Strategic risks

The continuing growth in ship dimensions also impacts the competitiveness of HHLA and Hamburg as a port location. The expansion of regional transport and hinterland infrastructure is therefore essential.

The dredging of the Elbe’s shipping channel to allow for a salt-water draught of 13.50 m throughout, and 14.50 m depending on the tides, is of considerable significance. The German Federal Ministry of Transport and the Hamburg Ministry for Economic and Labour Affairs expect the work to start in late 2011, assuming the necessary planning permission has been granted by then. Radical improvements for tidal shipping should start to emerge around nine months after construction work has begun. It would therefore be feasible to complete the project by 2013.

For the Port of Hamburg, the deepening of the waterway is a vital prerequisite for maintaining and extending its position as a key hub for international container traffi c in future. Delays in carrying out the work may mean that shipping companies increasingly look to other handling sites with better nautical access when planning their liner services. As a consequence, developments in freight traffi c might bypass the Port of Hamburg in the long run. These factors put a strain on HHLA’s business development, and depending on the further course of proceedings and the reactions of shipping companies, could severely impact the Group’s assets, fi nancial and earnings position.

As well as dredging the shipping channel, the regional road and rail infrastructure must be modernized and expanded if the Port of Hamburg wants to remain competitive and optimize its processes for the inbound and outbound flows of goods in its hinterland. Projects of this kind with special signifi cance for business at the port include constructing the transversal port motorway (A 252), establishing a high-speed rail link between Hannover and Hamburg/Bremen, and upgrading the Kiel Canal. HHLA is confi dent that the relevant political decision-makers will continue to press for the completion of these infrastructure projects. HHLA is attempting to prevent any further delay by making sure that HHLA’s interests are represented on the appropriate committees, as well as by means of lobbying and active public relations activities.

Market risks

Stable and ongoing economic growth in HHLA’s target markets is crucial for the further development of container handling, transport volumes and logistics services. Leading economic researchers and institutes expect global economic growth in 2011 to be slightly weaker than in 2010, but to remain stable.

However, a number of different macroeconomic risks may jeopardize further economic developments. There is still risk potential associated with the financial markets. The countries affected by the European debt crisis have now initiated measures to consolidate their budgets, and the countries’ further refinancing seems to have been safeguarded by bonds – some with high risk premiums – and rescue packages at EU level. Nevertheless, there are still risks inherent in banks’ balance sheets. The subprime crisis showed what effects turmoil on the fi nancial markets can have on the real markets and therefore on world trade.

Experts believe that prices for commodities such as oil, copper and rare earths, which are sensitive to cyclical trends, will climb further in 2011 following the recent sharp rises. This could have a negative impact on the global economic recovery.

Protectionist moves by various countries to keep their currency artifi cially low by means of monetary policy, therefore boosting their own competitiveness, could lead to retaliatory trade sanctions from other countries, such as compensatory tariffs, which might hamper world trade. 

China’s central bank has increased its base rate twice since October in an attempt to rein in inflation. The markets are therefore worried that further increases could slow China’s economic growth and thus hamper world trade.

The euro zone and its export industries have recently benefitted hugely from the low euro exchange rate. Should the euro start to recover, this could dampen economic developments. For the reasons listed above, there is still a
serious risk of the global economy suffering a setback. Consequently, there is also a risk that HHLA may not achieve its planned figures for container throughput, transport volumes or logistics services.

Terminal operators in the Hamburg-Antwerp range are gradually bringing the expansion of their handling capacities to a close. Due to the economic crisis, the supply of container throughput capacity still far outstrips demand. Drewry and Bremen’s Institute of Shipping Economics and Logistics (ISL) anticipate an underutilization of capacities in Northern Europe over the coming years. A surplus of this kind will lead to even greater competition.

Similar to the Container segment, the Intermodal segment may experience restrained growth in demand for container transport. This may lead to an underutilization of traction systems and hinterland terminals. Generally, underutilization entails the risk that it might not be possible to compensate fully for negative divergences in earnings because of insuffi cient fl exibility on the cost side. HHLA counters this risk by diversifying its customer base and concluding medium-term contracts of varying duration. The contracts governing the purchasing of traction services contain flexible components which permit the company to respond to market fluctuations and seasonal deviations.

The Intermodal companies are exposed to noticeably more intense competition from competing rail operators as well as from trucks and feeder ships as carriers. The market entry of new competitors with aggressive pricing policies, particularly in Eastern Europe, poses the risk that market share will shift to the detriment of rail operators in which HHLA has interests.

Some of the Group companies generate a large percentage of their revenue with a small number of customers. If one of these clients were to switch to a different service provider, it would have a sizeable impact on earnings at the company in question.

HHLA works with almost all the major global shipping companies in container traffic. For some years now, the industry has been undergoing a process of consolidation. Mergers and alliances among terminal operators, as well as between terminal operators and shipping companies, may result in a change in the volume and pricing structure currently in place between handlers.

