More bad news from Zim, the world’s 10th-largest container line operator and a major player in the Asia-U.S. East Coast trade: After slashing its full-year guidance in July, it reported much steeper second-quarter losses on Wednesday than analysts expected.
Israel-based Zim (NYSE: ZIM) posted a net loss of $213 million for Q2 2023, compared to net income of $1.34 billion in Q2 2022 and a net loss of $58 million in the first quarter of this year. The adjusted net loss of $1.37 per share in the latest period was 49% below the consensus forecast for a loss of 92 cents per share.
The company’s stock fell 10% in 2.7 times average trading volume Wednesday after results were announced, flirting with a new 52-week low.
Zim maintained July’s guidance for full-year adjusted earnings before interest and taxes (EBIT) of minus $100 million to minus $500 million. Its adjusted EBIT was minus $161 million in the first half, meaning it expects second-half EBIT of minus $339 million to plus $61 million.
On a positive note, the company has a very large cash cushion to weather the storm.
Liquidity totaled $3.2 billion at the end of June, down from $4.25 billion at the end of Q1 2023. A dividend payment in April tied to 2022 earnings accounted for $770 million, or 73%, of the sequential decline.
Freight rates still up 20% vs. pre-COVID levels
Zim is more exposed to spot rates than larger ocean carriers such as Maersk and Hapag-Lloyd that rely more on contract coverage.
This benefited Zim during the boom, when its average rate per container (including contract and spot) rose more than other carriers’, but the bill came due in the first half of 2023, when sinking spot rates hit Zim harder than other carriers.
(Chart: FreightWaves based on data from Zim, Maersk, Hapag-Lloyd quarterly filings)
Its average rate in Q2 2023 was $2,386 per forty-foot equivalent unit, down 67% year on year and 14% quarter on quarter, albeit still up 20% from Q2 2019, pre-COVID.
(Chart: FreightWaves based on Zim quarterly filings)
Spot rate upside for Zim in 2nd half?
The optimistic second-half case for Zim is that trans-Pacific spot rates have increased significantly over the past six weeks and the company has an even higher exposure to spot rates now than usual.
Annual contracts in the trans-Pacific typically begin May 1. During Wednesday’s conference call, CFO Xavier Destriau explained, “When we were in discussions during the contract season with our customers, we had a floor that we were not willing to go below in terms of agreeing to rates. We were not willing to agree to rates that were below a certain threshold we set for ourselves.”
The company generally puts 50% of its trans-Pacific business on contract and 50% on spot, but it didn’t find enough shippers willing to sign above the threshold this year. As a result, it has only 30% of its May 1, 2023-April 30, 2024, trans-Pacific capacity on contract, with 70% on spot.
The Drewry World Container Index (WCI) Shanghai-New York spot index is up 27% since the beginning of the third quarter, to $3,363 per FEU as of the week ending Aug. 10. The Freightos Baltic Daily Index (FBX) China-East Coast assessment is up 20% since the beginning of July, to $2,846 per FEU as of Tuesday.
Spot rate assessments in USD per FEU. Blue line: FBX China-East Coast. Green line: WCI Shanghai-New York. (Chart: FreightWaves SONAR)
Norway-based Xeneta tracks both spot and contract rates. According to Xeneta’s data, Far East-East Coast short-term rates averaged $3,121 per FEU on Wednesday, up 41% from the beginning of the third quarter and 14% above average long-term contract rates. Spot rates on this lane have exceeded contract rates since the beginning of this month.
(Chart: Xeneta)
‘A lot of uncertainty ahead’
“Clearly, the increase we see in spot rates on the trans-Pacific is a welcome development after having been through a period when the rates went down consistently week after week and reached a level below the 2019 average,” said Destriau.
“What is also clear to us today is that the spot market is now more beneficial to liners than the average rates contracted during the contract season. So, [regarding Zim’s 30-70 contract-spot mix], we feel we made the right decision at the time.
“As long as spot rates continue to be more elevated compared to average contract rates, it is going to benefit the company,” he said, confirming that current trans-Pacific spot rates are higher than the contract rate floor set by Zim during this year’s negotiations.
“But we remain extremely cautious, because we have seen only a few weeks of improvement in the trade. There is still a lot of uncertainty ahead. How long the recent improvement in the trans-Pacific trade lane will stick is unknown. Whether it’s going to go beyond October or not is unknown.
“High inventory levels built over 2021 and 2022 and continued concerns over economic growth have led importers to be cautious and limit any meaningful renewal of inventory,” he warned.
“Today, when we look at the peak season and the way it is shaping up, we think that if there is going to be one, it is going to be a very soft peak season, to say the least.”
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