Maritime Shipping Sector Update

Stephen DeAngelis

March 6, 2012

Last May, AP Møller-Maersk, operator of the world’s biggest container ship fleet, “warned rates would remain ‘under pressure’ in the short term.” Nevertheless, Maersk was hopeful about the rest of the year, asserting, “Container shipping profits would be ‘satisfactory’ but short of the $2.6bn net profit for 2010.” [“Maersk warns of short-term ‘pressure’,” by Robert Wright, Financial Times, 11 May 2011] In his article, Wright noted, “Container shipping is highly sensitive to world manufacturing and consumer demand because the ships carry most of the finished and semi-finished goods vital to those sectors. It is also heavily affected by the balance between ship availability and demand.” As discussed below, Maersk’s modest optimism didn’t prove accurate.

About the same time Maersk was expressing guarded optimism about the container business, Chris Jacob Abraham, a senior consultant for IBM, was analyzing the Baltic Dry Index, a daily average of prices to ship raw materials, and concluded that there was “a great likelihood that the Great Recession from 2009 [would] resume with all its consequent effects.” [“Ready for a recession?,” @ Supply Chain Management, 31 May 2011] Although the recession didn’t resume, the consequences of a very slow recovery were felt throughout the maritime shipping industry. By August of last year, it was clear that things weren’t going well. Maersk’s chief executive, Nils Andersen, announced “a slump in profits from the business for the first half of [the] year.” [“Maersk chief ‘not gloomy’ after container earnings fall,” by Robert Wright, Financial Times, 17 August 2011] Wright continued:

“Mr Andersen said, however, that container volumes were continuing to grow, in contrast to 2009, when volumes fell 10 per cent. Maersk Line’s container volumes grew 6 per cent over the first half of 2010, to 3.8m forty-foot equivalent units (FEUs). ‘We don’t see any sign of its slowing down,’ Mr Andersen said. ‘I’m not gloomy at all – we’re in a growth market. We have a temporary problem with overcapacity. But, in the longer term, this is still a good market.’ Mr Andersen accepted that earnings per container – which fell 3 per cent in the first half – would remain under pressure in the immediate future. He attributed the fall to the nervousness of many owners of new, large ships about filling the vessels.”

By November of last year, Maersk had made a number of changes to the way it did business, but it nevertheless posted a third quarter loss. [“Maersk Cuts Forecast, Warns of Overcapacity,” by Flemming Emil Hansen, Wall Street Journal, 9 November 2011] The company also warned “of industrywide overcapacity for the next couple of years.” Writing about the operational changes that Maersk had made, Bob Ferrari noted, “To respond to a groundswell of shipper concerns, Maersk launched a customer-focused innovation program in October.” [“Maersk’s Initiatives Shake-Up Ocean Container Shipping Carriers: That is Good News,” Supply Chain Matters, 11 November 2011] Ferrari continued:

“A November 7 interview with Maersk CEO Nils Andersen published in Fortune magazine specifically made note of this initiative. It included the launch of daily ship sailings from Asia to Europe, one of the most active routes, coupled with penalties to Maersk if the ship arrives late. This initiative was a response to customer feedback that indicated that customers wanted more frequent service as well as more on-time reliability. Instead of arranging large shipments of containers filled with inventory to coordinate with scheduled weekly sailings, daily service would allow shippers the flexibility to have smaller, more frequent shipments along with skin in the game for on-time reliability. This week came the announcement of Maersk Q3 earnings, and in a report published in the Financial Times, notes that while revenues increased 9 percent, profits declined by 78 percent. Of more significant interest, shipment volumes on Asia to Europe routes increased 24 percent, but the carrier earned 26 percent less per container. On a worldwide basis, volumes spiked 16 percent but again, revenue per container decreased by 12 percent. The carrier in essence took a financial hit in its response to customer needs for more on-time reliability.”

When the books were finally audited, “Maersk’s Liner Business made a loss of $600 million last year compared to a profit of $2.6bn in 2010 as a result of low freight rates on the Asia–Europe trades.” [“Rising container capacity hits profits at Maersk,” Supply Chain Standard, 28 February 2012] The article continues:

“The company said its plan now was to focus on profitability rather than increasing market share. Freight rates started the year at a reasonable level, but decreased throughout the year as large amounts of new tonnage was delivered. ‘Overall freight rates were eight per cent lower than in 2010 and this, combined with 35 per cent higher bunker prices, reduced margins considerably,’ the group said in its annual results. ‘The number of containers carried increased by 11 per cent to 8.1m FFE, and the group more regained the market share lost during 2010.'”