In order to confront these market risks, HHLA takes specific steps to reinforce customer loyalty and develop unique selling points in all its segments. The Group also makes use of its flexibility in cost and capacity management. HHLA’s strategy is to adapt its investments in the expansion of container terminals as flexibly as possible to foreseeable demand. Throughput and transport volumes in the affected markets are monitored together with the throughput volumes and service structure of each client, so that any negative developments can be recognized at an early stage. The network is also used to anticipate developments of relevance to the competitive situation.

A limited number of companies supply equipment and systems for container handling. This could lead to bottlenecks in the procurement of replacement parts and changes to purchasing agreements as a result of the low number of market participants. HHLA monitors the market in order to fi nd procurement alternatives and diversifi es its purchasing activities where necessary.

HHLA also works closely with strategic suppliers in a spirit of partnership. In coordination with HHLA’s departments and affi liates, relevant consolidation processes in the procurement markets are also carefully monitored and taken into account when awarding contracts, particularly when it comes to handling equipment. HHLA also continually tracks its suppliers’ credit ratings by means of a monitoring system.

The HHLA companies operating in the Intermodal segment purchase significant traction, carriage and network services from the respective public rail operators. This leads to a certain amount of dependence on one, or a small number of, service providers. In order to minimize this dependence, the Intermodal companies maintain regular contact with the public rail operators, some of which are HHLA shareholders. The Intermodal companies take specific precautionary steps to reinforce customer loyalty and develop unique selling points. All rail operators are constantly exposed to the risk of the public rail operators charging excessive usage fees.

The failure of central technical equipment can restrict the ability of equipment-based companies to provide services. Depending on the duration of the downtime, unavailable equipment can lead to decreased revenue and an increase in the costs involved in providing services. Preventative maintenance, contingency plans/repair services and redundant equipment, such as computing centres and transformer stations, reduce the risk considerably. HHLA’s affiliates carry out regular inspections and tests to identify possible faults before they happen.

Financial risks

Liquidity risks in fi nancial management are limited by, among other things, HHLA’s centralized responsibility for fi nancing its affi liates. Financing of the direct equity holdings where HHLA exercises operational control is safeguarded, controlled and monitored by HHLA by means of a cash pooling arrangement. Liquidity at the other Group equity holdings is ensured by,  for example, including them in the Group’s clearing system, arranging for their own credit lines or giving them access to those of HHLA.

As a result of borrowing, certain affi liates have covenants linked to key balance sheet figures. Violating these covenants would authorize the lender to demand additional collateral, a change in conditions or the repayment of the loan. In order to prevent such steps, HHLA constantly monitors compliance with the covenants and, where required, implements measures to ensure that all conditions of the loan are met. As of 31 December 2010, the relevant total borrowings came to € 81 million. The covenants were met at all agreed audit points throughout the reporting year.

When investing liquid funds, generally in the form of call money or term deposits, HHLA currently restricts itself to investments with domestic financial institutions which are fully secured by a deposit protection fund or comparable arrangement. Since HHLA only enters into transactions with institutions boasting a very high credit rating, and the fi nancial sector is currently being fortified by government measures, the risk of default can be regarded as low.

Changes in interest levels over the long term may alter the necessary pension provisions. A fall in long-term interest levels increases the fair value of the pension obligations. HHLA monitors interest trends so that it can adjust its provisions as necessary.

The HHLA Group uses derivative fi nancial instruments to reduce interest rate risks and, to a lesser extent the exchange rate and commodity price risks. Interest rate risks are largely hedged by interest rate derivatives and by fixed-interest agreements. No speculative hedging transactions are conducted. The theoretical default risk in the case of derivative fi nancial instruments is that of counterparty default and is therefore equivalent to the carrying amounts of the individual financial instruments. The risk of default can be regarded as minimal, as the HHLA Group only conducts derivative fi nancial transactions with counterparties boasting very good credit ratings (see also Notes, Note 46).

The bulk of HHLA’s services are rendered within the euro zone, meaning that the majority of its invoices are issued in euros. Even the Group’s Eastern European affi liates invoice mainly in euros, or based on euros or US dollars. Currency or transfer risks therefore result primarily from exchange rate fluctuations affecting Eastern European currencies.

In order to reduce the risks associated with exchange rate fluctuations, the affiliates strive to use the relevant functional currency for invoicing, loans and payments. Should currencies fluctuate, this minimizes the overall impact of individual contrary effects. All HHLA companies that operate with foreign currencies reduce the risk of exchange rate fluctuations by monitoring rates regularly and, where necessary, transferring free liquidity in local currency to accounts with hard currency. The holding company also constantly tracks those currencies of relevance to the Group. If there are indications that currencies will fl uctuate, suitable countermeasures are promptly discussed with the units affected.

Growth rates in the global container transport industry have reduced the probability of client bankruptcies compared with the previous year. Nevertheless, some degree of risk remains due to lower freight rates and new ship orders. 

