global trade flows for this year that could pose a downside risk to the container throughput growth for Westports Holdings Bhd, as transhipment makes up about 60% of its total container volume. We expect China’s reopening to act as a re-rating catalyst for Westports in terms of increased container throughput growth,” he said in a March 10 report.
Chia is maintaining a “neutral” call on the transport sector in view of flattening demand likely attributable to high inflation rates, ocean overcapacity and a still-high inventories level. In addition, freight rates are unlikely to return to pandemic-level highs, as capacity for both ocean and air freight is growing in tandem with a slowdown in demand.
Westports CEO Eddie Lee Mun Tat says the unprecedented supply chain issues such as container shortages, port congestion and shipping delays that shippers have been grappling with in recent years are over, with ocean freight rates and dwell times for containers at ports returning to pre-pandemic levels.
“Things are back to normal now that borders have reopened,” he tells The Edge.
He adds that yard utilisation at the ports is naturally dropping back to the optimal rate, resulting in increased port productivity. “Gone are the long-dwelling containers at ports that had led to increased storage fees during the pandemic. In fact, storage revenue for ports has halved from the 2021 peak. On the flip side, our productivity has increased, as we are now able to handle more container volume and accommodate more vessels.”
However, ports around the world are now complaining about the build-up of empty containers at the ports, which Lee attributes to a surge in container orders by shipping lines during the previous global container shortage caused by the pandemic, accompanied by a drop in shipping demand.
Port operators and logistics players are also seeing new pressure on their businesses as a result of buyer caution in the face of macroeconomic uncertainty.
Lee says: “Cargo volume through ports along the Straits of Malacca, including Port of Singapore, Port of Tanjung Pelepas, Westports and Northport, was not so encouraging in the first two months of the year. A big portion of the cargo comes from the Far East, especially China, so what happened were the Covid-19 outbreaks and factory closures in China for the Chinese New Year holidays had led to disruption to global shipping. As a result, cargo volume during that period had reduced,” says Lee.
He notes that cargo volume has shown signs of a rebound in March, but its sustainability is uncertain.
“Bear in mind there are so many things happening around the world such as the failure of two midsize US banks and the forced acquisition of Credit Suisse by its rival UBS. While the bank collapses do not appear to have affected Malaysia so far, this is something that we are monitoring closely. Also, geopolitical tensions between the US and China and the Russia-Ukraine war are something that will affect cargo volumes for most ports,” he adds.
Lee sees a bright spot, however, in Prime Minister Datuk Seri Anwar Ibrahim’s recent official trip to China, which saw a record RM170 billion in investment deals inked under 19 memorandums of understanding between Chinese and Malaysian businesses. “We are excited about this, as new investments will definitely spur the local economy, resulting in an increase in imports and exports to the country. Already, we have seen many Chinese companies setting up their factories in Port Klang in the past few years,” he says.
Westports, which is projecting flat-to-5% growth in container throughput for 2023, handled 10.05 million TEUs (twenty-foot equivalent units) of containers last year — down 3.4% from 10.4 million TEUs in 2021. It reported a net profit of RM699.58 million in the financial year ended Dec 31, 2022 (FY2022), down 13.4% year on year, owing to higher fuel cost, lower sundry income and a one-off prosperity tax in 2022. Revenue rose 2.3% y-o-y, however, to RM2.07 billion.
The port operator has consistently paid dividends every year. In FY2022, it paid out a dividend of 16.2 sen per share, down from 15 sen per share in FY2021.
So far this year, Westports’ share price is down 5.3%, closing at RM3.60 last Wednesday, for a market capitalisation of RM12.28 billion. In a Jan 12 report, CGS-CIMB Research analyst Raymond Yap says Westports’ share price has since recovered sharply from a trough of RM3.06 on Sept 20, 2022, as non-strategic foreign shareholders cut their holdings from about 10% in December 2021 to just 3.5% in September 2022, when Westports exited the MSCI Emerging Market Index on May 31, 2022.
Kenanga Research analyst Wan Mustaqim Wan Ab Aziz also has a “neutral” call on the seaports and logistics sector, in part because of the World Trade Organization’s projection of global merchandise trade volume inching up only 1% in 2023, down sharply from a 3.5% expansion in 2022, amid the global economic uncertainty.
Wan Mustaqim believes consumer confidence and spending globally are likely to take a beating on sustained elevated inflation, rising interest rates and the slowing global economy, which do not augur well for seaport operators such as Westports.
