Ladies and gentlemen, thank you for standing by. I am Yasmin, your Chorus Call operator. Welcome, and thank you for joining the Hapag-Lloyd analyst and investors conference call on the Q1 2018 results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.
Yeah, thank you very much, and thank you everybody for joining, and we'd like to take you, as I'm sitting here together with Nicolás Burr, through the results of the first quarter. Maybe if we start on page 3, a couple of opening remarks. First of all, when we look at synergies, the ramp up from the UASC integration, that's on track, and we expect to realize up to 90% in 2018. We think the start of the year has been solid, certainly compared to last year, although the environment, the market environment has been challenging on the one hand, because we've seen spot rates being under pressure, especially in the second half of the quarter, but also because we saw bunker cost and charter rates creeping up.
When you look at the sector midterm, we believe that the sector fundamentals remain favorable in the midterm. The order book, despite the number of orders that have been placed, remains at a fairly low level, and demand continues to develop well. The financials, you've read the numbers, an EBITDA of EUR 270 million compared to EUR 144 million last year, though not 100% comparable. Strong operating cash flow, quite a lot better than last year. If you look at our priorities going forward, it remains focused on delivering the synergies and make sure that we continue focusing on profitability and also on deleveraging. When looking at page number 4, looking at the synergy ramp up, I think not much more to be said here. We are on track to deliver those synergies, yeah.
We expect to hit 90% or close to 90% in the course of 2018. When we look at the financial highlights on page 5, probably two things to be mentioned there. One on transport volume. Of course, that's up a lot because if you compare with previous year, we now have also the UASC numbers in. Important to say that on a pro forma basis, volume is up around about 2.5%. To be pointed out there that last year we had an extremely strong quarter in Q1. We expect that percentage to creep up throughout the year. That means that our outlook that we will continue to grow in line with the market or possibly a little bit more than that, we will hold that up.
When it's around the freight rate, at first glance, it looks that year-on-year that freight rate is down. However, if you look at that on a pro forma basis, the freight rate is actually up around about 77%. EBIT, EBITDA, the group results, all known. Equity remains very solid at EUR 7.2 billion. Liquidity reserve on the upper end of what we've always given as our guidance, and our net debt continues to come down. If we look at the sector update, maybe starting with bunker price on page 6, there we clearly see that the bunker price has gone up. Last year, clearly below $300 a ton, and now we are at $354 a ton.
As we all know, when looking at the markets, there is certainly further upward pressure to be expected going into Q2. Global volumes definitely up our last estimates, although not all stats are probably fully final yet. It's a continued growth between 4%-5%. We have also seen that from a volume perspective, actually quite a good start into the second quarter. That makes us also cautiously optimistic looking forward. When you take a step back and look at the official forecast from IHS and also from IMF, the latest data we gotten from them on page 7 continue to indicate a volume growth both for this and next year that could hit up to 5%. I think we are a little bit more cautious there.
We would expect that growth to potentially be a little bit lower. That also means that if we indeed see 5%+, that will certainly be a big supporting factor for the industry. If we look at the order book on page 8, and also at the orders that have been placed so far and what we have as idle fleets, I mean, that's actually quite a healthy situation. An order book of 13%, taking into account that that covers about two and a half years with an annual growth of the market of 4% or 5% and scrapping of even if that's only 2.5%-3.5%, I would still say that that order book is on the low end of where it actually should be.
Of course, look at after the deliveries that we've seen so far this year, that's probably a fairly healthy percentage. That also means that when we look midterm at the market, one should expect a recovery of the market in the second half of 2018, and hopefully a continued strong market in 2019 and 2020. Idle fleet remains very low, which of course is a good sign and certainly an indicator together with charter rates that have.
where we've seen quite a lot of upward pressure, that the sentiment in the market today is definitely that there is going to be a recovery, though admittedly, when looking at spot rates, post Chinese New Year, those have shown quite some weakness up to a couple of weeks ago. If you look at page number 9, there you can see, as we're saying, short-term supply pressure will persist. We do see the midterm supply demand gap closing further and further. I think that's where the picture on the supply demand balance, as you see it on the right-hand bottom of page number 9, certainly gives you a good flavor of what is expected to happen over the upcoming couple of years.
