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Reuters: Shipping and oil conglomerate A.P. Moller-Maersk said on Friday third-quarter profit almost halved and global demand for container transportation this year would grow at a slower pace than previously expected.
The Danish company, which operates the largest container shipping business in the world, kept a reduced forecast made two weeks ago for a 2015 underlying profit of $ 3.4 billion, down from the $ 4.0 billion previously expected.
Maersk has taken a double hit to its businesses – its oil units have floundered as crude prices halved since last year, while low trade volumes and an overcapacity of vessels have weighed on Maersk Line, the container shipping business.
The earnings report, which showed third-quarter net profit almost halved to $ 778 million from $ 1.5 billion a year ago, comes two days after Maersk Line said it would slash costs, cut staff by almost a fifth and pull out of some vessel orders.
On Friday, the company said it now expected demand for seaborne container transportation around the world to grow 1-3% this year, lower than its previous view of 2-4%. Growth in demand for shipping, at 1% in the third quarter, is the lowest since the 2008 financial crisis that hit the industry particularly hard. Maersk made an annual loss in 2009, the only year it has lost money in its 111-year history. Though the global economy has recovered since, trade volumes have risen at a slower pace than in the past and economists are increasingly concerned about flagging growth in China.
Overcapacity has exacerbated that situation - in 2015, Maersk expects a 9% growth in container shipping capacity, outstripping the around 1-3% growth in trade.
That leads to a slump in freight rates. On the busiest routes in the world, from China to Europe, spot rates this year have been at barely profitable levels. This week they fell 32% to $ 674 per container, a source with access to data from the Shanghai Shipping Exchange told Reuters.
Despite the dire conditions, Maersk Line has been one of the most profitable shipping companies around thanks to its scale and cost cutting, and the group’s third quarter results were in line with forecasts.
“Maersk is definitely under pressure at this hour, but this is an absolutely worst case scenario situation, so I’m quite optimistic because Maersk is still able to generate 3.4 billion (dollars) in profit in such a year,” said Sydbank analyst Jacob Pedersen. “Maersk is still in front in the market.”
Chief Executive Nils Smedegaard Andersen said consolidation within the shipping industry, which is largely operated by state- or billionaire-owned companies, would be natural during the slump.
“We have for several years expected consolidation. It has not happened but it would be a natural thing since many players are loss-making,” he said during a conference call.
The industry is awash with consolidation talk. Shares in China’s Cosco have been suspended since 10 August and industry insiders expect its container shipping unit to merge with China Shipping Container Lines (CSCL) to create the fourth largest shipping company in the world.
Reuters: Maersk Line, the world’s largest container shipping company, said last week it will slash costs, cut staff by almost a fifth and pull out of vessel orders as trade along the busiest routes in the world, from Asia to Europe, slows down.
The business, part of the A.P. Moller-Maersk conglomerate , is a bellwether for global trade and the shipping industry, which is run mainly by unlisted companies not required to make their assessments or financial circumstances public.
The plans come two weeks after A.P. Moller-Maersk cut its 2015 profit forecast by 15%, blaming a slowdown in the container shipping market.
“A number of markets have disappointed with a lot weaker demand than expected this year,” Maersk Line Chief Executive Soren Skou told reporters on a conference call.
“And it’s first of all Asia to Europe, which has had negative growth. Europeans have been importing less this year from Asia than last year and that was frankly a surprise.”
Raw material trade routes, such as West Africa and the east coast of Latin America, had also slowed, Skou said, because “what went up with China, went down with China,” Skou said.
China’s factory activity fell for an eighth straight month in October, a private survey showed on Monday, pointing to continued sluggishness in the world’s second-largest economy.
The cost of transporting a container has slumped this year compared to already weak previous years due to overcapacity in the shipping market as trade volumes failed to recover from the 2008 financial crisis.
Weekly freight spot rates on Asia to Europe routes have been languishing below $ 1,000 per 20-foot container, according to the Shanghai Containerised Freight Index, spending all but five weeks of the year at or below levels deemed profitable.
Shipowners ‘digging their graves’
Maersk Line said it would save $ 250 million in the coming two years and reduce its workforce by 17% or 4,000 people, mainly through attrition.
The company, with a fleet of 600 ships, ordered 27 new vessels this year, including 11 of its flagship Triple E mega-vessels that can carry about 20,000 20-foot containers, with an option to order eight more.
Now it says it will not exercise the options, including on six of the largest ships. The orders would have gone to Korea’s Daewoo Shipbuilding and Marine Engineering Co and China’s Cosco.
Overcapacity has long been a problem in the industry and has been exacerbated by companies ordering new mega-vessels, rushing to place orders before new environmental regulations take effect next year, said Jan Tiedemann, an analyst with shipping consultancy Alphaliner.
“Shipping companies definitely ordered too much because they tried to get these ships with a Tier II compliance,” Tiedemann said, referring to the new international regulations aimed at cutting nitrogen oxide emissions.
“What happens now is some who optimistically have done that are getting cold feet. They thought maybe we can get away with it – the ships will be delivered in 2017, the market would have recovered by then and now they say, ‘we’re digging our own grave’.” Maersk Line said it had not gone on a buying spree to avoid the regulations, noting its previous order for new ships was in 2011.