“However, we believe Bintulu Port Holdings Bhd will be able to weather these macro challenges better, thanks to its stable operation in the handling of liquefied natural gas (LNG) cargoes, a potential tariff hike at Bintulu Port, as well as the long-term growth potential of Samalaju Industrial Port’s hinterland in Samalaju, Sarawak, driven by the growing investment in heavy industries,” he said in an April 10 report.
Wan Mustaqim also sees stricter regulations on carbon emissions posing new challenges to global trade, particularly, one from the United Nations’ International Maritime Organization (IMO) and another from the EU. “While the exact implications of the regulation of IMO and EU’s Carbon Border Adjustment Mechanism (CBAM) on the seaport and logistics sector remain unclear (especially for CBAM, which is still pending finalisation), the volume of containers heading to the EU will certainly be affected (about 18% of container throughput under Asia-Europe trade), especially those originating from China, which is a major exporter of iron and steel and aluminium to the EU,” he says.
Freight rates normalisation, weaker demand marks end of shipping boom
The shipping boom that saw shipping companies reap massive windfalls and hand out mega bonuses that equal up to three years’ salary to employees has run its course, say logistics players.
Tasco Bhd deputy group CEO Tan Kim Yong says the exceptionally high freight rates that have been causing major headaches for shippers have normalised, as demand eases and capacity loosens up.
“Ocean freight rates have started to normalise since the end of the third quarter last year. Today, the price of shipping goods on some global trade routes has fallen slightly below pre-pandemic levels, while some are still 10% to 20% above pre-pandemic levels. In fact, the rate on some routes has gone down to as low as US$1 per TEU as empty containers are repositioned back to China (given that the pandemic had left containers scattered in the wrong ports). However, this is a short-term phenomenon,” he tells The Edge.
Tan says this year, shipping companies are unlikely to return to the same performance seen during the pandemic, owing to the normalisation of freight rates.
The latest Drewry World Container Index, which measures the cost of shipping a forty-foot equivalent unit (FEU) container in eight major routes to/from the US, Europe and Asia, of US$1,709 per FEU on April 13 shows that it is now 84% below the peak of US$10,377 reached in September 2021. It is 36% lower than the 10-year average of US$2,688, indicating a return to more normal prices, but remains 20% higher than average 2019 rates of US$1,420.
Similarly, air freight rates have come off from their peak in mid-2022 to return to pre-pandemic levels on some routes, says Tan.
While the normalisation of freight rates may affect the revenue growth of Tasco’s freight-forwarding business, its earnings are expected to remain resilient, thanks to its diversified businesses that now encompass not only air and ocean freight forwarding, trucking, supply chain solutions and contract logistics, but also cold supply chain, says Tan.
He notes that because of its diversified businesses, customer bases and customer industries, the group has yet to experience a drop in volume.
“For example, there may be a slight drop in volume for consumer electrical and electronics from the pandemic period when people were locked in their homes and had extra money to spend on gadgets. Now, people would rather spend their money on travel. But this is being offset by the increase in volume from other segments such as the aerospace industry that seem to be picking up in volume and expanding.”
Although the general downtrend in freight rates is not a big concern, Tan says Tasco remains cautious of the growing macroeconomic risks that could affect volume in its freight business.
“The outlook over the next six to nine months is murky, with US interest rates still rising and a possible impact of the recent failure of two US banks. Many people believe a recession is inevitable, but the question is how severe it will be.
“Other challenges that we are cautious of are the US-China trade war and inflationary pressure, where the cost of doing business has gone up tremendously not just for Tasco but also globally,” he adds.
Tasco’s net profit for the nine months ended Dec 31, 2022 (9MFY2023), has surpassed the RM65.25 million for the full-year FY2022. Its net profit in 9MFY2023 increased 71.4% y-o-y to RM69 million, while revenue rose 26.4% y-o-y to RM1.34 billion. It is due to release its results for 4QFY2023 and full-year FY2023 at end-April.
Bloomberg data shows that of the four analysts covering Tasco, three had a “buy” call on the stock and one had a “hold” call, with an average target price of RM1.54. This indicates a potential upside of 75% in the stock from its closing price of 88 sen last Wednesday.
RHB’s Chia favours diversified logistics players, particularly freight forwarders and third-party logistics (3PL) players such as Tasco, which should continue to record robust net profits and remain shielded from an ongoing weakening operating environment.
“The logistics sector delivered a mixed performance [in 2022], with freight forwarders and 3PL players such as Tasco and FM Global Logistics Holdings Bhd continuing to meet expectations and charting stellar performances despite a normalisation of freight rates,” he says.