With only low supply growth in 2019, and very likely also supply growth in 2020, that will be below market growth. That, of course, will help the sector. When you take into account that the idle fleet today is at an extremely low level, those are definitely encouraging signs. If you look ahead on the, on page 10, maybe one other point to be mentioned. When we look at the new fuel regulations that are now pretty much around the corner, I think it's fair to say that the whole industry will have to face a significant challenge there, as the new regulations will kick in as from beginning of 2020. I think our perspective on that is that, in reality, the industry has three options.
One is move to LNG, which is probably for many new builds a viable option. For those vessels that are already being operated today, there are some that one could convert. For the vast majority of the ships, this will be an option that's highly questionable. Of course, we have the option to install scrubbers, which is less capital intensive and allows you to continue to use sulfur fuel. That also has some pros and cons. Of course, the third one is use compliant fuels. If you look at what we are doing today, we are clearly looking at all three.
We're on the one hand looking at what can we do to convert vessels onto LNG, as we have 17 vessels that are LNG-ready, the last 2 classes that were built by UASC. We are also evaluating which vessel classes are potentially suited for scrubbers. We already know that a big chunk of the vessels will need to be operated with compliant fuel also because it's technically simply not feasible to convert a large percentage of the fleet before January 1, 2020. We'll probably come out with a firmer position on that after the release of the half one figures, but I think it's fair to say right now that we are evaluating all three of the options. It's not unlikely that in the end, some kind of combination between the three will be the outcome. That brings me to the numbers for which I'll hand it over to Nicholas.
Thank you, Rolf. Good morning, everybody. Volumes are up, as Rolf commented, 48%, due to the merger with UASC. When you compare in a pro forma basis, then the increase is 2.5%. The freight rate is 2.6% lower than last year. When you compare in the pro forma basis, it's 7.9% increase compared to last year. For that reason, the revenue increased by $2.74 billion. The bunker went up 19%, which is the main problem that we are facing today, and also the industry is facing today. That led us to an operational.
An improved operational result compared to last year of around an improvement of EUR 58 million from EUR 8 million to EUR 66 million. In terms of dollar per TEU is from $4 per TEU to $23 per TEU. The reason behind this improvement is the incorporation, of course, of UASC, the volumes that gave the merger the first synergies. This is partially compensated by lower rates and a higher bunker price. If you go to the one-off, not so significant this time, but we wanted to make a follow-up on that. You have there the one-off in page 12 that occurred in 2017, which is basically the year in which we had the bulk of them.
Only EUR 3 million, we expect this quarter, the first, we expect EUR 27 million to come in the second quarter, then we should finalize the one-off related to UASC or the integration with UASC. On the next page, you have the details of the volumes. As I commented, 48% with nice growth in most of the trades, especially Latin American trades. I'm sorry. When you compare on a pro forma basis, that growth is a little bit more moderate. I mean, in line with the market, but 2.5%. When you look at the next page, the rate, you see very drastically the 2.6% decrease in rate compared to last year.
The 7% when you look at the pro forma, given the fact that the composition of rate, when you look at the mixture of UASC and Hapag-Lloyd, is lower, then you compare 9,961 to the 1,029, and that gives us 7.1% up in rate. In terms of the bunker consumption, you see the bunker how it went up, so 19% up compared to the same period last year. The best way to react to this increase is basically to lower the consumption, which is basically what we have done, when you look at the specific consumption of 0.38 tons of bunker per TEU moved compared to 0.42.
That is basically explained by the fleet of UASC, the increased efficiency and the high quality of their vessels. In terms of the unit cost, we continue improving a little bit, 6% this time, despite the increase in bunkers. The bunker went up $7 per TEU. You see an overall improvement of around $58 per TEU, which is basically 6% compared to the same quarter last year. In terms of the cash flow, I think this is the highlight of the quarter. A very good operational cash flow, a little bit higher than the EBITDA of the period, because we tightened working capital $42 million. Total operational cash flow $312 million, with an EBITDA of $270 million.
