Maersk Only Asia-Europe Line Showing Profit: Freight Markets

A.P. Moeller-Maersk A/S may be the only shipping line to profit from growing trade between Asia and Europe even as rates reach a two-year low.

While Maersk is ordering the world’s biggest ships for the routes, companies such as Hapag-Lloyd AG may lose out. Maersk, the largest container shipping line, probably was the only major operator to make money on Asia-Europe trade in the first quarter, said Ben Gibson, a freight derivatives broker in London at Clarkson Plc, the world’s largest shipbroker. The shares jumped as much as 1.9 percent today.

Container lines have contracted for new ships with capacity equal to 24 percent of the existing fleet, according to Paris- based data provider Alphaliner. The price of carrying containers to northern European ports from Shanghai has dropped to $874 per standard box, the lowest since July 2009. The peak was $2,164 in March last year, data from the Shanghai Shipping Exchange shows.

“It’s a very tough freight lane at the moment, but Maersk is definitely in a better position than its rivals because of its size,” Jacob Pedersen, an analyst at Aabenraa, Denmark- based Sydbank A/S, said in a telephone interview. He has an “overweight” recommendation on Maersk’s stock.

The Copenhagen-based company’s shares have gained 9.1 percent since container freight rates peaked on March 5, 2010. Maersk advanced today to 45,920 kroner as of 4:20 p.m. in Copenhagen trading, after four days of declines.

Quarterly Losses

“Maersk is leading when it comes to having the lowest costs per transported container and is therefore in a better condition with the current low rates,” Jesper Langmack, managing director at PFA, Denmark’s second-biggest fund, said by e-mail.

PFA, which has about 250 billion kroner ($50 billion) in investment assets, returned 37.1 percent on Danish shares last year, compared with a 32.7 percent gain for all of the country’s stocks including dividend payments. Langmack’s portfolio had Maersk shares worth about 700 million kroner at the end of 2010. The Copenhagen-based fund doesn’t comment on its holdings.

Maersk’s stock is “cheap” because the market isn’t giving the company credit for its ability to keep reducing costs, Robin Byde, an analyst with HSBC Bank Plc in London, said today in a note. “Despite weaker container rates in recent months, Maersk is well-placed to cut unit costs with its new bigger ships,” he said, repeating his “overweight” recommendation on the stock.

Bigger Than Ever

Maersk on Feb. 21 ordered 10 vessels able to carry 18,000 containers from Daewoo Shipbuilding & Marine Engineering Co., and has an option to order 20 more. The new container ships will be about 30 percent bigger than the largest vessels now in use.

Hamburg-based Hapag-Lloyd, Europe’s fourth-largest container line, is grappling with surging fuel prices and increasing competition that culminated in a first-quarter net loss of 22.1 million euros ($32.3 million).

The “rise in the oil price, the weak U.S. dollar and growing competition are making business more difficult,” Michael Behrendt, chairman of the executive board of Hapag- Lloyd, said in an earnings statement on May 12. The German shipping company aims to balance higher fuel costs by increasing prices, Behrendt said then. Volume on Far East routes was down 8.5 percent as the company declined lower-price contracts.

Crude oil is up 10.7 percent this year to more than $101 a barrel while the euro reached a one-month high against the dollar on June 7.

No More Service

Taiwan’s Wan Hai Lines Ltd. (2615) and China’s Pacific International Lines Private Ltd., which have about 2.9 percent of the container market, said in a May 31 statement that they would stop service on the Asia-to-Europe route and instead slot charter space on China Cosco Holdings Co. container unit.

CMA CGM SA, the world’s third-largest container line, will lift rates on the Asia to North Europe route in response to “on-going deterioration of revenues,” the Marseille-based line said yesterday on its website. Privately held Mediterranean Shipping Co. of Geneva, the second-largest line, declined to comment.

The route between Asia and Europe is particularly hard-hit by falling freight rates because it’s where most of the world’s largest container ships, which are too big for the Panama Canal between North and South America, are used.

Ongoing Losses

“Several container shipping lines reported losses in the first quarter and I expect this to continue,” said Philip Damas, an analyst at Drewry Shipping Consultants Ltd. in London. Container shipping companies “are now going for market share and the perceived need to fill their new ships at much lower prices, whereas in 2010 their priority was to minimize overcapacity.”

Shipping lines usually call at ports in Japan, South Korea, China and Singapore before leaving Asia to sail through the Suez Canal, which connects the Indian Ocean with the Mediterranean, and onto northern European ports such as Rotterdam, Amsterdam, Antwerp, Southampton and Hamburg.

Some 154 ships with capacity above 10,000 standard containers will start operating between 2011 and 2014, according to Eurogate GmbH & Co. KgaA, Europe’s largest port operator.

“The current fall of container freight rates on the east- west routes is supply-driven, not demand-driven,” said Damas.

Because of Maersk’s container earnings, at $2.6 billion last year more than at any other shipping line, the company is better able than competitors to weather the changes in global shipping capacity and cargo.

$100 More

Last year, Maersk Line made almost $100 more than its rivals per each transported 40-foot container, based on earnings before interest and taxes, Chief Executive Officer Eivind Kolding said in a March 7 interview.

The company is feeling the lower rates, said Lee Sissons, Maersk Line’s trade director for Asia to Europe services.

“The situation does present a risk to profitability levels, and it is our expectation that we may see services being re-structured or changed in the short term,” he said in an e- mail. “It remains our objective to keep Maersk Line services stable, avoiding unnecessary changes to our customers.”

Most of the container ships being ordered and delivered this year are the largest container vessels built, with capacity of more than 10,000 standard boxes, or TEUs, Gibson said. They are typically used on the long routes between Asia and Europe, partly because they are too big for the Panama Canal and for West Coast ports to handle. Maersk’s margins suggest it was the only carrier to make money on the route, he said.

Zodiac Orders

Zodiac Maritime Agencies Ltd. and Neptune Orient Lines Ltd. ordered 10,000-container-plus ships last year as the end of the global recession revived U.S. and European demand for Asian-made goods.

Maersk Line operates more than 500 vessels and has a number of containers that if stacked on top of each other would span more than 2,500 kilometers (1,554 miles), or the equivalent of 8,550 Eiffel Towers, according to Maersk. The company has some 17,000 employees and an additional 7,600 seafarers, according to information on its website.

Container trade to Europe from Asia in the first four months increased 5.8 percent to about 4.5 million containers, according to Container Trades Statistics.

“There’s a lot of spot-market trade on Asia to Europe, but Maersk has more of its cargo fixed on long-term contracts that were signed some time ago, so the company is less exposed than rivals to the recent drop on the spot market,” said Pedersen, the Sydbank analyst. “Maersk also has newer ships than its rivals and that gives a competitive advantage. Maersk can keep costs low and that’s the way to make money.”

To contact the reporters on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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