FM Global Logistics group managing director Chew Chong Keat concurs that the days of exceptionally high freight rates are over, which bodes well for exporters.
“There are indications, however, that shipping lines may be looking to increase their rates [again], as cargo bookings from China have been picking up since April after its reopening and the long Chinese New Year holidays. Space in ships is getting filled up,” he says.
Like its logistics peers, FM Global Logistics is facing the same situation, that is, a general global slowdown, Chew says.
“For sure, there is a global slowdown. When this slowdown will improve, it is still up in the air. Some industry practitioners expect an uptick in business in the second half of this year as a result of China resuming its growth, which suggests increased volumes. If that happens, it may augur well for us.
“The global slowdown and the inflationary pressure will, over time, affect global trade flows. This is a challenge. Also, in terms of certain areas like Europe, who [could have foreseen] that the Russia-Ukraine war would drag on until today,” says Chew.
On the group’s part, it will focus on improving its service level, offer more competitive package deals, further complemented by its customer-acquisition efforts.
Chew also points out that FM Global Logistics is backed by its multimodal logistics business model, with operations across multiple geographies. “The benefit for us as a group is that we are not entirely Malaysian-centric. We have a greater marketplace to target. That helps us mitigate whatever comes. For example, my Indonesian office will try to procure business based on the needs of the Indonesian exporters and importers. Likewise for our companies in Australia, Thailand, Vietnam, India and the US,” he says. Currently about 35% of its gross profit is derived from overseas and the balance from Malaysia.
FM Global Logistics’ net profit came in at RM23.5 million in the six months ended Dec 31, 2022 (1HFY2022), up 11.3% y-o-y, while revenue rose 11% y-o-y to RM548.85 million, from RM494.5 million.
Its share price had risen 11.8% year to date to close at 61.5 sen last Wednesday, giving it a market capitalisation of RM343.4 million.
Rising operating costs a key concern for shipping firms
Dennis Ling Li Kuang, group managing director of Hubline Bhd, says that while congestion at ports or space shortage at storage yards is no longer a problem, shipping lines are facing rising operating costs from increases in terminal handling charges, warehousing, utility and labour costs.
“The costs have gone up above the annual inflation increase. Mitigating these cost increases is a moderation in oil prices, which have come down more in line with the 2019 levels,” Ling tells The Edge.
Fortunately for Hubline, there is greater understanding of logistics cost among customers than before the pandemic. “We do try to pass on the cost. Our freight rates are still above pre-pandemic levels, which helps soften the impact of rising operating costs,” he adds.
The Baltic Dry Index, a bellwether for global dry bulk shipping, closed at 1,463 points on April 12, down 29.26% since the beginning of 2023, amid lower demand.
Ling concedes that demand for cargo is unlike that of last year, when there were capacity constraints. “Now, people don’t book five to six shipments down the road. The market is not like that anymore. You now have to go and secure the cargo. But, to me, the demand is still quite good,” he says.
“Freight rates have been trending in accordance with bunker prices. If bunker prices are down, shippers will try to book a little bit later. But once bunker prices start to move up, shippers will quickly book. And bunker prices ticked up last week on news that the Organization of the Petroleum Exporting Countries would cut production.”
Ling says Hubline’s advantage is that it is operating in a niche market; as such, its vessels can call on smaller ports, where larger vessels cannot call on because of draft problems.
“Even if the global economy is hit by recession, I don’t think it would be so serious in this part of the world. But if demand really plunges, we can lay up our tugs and barges to control our costs until market conditions improve. Like during the pandemic in 2020, we took the opportunity to lay up most of our tugs and barges because most ports went into lockdown,” he says, noting that Hubline managed to swing to profit in FY2021 and announced strong financial results for FY2021 and FY2022, as it brought back its vessels into service and benefited from the elevated freight rates.
Hubline posted a lower net profit of RM12.92 million for the financial year ended Sept 30, 2022 (FY2022), down 22.6% y-o-y, owing to losses suffered by the aviation segment, even though revenue was up 49.9% to RM229.16 million. In 1QFY2023, net profit was down 30.8% y-o-y to RM2.68 million.
Ling expects the shipping segment to continue to drive the group’s earnings this year, as its flying academy continues to pose a drag on its aviation segment’s earnings growth because student intake remains slow. The Sarawak-based shipping firm owns 23 sets of tugs and barges.
Source: The Edge Markets