The investment cash flow is EUR -72 million, meaning and that is basically driven by some investments in vessels, maintenance and containers. 96. We had the disinvestment for the sale of the Panamax that we informed you, $24 million positive. We have a financing cash flow that reflects the continuing de-leveraging effort that we are making. That gave us a cash result, a cash balance of EUR 738 million at the end of Q1, which along with the credit lines that we have, the liquidity reserve is over EUR 1.2 billion. Finally, a little bit of the balance sheet before I hand it over to Rolf again to the outlook. We still have a healthy equity ratio.
You see the equity on the left upper side of the slide, EUR 7.2 billion. The net debt of EUR 6.65 billion. And the liquidity reserve a little bit more than EUR 1.2 billion. The equity ratio is maintained more or less at 41%. And the debt reduction that we made during the quarter is around EUR 141 million, as I commented in the previous slide. With that, we go to the outlook with Rolf again.
Yeah, I think. Thanks, Nicholas. I mean, in terms of way forward, I mean, the outlook remains unchanged. We do expect the transportation volume to go up, to increase clearly.
Yeah.
We expect the average freight rate to be comparable to last year. Again, this is based on the externally published numbers on a pro forma basis. That would mean that it's gonna be up somewhat. Bunker price increasing clearly in line with what we said earlier. The EBITDA, we still expect to increase clearly, and the same for the EBIT. If we look at our financial policy, we think that's also rather pretty much unchanged, profitability focus, of course, yeah, supported by approved fleet ownership structure and also the realization of the synergies. In terms of investments, yeah, we have no planned vessel investments at this point in time, yeah, as our objective is to maximize free cash flow to bring down the debt, yeah. The de-leveraging target remains unchanged. Yeah.
We will maintain an adequate liquidity reserve for the size of the company that we are. We are currently working on developing our midterm strategy to further strengthen our position in the market, and we intend to communicate more about that in the second half of 2018. I think that brings us to the introduction from our end, and we'll be happy to take any questions that you may have.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on your touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Andy Chu of Deutsche Bank. Please go ahead.
Oh, yeah. Good morning. Three questions, please, from me. Just in terms of the fuel issue, is it possible to sort of talk about sort of you mentioned a sort of mix of solutions. Is it possible to give us a sort of range or flavor of what CapEx and OpEx might look like to make you sort of fully compliant for the low sulfur regulations? First question. Second question, in terms of the mention of the sort of tough comp in terms of volumes and volumes picking up and a good start to Q2, could you just talk about what sort of volume growth you're seeing at the moment?
On the cost front, in terms of the unit cost reduction ex bunker, what should we be thinking about, please, sort of this year and medium term in terms of the ability to continue to reduce the unit costs? Thanks very much.
Okay. Maybe first one in terms of fuel regulations, I mean, if you want to make a calculation with ballpark figures, if you wanna convert a vessel to LNG, I think you have to assume a CapEx per vessel of between $20 million and $25 million. If you look at scrubbers, a little bit dependent on the size of the vessels, you know, in many cases will be looking at a number between $7 million and $10 million. Dependent on how many might qualify to be retrofitted to LNG or and how many might qualify to get scrubbers, you can calculate what the total is.
You also have to take into account that that's gonna be an investment or CapEx that will have to be spread over multiple years, but probably a little bit as from 2019, but the majority probably in 2020, 2021 and 2022. In terms of volume, I think what we see in Q2 is mid-single digits.
Yeah.
In terms of costs, going forward, there's various factors there. On the positive side, we have, of course, the synergies that are kicking in, but we also have to be a little bit realistic that there are also some factors that are pushing us in the other direction, where on the one hand we have the bunker price that Nicholas has already alluded to. We also see charter rates for vessels going up significantly in pretty much each and every category. We also have trucking costs going up in some markets where there is clearly a shortage, first and foremost, the U.S. Finally, you also have the exchange rate between the US dollar and the euro that has moved quite a bit.
