UPS Margins Head Down on Fuel, China Tariff Risks The Next Headwind — Panjiva
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UPS Margins Head Down on Fuel, China Tariff Risks The Next Headwind

Corp - Forwarders 157 Earnings 365 Global 722 Mode - Containerized 1005 Mode - Seaborne 1273 Theme - Rates 141

Third-party logistics operator (3PL) UPS reported third quarter revenues that expanded by 9.2% on a year earlier. That was driven by a 16.6% surge in forwarding revenues and 11.4% in freight handling in the supply chain business. The traditional packages business meanwhile saw a more modest 2.7% growth in volumes but was helped by a 4.0% rise in average revenues per parcel.

UPS CONTINUING TO ENSURE REVENUES HEAD UP

Chart compares UPS reported revenues to the top 12 freight forwarders*. Calculations include S&P Global Market Intelligence figures retrieved on October 23 2018.   Source: Panjiva

EBITDA margin of 13.5% was well below the 14.3% expected by analysts surveyed by S&P Global Market Intelligence. That was likely due in large part to a 1.4% point drop in profit margins in the international business due to “unforeseen currency and fuel headwinds”.

The rising fuel costs can be seen in a 43.1% rise in average bunker fuel costs for marine shipping in the third quarter vs. a year earlier and by 5.7% vs. the second quarter, S&P Global Platts data shows. In turn that has also caused a headache for container-lines as outlined in Panjiva research of October which led to a series of bunker-fuel surcharges and a 7.5% rise in container rates in the third quarter vs. the second quarter.

RISING FUEL AND CONTAINER COSTS FACED BY FORWARDERS

Chart compares China-outbound container rates to bunker fuel costs. Calculations include S&P Global Platts and Shanghai Shipping Exchange data.   Source: Panjiva

The increase in costs left the EBITDA margin below the 16.3% level seen a year earlier and at its lowest since at least 2013. That’s consistent with the pattern seen by both Fedex and K+N. It supports UPS’s push for a new round of efficiency improvements and technology investments.

STEADY SLIDE IN UPS MARGINS SHARED BY PEERS

Chart compares UPS EBITDA margin (earnings before interest, tax, depreciation and amortization vs. revenues) to the top 12 freight forwarders*. Calculations include S&P Global Market Intelligence figures retrieved on Oct. 23 2018.   Source: Panjiva

That bigger challenge will come from the expansion of tariffs on bilateral trade worth $360 billion between the U.S. and China. These were implemented fully on September 24 with rates set to be increased from January.

UPS had already seen a decline in its share of U.S.-inbound seaborne shipments, Panjiva data shows, after a 9.3% drop vs. a 4.0% increase for the industry as a whole in the third quarter.  With 60.9% of UPS’s U.S.-inbound seaborne traffic having originated in China in the third quarter the risks from tariff-led competition are particularly high.

UPS’ U.S. VOLUMES IN DECLINE

Chart segments U.S. seaborne shipments in the period to Sept. 30 2018 by NVOCC SCAC. Bubble size indicates volumes handled in the past three months.   Source: Panjiva

*Forwarders included in aggregates include: Ceva Logistics, CH Robinson, DSV, Expeditors International, K+N, Nippon Express, Palapina, UPS, Fedex, Deutche Post, JB Hunt and XPO Logistics.

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