Canary On The Containership—Maersk Profit Warning Bodes Ill For World Trade


Danish conglomerate A.P. Møller-Maersk A/S on Friday cut its full-year profit guidance, saying global demand for container shipping—the conglomerate’s biggest contributor—has been weaker than expected.

The company said it expected underlying earnings to come in at $3.4 billion this year, compared with its previous guidance of $4 billion, based on a weaker-than-expected performance at its Maersk Line unit, the world’s biggest container-shipping operator in terms of capacity. That unit now expects full-year underlying earnings of $1.6 billion, compared with an earlier forecast of more than $2.2 billion.

Maersk said its third-quarter net profit was $778 million, compared with $1.47 billion last year.

At midday Friday, shares in the company were trading 6.8% lower at 9,760 Danish kroner in Copenhagen.

The profit warning is the latest in a series of dire forecasts from the global container-shipping industry. Maersk, the industry giant, has served as a bellwether, not just for the industry but for global trade in general.

Over the past three years, the world’s top 20 container operators have attempted to consolidate and form mega-alliances, in an effort to cut costs in the wake of the global economic crisis, which decimated global trade and exposed massive overcapacity of ships. But they have also spent billions of dollars on giant container ships, which are cheaper to steam and more efficient when they are full, adding even more capacity to the world’s fleet.

Analysts estimate the industry operates up to 30% more shipping capacity than demand calls for on some of the busiest ocean trade routes. Container ships move more than 95% of the world’s manufactured goods.

“This year alone new ship deliveries will boost capacity by 1.7 million containers or 8.2%, while demand will be a maximum 2%, the lowest since 2009 when the global economy went into recession. It’s a grim picture for container shipping and it won’t change in the near term,” said Jonathan Roach, a container analyst at London-based Braemar ACM Shipbroking.

Slowing growth in China and the eurozone’s anemic economy have pushed freight rates to levels that barely cover fuel costs. They are hovering around $300 a container on the main Asia-to-Europe trade loop, well below the $1,300-a-container average that ship operators say they need to break even in the long term.

The rock bottom rates during what is supposed to be peak season for container shipping as retailers stock up on clothing, electronics, home appliances and toys ahead of the year-end holidays.

This year that gift-giving bounce hasn’t materialized and market watchers are blaming lower demand from Europe, as well as an easing Chinese appetite for luxury items and other imports. Shipping brokers in London and Singapore said the August devaluation of the yuan had a profound effect on shipments of luxury goods from Europe.

“We are seeing shipments of luxury items like handbags, branded clothing and shoes down by around 18% since the devaluation,” said one broker

Hong Kong-based Orient Overseas Container Lines, one of Asia’s biggest container operators, said Friday revenue from its Asia to Europe sailings plunged 32.2% on the year in the third quarter on falling freight rates. The shipping line’s total revenue in the third quarter dropped 12.2% to $1.3 billion.

Maersk Chief Executive Nils Andersen said the average rate per 40-foot container across all ocean routes in the third quarter had fallen by more than $500 compared with the year-earlier period.

“So we’ve seen a significant drop in rates, and the rate situation in the market now is very challenging for everybody,” Mr. Andersen said in a conference call.

“The only thing which is surprising is that the profit warning didn’t come much earlier,” said Lars Jensen, who runs Copenhagen-based SeaIntelligence Consulting. “This is going to be an industry-wide issue this year.”

Source: Maersk Issues Profit Warning on Weaker Shipping Market – WSJ