If you compare the first quarter of 2017 with the first quarter of 2018, you have a move of about 15 cents, which has a material impact on our cost when measured in US dollars, because quite a lot of our costs, not only SG&A, but also, for example, terminal costs, are in euros. When you look at the development of costs, you clearly need to look at these factors, and that makes it a little bit difficult to put a percentage on there. Of course, our intention is to continue to try and become more efficient year-over-year. It's also pretty clear that there are some cost categories that are currently moving us in the same direction. That's also why I'm not gonna put a percentage on that at this point in time.
Thanks very much.
The next question comes from the line of Neil Glynn of Credit Suisse. Please go ahead.
Well, good morning. If I could ask three questions, please. The first one following on the cost side. The charter costs and bunker are obviously squeezing margins. Just interested in terms of how that may influence capacity decisions. I guess at this point, given your comments, you expect a decent peak season, but how do you think about the timing of capacity decisions if indeed rates don't follow charter and bunker fuel rates up? The second question, your other operating income, it was the highest since the second quarter of last year, the second highest since the fourth quarter of 2015. I'm just interested in the key driver there and any timing effects to be considered for the rest of the year. Then a final broader question.
In your slide, I think slide 8, plotting the supply growth equation for the next couple of years, I noticed that delayed deliveries or slippage in 2019 and 2020, they looked like the lowest numbers in recent years. Just interested in your take on the prospects of a positive surprise there to maybe balance with your conservatism on the volume outlook. Thank you.
Okay. Well, maybe I'll take questions 1 and 3, yeah, and ask Nicolás to comment on point 2. I mean, if you look at the first one, which was around capacity decisions and charter rates. I mean, normally you see that the charter rates are a little bit of a leading indicator of what's gonna happen in the market. So what you see is that the rising charter rates reflect, I think, a fairly decent level of confidence in the market that we will actually see a recovery in the second half, and as you said, a decent peak season. If that does not come, yeah, then you will start seeing adjustments, I think, already in the third quarter. Admittedly, that does not look so likely at this point in time.
In terms of supply growth, you know, I think your observation in and of itself is correct, yeah. Looking at what we expect as deliveries in 2019 and 2020, I also think that there is not gonna be that much slippage because capacity could be quite tight if demand continues to grow at the pace that we see at this point in time.
In other operating income, the answer to that is basically exchange rates gains. Even though the net effect of the appreciation of the euro is negative because we have more costs in euros than revenue in euros, we accrue for the effect in a separate manner. All the incomes or the gains in other operating income and all the expenses and the losses in other operating losses. That's the reason why we have a significant chunk of other operating income because of, also because of the fact that the company is bigger, but also we have some income or revenue in euro, and that's the reason why we have a positive number there.
Understood. Thanks, Nicholas. I had actually looked at other operating income minus other OpEx, and that's also similarly high. It's highest in second quarter of 2017 and the second highest in second quarter of 2015. Certainly there's nothing else to consider in that equation.
No, nothing else.
Okay. Thank you.
The next question comes from the line of Robert Joynson of Exane BNP Paribas. Please go ahead.
Good morning, everybody. Three questions from me, please. First of all, if I look at the chartered capacity, I see there's been a material increase in the size of Hapag's chartered fleet since the end of Q1. I think it's up by about 18% between the end of March and the middle of May. Could you just provide some color on where those ships have been deployed? Also whether you'd expect the higher chartering cost that will come from those additional ships to be fully compensated by higher volume in Q2. I.e., could utilization rates be temporarily squeezed downwards because of the higher chartered capacity? That's question one.
Question two, just on the transpacific, obviously we're at the time of the year where the contracts have mainly been concluded, I think, now. Maybe if you'd give an update on what you've seen on Transpacific contract rates. The third question on synergies. My previous understanding was that 30% of the synergies have been realized by the end of 2017, but slide four suggested it is now around about 50% have been realized by the end of 2017. Was I mistaken on the 30%, or has something changed in the calculations there? Thank you.
Thank you. Let me try and answer those. I mean, in terms of capacity, I think, you know, we've seen a bit of an uptick in the number of charter vessels. But frankly speaking, in the first quarter, also because of Chinese New Year, it's seasonally down typically a bit. If you compare it to the end of last year, there's actually not a big increase in the number of charter vessels. The percentages are a lot lower. I think the only specific thing which has changed in terms of a new service as from the first of April, where we phased in a few charter vessels, smaller ones admittedly, is into East Africa.