The article goes to report, “Maersk Line is to take 20 new vessels each with18,000 TEU capacity between mid-2013 to mid-2015.” Although it may seem illogical to add capacity to a sector that already has too much, the article reports that Maersk “reckons that the increased size and efficiency of these vessels will result in lower unit costs and the best environmental performance in the industry.” To learn more about this strategy, read my post entitled Shipping Industry Update: Going Big and Going Green. The article concludes:

“The company said that competition remained tough. ‘There is continued need for consolidation, reduction of capacity and more stable and sustainable rates. Some operational consolidation was seen at the end of 2011, but Maersk Line maintains its view that more is needed for the industry to deliver sustainable returns to shareholders.’ The aim in the liner shipping market would be to focus on profitability rather than market share, it said. ‘Maersk Line is satisfied with, and will defend its current market share, which provides sufficient scale benefits allowing for an optimal product offering to its customers. By focusing on profitability over further market share growth, Maersk Line will take a number of initiatives to restore freight rates from the current loss-making levels. More specifically, Maersk Line will optimise its pricing practices and adjust its capacity to improve the market balance. Lay-up plans are also activated, super slow-steaming will be used more extensively and Maersk Line will invest in line with market growth.'”

The editorial staff at Supply Chain Digest wrote, “There has been a steady stream of news of late from ocean container shipping giant Maersk Line, which in total says a whole lot about where the industry stands right now – a position that isn’t a very good one, for carriers at least.” [“Following Events at Maersk can Say a Lot about the State of the Container Shipping Industry,” 29 February 2012] The article continues:

“Maersk Line, a division of A.P. Moller-Maersk, said this week that is lost $602 million in 2011, after record profits of $2.6 billion on 2010. That even though the company said it saw cargo volume gains of 11%, handily above estimates for overall tonnage growth globally of 7%. Maersk also saw its revenues grow 5% to just over $25 billion. But those market share and revenue gains came at a great price, as the company bid below costs for market share and continued plans for growing overall capacity. Amid a punishing industry capacity glut, rates slipped on average 8%, including bunker fuel surcharge, to $2,828 per 40-foot container from $3,064 in 2010. That as those bunker fuel costs rose about 35% during the year. The result: the big loss. The losses occurred in the second half of the year, with a Q4 loss of $633 million, following a loss of $297 million in Q3. The first half of year had been modestly profitable.”

The article reports, “Maersk said [it] lost $75 on each 40-foot container shipped in 2011 compared with a $384 profit per container in 2010. Reminds of the old joke about ‘we lose money on every unit but we’ll make it up on volume.'” Personally, I’m reminded of the redneck version of that joke. Two would-be entrepreneurs decided to go into the watermelon business. They bought a truck, drove it to the fields, and paid farmers a dollar per watermelon. They then drove back to the city and sold their watermelons for a dollar a piece. They soon realized that they weren’t making any money. At that point, one of them said, “I don’t get it. We’re selling all of our watermelons and should be getting rich. Maybe we need a bigger truck!” Some people see this as the situation in which Maersk finds itself and the new Triple E container ship is the bigger truck. The really bad news is that “Maersk says it expects the losses to continue in 2012.” At least the company doesn’t look like it is going to buy any additional “big trucks” once they put in service those already on order. The article explains:

“The previous week, Maersk had announced it was cancelling its option to buy another 10 of the giant Triple E container ships that it could have ordered from Korean shipbuilder Daewoo, a move not unexpected given the continued glut of ocean shipping capacity referenced above. The Triple E’s, first announced by Maersk last March, can each hold 18,000 TEU, a major jump from the 15,000 TEU megaships that set records for capacity over the last couple of years. That means 180,000 of potential TEU capacity will not be coming to market, but Maersk does have 20 of these giants already on firm order, with the first ships coming into service in 2013.”

To deal with this glut of capacity, “Maersk … announced it was idling about 9% of its capacity on troubled Asia to Europe routes, where the debt crisis there has dramatically slowed import volumes.” The article concludes:

“Maersk also said it will increase its level of ‘super slow steaming’ to reduce operating costs of its vessels by reducing fuel usage. Despite the canceled order for more Triple E’s, the high levels of industry capacity, and falling rates, Maersk CEO Soren Skou recently said that the carrier ‘will defend our market share position at any cost.’ Sounds to us like that means the good times will keep sailing for ocean shippers and importers – if you are willing to wait a few extra weeks to get your goods.”

Obviously, carriers can’t go on losing money and stay in business. The sooner they get back to profitability the more stable the maritime industry will become. That’s good for everyone. Carriers and shippers alike are concerned about rising oil prices, which are the principal culprit driving shipping costs up and keeping profits down. Maybe it’s time to break out the kites. According to SkySails, its system will “reduce a cargo vessel’s fuel consumption by an average of 10 to 35 percent annually.” For more on that topic, click on the following story: “Cargill ship will be largest ever to utilize kite power.” [Ben Coxworth, Gizmag, 28 February 2011] The only thing we know for certain about the years ahead is that ships will be plying the oceans carrying goods as they have done since man first set out to sea. At what rate they carry those goods remains in question.