In addition to the loss of any outstanding accounts receivable, the insolvency of one of HHLA’s shipping clients could lead to freight volumes being taken on by shipping companies which are not clients of HHLA. As the HHLA Group’s customers are international, the Group must adapt its payment transactions to prevailing global practice. For the HHLA Group, this means granting its customers trade credit during the course of its commercial relationships. HHLA uses credit checks to reduce del credere collection risks.

To reduce the risk of default, HHLA operates an active receivables management system that enables outstanding accounts to be monitored with precision. HHLA has also taken out loan loss insurance to minimize default risks.

Economic developments at certain affi liates remain difficult. This could make it necessary to write down the carrying amount of holdings and/or set aside provisions for impending losses. It may also prove necessary to assume losses. HHLA checks the value of its equity holdings regularly and makes adjustments where necessary.

Change in the legal environment

The rendering of port services has long been a focal point of legislative considerations at EU level. The EU’s deliberations so far have aimed at opening up the market for port services and establishing a valid EU-wide legal framework for their rendering. As part of a public consultation process in 2010, the European Commission launched an investigation into the need for an initiative to adjust the valid legal framework for licences and the effects of such an initiative. Although the consultation process essentially covered all licences, it focussed specifically on port operations.

Effective as of 1 July 2010, the sulphur limits for ocean-going vessels in the North Sea and the Baltic Sea were reduced from 1.5 % to 1.0 %. The limit is to be lowered further, to 0.1 %, from 2015. As of 2012, the international limit will be cut from its current 4.5 % to 3.5 %, with a further reduction to 0.5 % starting in 2020. As the stricter limits in the North Sea and the Baltic Sea make transportation costlier, there is a risk of traffic shifting and competition being distorted. 

Staff risks

HHLA’s ability to operate relies to a large degree on the skills of its staff. For this reason, the HHLA Group is exposed to individual risks resulting from the age distribution of its workforce, a shortage of staff with the necessary qualifications and training, and fl uctuation among key personnel. In order to minimize such risks, staff selection, recruitment and development are carried out centrally by HHLA Holding in coordination with the subsidiaries and associated companies using standardized processes and procedures. Furthermore, expertise is systematically shared among staff and substitution procedures have been put in place. Staff appraisals are also conducted on a regular basis to retain employees on a long-term basis. A standardized procedure is used to assess managers and help them to develop. This procedure allows HHLA to recognize potential and safeguard succession plans.

Staff risks also include the possibility of fraudulent acts and, at a more general level, employees violating the law during their work. To reduce these risks, HHLA has introduced guidelines, manuals and double-checking, embedded controls in its processes and established spot checks. Furthermore, the Group has issued a code of conduct which applies to all HHLA managers and staff. Training sessions are held regularly on the contents of the code of conduct. New employees and apprentices also receive training on the code. Regular induction and training sessions focusing on special issues are also held for relevant groups of staff. These cover topics such as occupational health and safety, environmental protection, conduct in the competitive environment, preventing corruption and insider trading rules.

IT risks

As part of the expansion of terminal capacity, major investments were made in hardware and software components. Ever-greater process automation, increasing integration of customers and service providers into organizational processes and the consequent growth of data transfer mean that the availability of IT systems is becoming increasingly important. Redundant copies of key IT components such as computing centres, computer networks and telecommunications systems substantially reduce the probability of downtime.

IT security and SAP authorization guidelines define the responsible operation of IT systems and serve to prevent IT security violations.

Other risks

All of the handling sites within the HHLA Group offer ships and port facilities maximum protection against potential terrorist attacks. The requirements of the International Ship and Port Facility Security Code (ISPS Code), which took effect in 2004, are met in full.

Generally speaking, the competent authorities worldwide are looking to tighten the security guidelines in maritime transport even further. These measures would lead to additional costs which it may not be possible to fully recoup, or which cannot be passed on due to the competitive situation. HHLA makes its position clear by means of lobbying and public relations work.

Increases in rents in the years ahead are expected as a result of contractual step-up clauses in leases for quays and other areas. Planning authorities may require supplementary conditions to be fulfi lled when granting permission for container terminal capacities to be expanded. These conditions can relate in particular to environmental and emission protection measures. There is also a general risk of further legal obligations if the project turns out to have any unforeseen negative consequences.

As a result of the existing structural situation and the fact that HHLA’s port facilities and buildings operate close to water, a risk of storm fl ooding must be assumed. Flood protection work undertaken by HHLA and the Free and Hanseatic City of Hamburg in recent years has reduced this risk considerably, however. Should this risk ever become reality, comprehensive emergency programmes have been put in place by public authorities and companies operating in the port to minimize the potential damage. Additionally, anticipated third-party claims for damage to property are insured against.

The HHLA Group companies are active in Central and Eastern Europe via terminals operated there. The general environment in some parts of these countries is different from that in Western Europe, with little political, economic and legal stability. As a result, the HHLA Group is exposed to a number of factors which it cannot infl uence directly and which could have an impact on its commercial activities in these countries. In particular, it cannot be ruled out that for political or legal reasons, HHLA may not receive all or some of the profits it generates.

Above and beyond the risks mentioned, no further significant risks have currently been identified, while those that do exist are largely insured against.