In terms of the Transpacific, you are right that we are in the process of concluding that tendering season. I think we signed up the volumes that we wanted to sign up. In terms of the rates, there's still quite a lot that needs to be finalized. I would say that on the West Coast, we have seen rates, you know, the tendency being them a little bit up compared to last year. On the East Coast, we still have a lot of open issues at this point in time, so a little bit early to say that.
In terms of the synergies, we said we realized 30% in the calendar year 2017, but admittedly, a big chunk of that, or pretty much all of that, was realized in the second half year, and that's where I think the confusion potentially comes from. Because the run rate in the second half year was up to 60%, and then that's why we're now gonna increase that further in the course of 2018, and that's why we're gonna get up to 90% in 2018.
Got it. Okay, thank you.
The next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead.
Yes, coming back to this, sulfur regulation, and then you mentioned what the average CapEx would be for updating your ships. How should we think about CapEx, the CapEx holiday that you've been talking about? Should we sort of pencil in significant CapEx hikes in 2021 and 2022, and then a slower or a holiday again by 2023 and forward versus the CapEx levels where we are today, or how should we think about that? Secondly, it seems like, at least initially, it has to be the low sulfur fuel that you have to use, and your competitors as well. That will obviously bring up the fuel cost quite a lot.
Do you think there will be a significant chunk of slow steaming happening again, or are we already running at a very slow rate, so that will not have a significant impact as we face these higher fuel costs, 2020, potentially? Thank you.
Well, I mean, maybe first about the CapEx. I mean, we've always said that after 2019, our CapEx will most likely get back to a level which is round about depreciation. I think that's still our guidance today. A chunk of that will likely be related to these fuel regulations. Whether we have to do more than that remains to be seen. I don't think you should assume a CapEx holiday beyond 2022, though.
Yeah.
I n terms of the increased fuel cost, well, I think first effect of that will be is that it will have to be passed on to the customer. Yeah, because the increase in the fuel cost will be so significant that it is simply not possible for anyone to absorb that.
We will just have to pass that on to the customer, who will most likely also understand that. Yeah. Also reflecting a little bit on the discussions that we've had with customers so far, that will result in an adjustment most likely of most of the bunker factors. Whether it will result in more slow steaming, I personally do not think so.
Yeah.
One can never rule that out. I mean, most of the ships today are technically performing at their best at the existing speeds, and going much slower would not yield a very material saving in bunker fuel, and it would also require more capacity. I personally don't think that is likely.
Okay, thank you.
The next question comes from the line of Joel Spångberg of Berenberg. Please go ahead.
Yeah. Good morning. I've got three. I just if I could start maybe just to understand in terms of this year's CapEx, where you now expect that to come out, is it reasonable to sort of take the EUR 100 odd million you had in the first quarter and multiply by 4? So if you could just clarify that, it'd be helpful. My second comment was just on the volume growth that you reported in Latin America. Just interested if you could give us a bit of flavor on what you think is happening on that trade at the moment, whether or not that volume growth has been as a result of the Hamburg Süd Maersk merger and you picking up volumes as a result of that.
My third question is just sort of thinking longer term about supply and demand. Obviously, you've got demand growth outstripping supply in 2019, probably into 2020. Given the you know, the window that's required to order new vessels, it sort of feels likely that we'll see a pickup in ordering activity over the next sort of 6 to 12 months
Is it fair to say that you're willing to sacrifice market share in order to focus on delivering the balance sheet over the couple of years? At what point do you think that equation changes, and you have to start thinking about how to add additional capacity?
Maybe take them one by one. In terms of CapEx, we've always guided EUR 400 million-EUR 450 million. There's no reason to change that guidance for this year. That's roughly in line with the, you know, what we saw in the first quarter. In terms of Latin America trades, I mean, you always, when you cut off the quarter, you always have some peaks and troughs and some things that look a little bit more than average and some that look a little bit less than average. In general, we're also growing in line with the market into Latin America, yeah, if we look at the first five or six months. In terms of supply and demand, our intention is definitely to continue to grow with the market. Yeah.
