Maersk Set to Benefit as Overcapacity Hits Rivals: Freight

Maersk May Benefit as Overcapacity Hits Rivals
An A.P. Moeller-Maersk A/S shipping container is unloaded at the Georgia Port Authority terminal in Garden City, Georgia, U.S. Photographer: Stephen Morton/Bloomberg

A.P. Moeller-Maersk A/S, owner of the world’s largest container line, is prepared to outlast rivals as the industry faces four years of overcapacity.

“We are actually quite well positioned for a longer stretch of tough competition,” Nils Smedegaard Andersen, chief executive officer at the Copenhagen-based company, said in a telephone interview. “It would be natural if the smaller players in this business, or their banks, start questioning whether it’s a good idea to keep competing.”

Maersk Line, with almost 16 percent of the global container market, is betting it can outlast such publicly traded competitors as Japan’s Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K., both of which have cut capacity to cope with falling freight rates. Success may help reverse a Maersk share decline this year of 28 percent, compared with a fall of 17 percent in the OMX Copenhagen 20 Index.

“Maersk is the container line that has the scale and the strong balance sheet to play this volume game, particularly as it’s better than the competition on keeping costs low,” said Per Kronborg Jensen, a senior portfolio manager at Sparinvest A/S. It owns just over 0.6 percent of Maersk “B” shares.

The container industry will lose money this year as oversupply sends freight rates plunging, Andersen said. In 2009, the first year the industry failed to turn a profit since the 1970s, Maersk Line idled ships. The company won’t do that this time and is ready to reduce prices to preserve market share, Andersen said.

Economies of Scale

Maersk is better positioned than rivals to ride out the container glut because its size helps it keep costs down through economies of scale, Jacob Pedersen, an analyst at Sydbank A/S, said by phone. Maersk’s parent, which also owns the Nordic region’s second-largest oil company, provides a strong balance sheet to help absorb losses, he said.

“Maersk Line is willing to sacrifice some earnings in the short term for a better and more profitable market in the long term,” Pedersen said. “In the last crisis, Maersk Line was among those that helped the sector recover, which probably saved some weak rivals from bankruptcy. This time, Maersk is leaving it to those with the most at stake to lay up ships and improve conditions.” He has a “buy” rating on the shares.

Cutting Back

Smaller shipping lines have already scaled down, according to shipping-data provider Alphaliner. Cia. Sud Americana de Vapores SA, Horizon Lines Inc., Grand China Shipping and TCC ASA, which had a combined market share of as much as 4.5 percent on transpacific trade, have cut back, Paris-based Alphaliner said in a note distributed Nov. 8.

Mitsui O.S.K. Lines and Nippon Yusen, Japan’s largest shipping lines, last month cut capacity after reversing profit forecasts to loss predictions for this fiscal year. The global fleet has expanded for two years to a record, according to IHS Fairplay in Redhill, U.K.

“The hardball game could continue well into 2012,” Finn Bjarke Petersen, an analyst at Nordea Bank AB, the Nordic region’s biggest lender, said in a Nov. 10 note to clients. The world’s second- and third-largest container lines, Mediterranean Shipping Co. and CMA CGM SA, also plan to squeeze rivals out of the market, said Copenhagen-based Petersen, who has a “buy” recommendation on Maersk shares.

Global Carrier

MSC, based in Geneva, didn’t respond to e-mailed questions about its strategy.

“CMA CGM is constantly adapting to the changing economic environment and looking for ways to improve its business lines,” Anne-France Malrieu, a spokeswoman for Marseille-based CMA, said in an e-mailed response to questions. “Being a global carrier enables CMA CGM to benefit from growing regions around the world.”

Hamburg Sued, the world’s 14th-largest container shipping line according to Alphaliner, has criticized the price war between larger rivals, Hamburger Abendblatt reported today, citing Hamburg Sued Chief Executive Officer Ottmar Gast.

The hunt for market share seems more important for some companies than profitability, which means some shipping lines may be pushed to their limits, Gast said, according to the newspaper.

Maersk Line last week lowered its full-year forecast to a net loss from an August prediction of a “modest” profit. The unit lost a net 1.58 billion kroner ($288 million) in the third quarter versus a 5.9 billion kroner profit a year earlier.

Too Many Ships

The line outperformed its peers in the first six months of the year, Andersen said. Its earnings margin before interest and taxes was 3 percentage points higher than the industry average, giving it more scope to weather industry losses, he said in the Nov. 9 interview.

“There’s already overcapacity and the order books for new ships are still big, so I don’t think that freight rates will recover enough in 2012 to make it an attractive industry to be in,” Andersen said. “There’s no need for new ships the next four years.”

Maersk’s global freight rates fell 12 percent in the third quarter amid a 16 percent increase in shipping volumes as too many vessels competed for orders, according to the company’s Nov. 9 earnings report.

“The beginning of next year will be quite difficult,” Andersen told Bloomberg Television in an interview also broadcast on Nov. 9. “The industry has to clean itself up by not placing orders in the next years.”

No Recovery

Shipping traders are betting that the container market won’t recover next year, according to data from Clarkson Securities Ltd., a unit of the world’s largest shipbroker. The cost of shipping Asian-made goods to the West Coast of the U.S. will decline 0.8 percent from this year’s average to $1,688 per 40-foot container next year, according to derivative prices provided by Clarkson.

Maersk Line’s strategy could help restore the balance between supply and demand and make the industry profitable again, Sydbank’s Pedersen said. Still, there’s a risk the effect will be limited as vessels owned by bankrupt shipping lines re-enter the market after assets are liquidated, he said.

Smaller shipping companies may also come under pressure from their banks, according to Max Johns, a spokesman for Germany’s VDR shipping association. Global capital requirements, which are forcing lenders to boost equity to back up loans, mean ship finance is becoming less attractive for banks, he said.

Impatient Lenders?

Lenders “cannot be patient forever,” Johns said.

Jensen’s fund has no plans to change its holdings as its Maersk shares are a “long-term” investment, he said. “This obviously affects the short-term return we’ll get, but if this is what Maersk believes is the right thing to do to emerge stronger when freight markets improve, then we’re behind it.”

A.P. Moeller-Maersk was founded in 1904 when Arnold Peter Moeller together with his father bought a second-hand ship. Today, the company, Denmark’s biggest, employs more than 100,000 people in 130 countries. It also owns a supermarket chain, an oil drilling unit and a stake in Denmark’s biggest lender, Danske Bank A/S.

Maersk Line’s strategy has so far helped the company increase its market share to 15.9 percent as of Nov. 14, compared with 14.5 percent at the beginning of the year, according to Alphaliner data. The top five container lines hold about 45.6 percent of the market, while the next 25 hold a total 43.2 percent.

“We’re not holding back on offering competitive rates,” Andersen said. “If the market declines, then we follow.”


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