We think we can still sweat our assets as we have them today, a little bit more. We also could go to the chartering market if and when that would be required. If that, at some point in time, is no longer enough, then we will have to reconsider whether we want to put in orders, but that is not on the table at this point in time.
Okay. Thank you.
The next question comes from the line of Alexia Dogani of J.P. Morgan. Please go ahead.
Hi. Thanks very much for taking my questions. I wondered if you could expand a little bit on some of the outlook comments that you've given. You said that the industry market conditions are challenging at the moment, but your underlying freight rates in the first quarter were up 7%, you said, and you're pointing to an improvement in the second half. I just wanted to kinda reconcile. Are you implying that the second quarter will be a particularly tough quarter for the rates and margin environment? Or am I kind of overreading into this? Are you simply referring to the cost pressures there? And then somewhat related to that, just be interested to hear a little more on your thoughts on the move up we've seen in spot rate indicators in the past couple of weeks.
Do you think that this move upwards can be sustained? Finally from me, you mentioned that the Transpacific rates agreed so far have been a little bit higher. Has that been sufficient to cover your higher bunker costs there? That would be great. Thank you.
Yeah. Let me try and take them one by one. In terms of the outlook, I think your interpretation is not incorrect. I mean, we've seen quite a lot of pressure on spot rates between Chinese New Year and you know, as you rightly pointed out some weeks ago. Of course, as we record our results on an end-of-voyage basis, that's pretty much the period that we expect to deliver the rate, the goods in the second quarter. Yes, I think you're right. I mean, I think the second quarter is not gonna be easy. Yeah. I think the outlook for Q3 and Q4 are materially better. In terms of spot rates, I think you are right, is that there's been an encouraging trend over the last few weeks.
Yeah.
We also see that utilizations are high. That is certainly an encouraging sign if you look ahead into the second half of the year. As we all know, this is probably the period of the year where there's usually more uncertainty than normal. As you point out, encouraging signs the last two, three weeks. In terms of Transpacific, it's too early to say whether the uptick in rates that we've particularly seen on the West Coast, whether that's enough to cover the bunker cost, because we haven't wrapped up the contract season fully.
Thanks very much.
The next question comes from the line of Adrian Pehl of Commerzbank. Please go ahead.
Yes. Hi, everybody. Two questions left from my side. First of all, coming back to costs or unit costs, if you want. So I saw that as a component of your total transportation costs, the container transport costs in particular per TEU were down quite nicely. In the conference call, you mentioned again that obviously trucking expenses have gone up. So I was just wondering whether you could give us some additional information here. What were the driving forces? Secondly, coming back to the trades a little bit, somewhat linking to the question that has been asked on Latin America, with volumes being strongly up, but also the freight rate was up quite substantially versus you know the trend that we saw last year.
I was just wondering whether there's any change of competitive dynamics or any particular impacts on Hapag-Lloyd. Having said this, I found at least a little bit, I mean, momentum seems to be improving in terms of growth rates, but Transatlantic rate below $1,300 looked a bit low given that volume was also quite solid. Maybe the same question here, whether or not there were any kind of changes in competition. Thank you.
Okay. Thank you. I think in terms of the unit cost, to be honest, for a more detailed explanation, we'd have to revert to you separately. I mean, if we look at the quarter-on-quarter developments from Q4 to Q1, it's actually fairly stable.
Right.
The drop that you refer to is very much compared to Q1, where we were still looking at Hapag-Lloyd on a standalone basis. I would suggest that we follow up with you on that separately. I suspect it has to do with a change in composition of the business post-merger. In terms of trades, when you mentioned Latin America, yes, we've seen good volume growth there. Rates year-on-year were good, but we've clearly seen rates being under pressure in especially the West Coast of South America over the last, say, 8-10 weeks. So that's not automatically gonna continue. On the Atlantic, we've actually seen a fairly normal development that we have not seen any massive changes there. So nothing extraordinary there to report.
Also there, when you compare to the 2017 figures, yeah, you have a little bit this effect of the UASC business being added in there.
Right. Thank you.
The next question comes from the line of Christian Kohl of Warburg Research. Please go ahead.
Yes, good morning. Thanks for taking my questions. On the idle fleet, you mentioned that the charter market is a good indicator of confidence, but maybe put it the other way around. I usually expected, or I originally expected that the idle fleet would go up massively on the back of new builds entering the market, and now the idle fleet remains at low levels. Isn't that a risk that we see quite massive capacity upgrades with owned and chartered vessels in the market that could prove to be too ambitious? Would you agree on that one? Secondly, in light of the rise in bunker costs, when do you expect that you can implement additional surcharges to cover for these?
Lastly, your alliance partner, the so-called ONE Network is, I think, facing some teething issues with regards to booking systems, et cetera. Does this also have some negative impact on you as an alliance partner for these?
Okay. Maybe try and take the one on idle fleet first. I mean, of course you are right that if new supply comes in, then that always has an impact if the idle fleet does not go up, that is potentially a risk. I would say, though, that we've also seen strong demand growth and the fact that spot rates have actually been going up over the last three weeks or so, and they seem to hold, seems to indicate that the risk that you're referring to is not kicking in, at least not to the order of magnitude that could be seen in a worst-case scenario. I think that has actually been probably a little bit better than I expected.
In terms of bunker costs, that typically takes us 1-2 quarters before you see that reflected in the rates. You have an increase in the bunker in Q1, and you see also a further increase potentially in the bunker in Q2, and then you'll see that it takes us 1-2 quarters to pass that on. I think to your last point, I mean, we have not seen any operational impact from the startup of ONE, yeah, on our business.
Okay. That's clear. Thank you.
Next question comes from the line of Frans Høyer of Jyske Bank. Please go ahead.
Thanks very much. I was wondering if you could rank the different categories of vessels in terms of cost efficiency. I'm thinking about new build LNGs that have been converted, and those fitted with scrubbers, and those opting for compliant fuel. How do these four categories compare? It's probably a bit early days to be very firm on it, but some thoughts on that, please.
Yeah. I mean, I think as you rightfully point out, I mean, that is really too early to say. The challenge we have in this whole, in the current environment is that there's a lot of things that are unclear. Yeah. It's a little bit unclear what exactly the consumption will be of LNG vessels. That's only calculated in theory. It's unclear what the exact delivered price will be of LNG, and it's also unclear what will be the spread between high sulfur and low sulfur fuel. Those will determine very much on which vessels are going to be, you know, the most efficient.
I think it's fair to say that both LNG powered vessels as well as vessels that are operating with scrubbers should have lower operating costs than those that are going to have compliant fuel. You have to also put some CapEx against that. There's not much more that we can say about that. Unfortunately, at this point in time, we would also like to have that cleared up. Because that would make it easier for us to make the right investment decisions. As you rightly point out, I mean, not much to be said about that yet at this point in time.
A little extra one then. To order a new build with LNG engine, is that going to be more expensive than ordering a vessel with a traditional engine?
The answer is yes.
Yeah.
Okay. Thanks very much.
Next question comes from the line of Piotr Ossowicz of Ironshield Capital. Please go ahead.
Good morning, and thank you for taking my questions. First maybe starting with the disparity between the movement in the freight rates and the time charter rates. You mentioned that the TC rates that normally precedes the movement in the freight rates. We have really seen them going into two opposite directions over the past few months. Could you please provide some color on what are your views why this is happening and why would that change?
Yeah. I mean, I think as I said, you know, the time charter tends to be a bit of a leading indicator. That means it goes, you see it earlier than what really happens on the freight rate. I mean, I think the fact that you see that those rates are going up, I mean, they've been going up for a couple of months now, and we see now spot rates picking up in the last couple of weeks. So I think that underlines that trend. Another data point there, I would say, are the rates that we have seen for Asia/Europe, which is a contract season that has clearly been concluded.
We've seen that on average, the contract rates for Asia/Europe will close well above the spot rate, and also above last year, which also signals that the market believes that when you look at the whole calendar year, 2018, the average rate will actually be higher than what we have seen in 2017. It's always a little bit looking into a crystal ball, admittedly. Again, we can only give you the picture of what we see in the market, and what you typically see as trends. Those seem to paint a fairly consistent pattern. Of course, you know, the proof of the pudding will be in the eating in the second half of 2018.
Going up a bit on this answer. When I look at the spot rate, it actually improved quite materially early in the year. There was some, again, very material drop to the levels we haven't seen for two years. Now they start to improve a little bit. Over the same period, the time charter rates have been fairly steadily increasing. I don't know, maybe this is just the volatility of the spot rate, and you see a different picture in the contract rate. I mean, this is the picture that we see.
Yeah. I think it's fair. I mean, the spot rates of course are more volatile, yeah, almost by definition. That's, I think, why I also try to add in the perspective on what happened on contract rates. Yeah. Where if you look at the trades that have been concluded, Asia/Europe, yeah, there the contract rates were up, yeah, compared to what we saw last year, which reflects more confidence in the market. We've seen that in a few other trades as well. For the TP, it's still too early to say.
Okay, understood. Moving on the TC rates, to what extent have you already been affected by higher time charter rate? And when we think about the leased fleet, to what extent is your fleet now below the market and to what extent it is above the market? Is there more upside or downside from the tightening TC rates for you?
I mean, of course, everybody gets affected by the TC rates when you have to renew charters. We typically go predominantly short, yeah. That means less than 12 months, and that means that we now steadily start incurring higher TC costs, yeah, as time moves on. As our time charter percentage is relatively low compared to others, I still think that the impact that that has on us is probably less than average.
Okay. Lastly, you also talked a bit about new capacity potentially changing the supply demand balance. What freight rates do you think are required on a stable basis, broadly speaking, to incentivize people to go out and order new ships?
I mean, that's impossible to say because that depends on so many factors, and I really cannot say that. Yeah. I mean, that's a very hypothetical question. I would also say that having stable freight rates is also something which we have not seen for a very, very long time. That means that people will always have to base their investment decisions on the midterm confidence that they actually have, yeah, in where the market will go.
Have you seen any changes in the capacity ordering behavior over the last couple of months?
No, not really. We've seen a number of orders coming in since autumn last year. Yeah. As we said earlier, the order book today is still certainly not on the high side. I believe many people are today, like we are, studying what the actual impact of the new fuel regulations is and what does that mean for new ships. Based on that, people will make their judgment in terms of what will need to be done going forward.
Okay. Just to be clear, you have seen some increase in the orders, but you're not seeing this getting out of hand and spiraling into the ordering trends that we have seen in the previous cycle.
I mean, I don't think that when you look at the order book. The order book in and of itself has been at a reasonable level already for quite some time. We have seen some orders over the last 8-9 months, but we're still only at 13%, which is nowhere near to what we had 10 years ago when we were even above 50.
Okay. Thank you.
Thank you.
The next question comes from the line of Adil Taleb of Deutsche Bank. Please go ahead.
Hi, guys. I just wanna clarify the current dynamics on the transpacific negotiation rates. You mentioned at the end for the volumes you guys were advanced in terms of negotiating them, but there was still room for negotiation on the rates. You mentioned that there was kind of a disparity between the West Coast and the East Coast, with the rates being slightly up year-on-year on the West Coast, but it was difficult to get an idea on the East Coast. Can you clarify why there is such disparity in terms of negotiation and why also did the timing for negotiation dragged this year on Transpacific?
Well, I mean, the negotiations in the Transpacific tend to drag on almost every year, and then we say that it's typically late. I was just trying to give you a bit of a flavor where we see that on the West Coast rates seem to be up a bit. On the East Coast, that seems to be less the case for now. The season is not yet concluded. I would also add, you know, that you need to be cautious drawing too many conclusions from this because we are a rather small player, particularly on the West Coast. As such, you know, what we see may not be entirely representative of what you see in the market. I just don't know that.
Okay. Thank you.
This was the last question today. Please direct any further questions to the investor relations team. I hand the conference call back to Rolf Habben Jansen for closing remarks.
Okay. Well, not much to add from our side. Thank you very much for joining and thank you very much for your questions and we'll speak again soon. Thank you.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.