Less Profit in Sight as Maersk Overcapacity Hits Growth: Freight
European container-shipping operators such as A.P. Moeller-Maersk A/S may benefit little from higher volumes next year as carrier lines battle to remain profitable amid overcapacity and weak demand.
Global lines will ship the equivalent of 168 million 20-foot containers, an increase of 6.6 percent from 2012, according to London-based shipping-services company Clarkson Plc. (CKN) Traffic on mainline Asia-Europe routes will lag global growth, rising 4 percent to 21 million 20-foot boxes as low European consumer demand limits orders.
Economic weakness caused by the debt crisis in Europe, which accounts for more than a third of global trade, is putting pressure on earnings at shipping lines such as Copenhagen-based Maersk Line, the world’s largest, and CMA CGM SA. Further clouding the outlook, industry capacity will grow 7.5 percent next year, Clarkson says, undermining efforts to boost profit on Asia-Europe routes as earlier rate rises struggle to take hold.
“Unless Europe has an unexpected recovery, growth volumes from Asia to Europe are likely to be low,” said Lars Jensen, chief executive officer of Copenhagen-based SeaIntel Maritime Analysis. “Consequently we expect the structural overcapacity to persist in 2013, leading to rapid cycles of price increases and price declines as carriers intermittently idle and re-activate tonnage.”
World freight traffic growth probably slowed to 4.8 percent this year from 7.1 percent in 2011, according to Clarkson. East Asia-Europe volumes will decline 3.3 percent as European consumers struggle with fiscal austerity and economic uncertainty caused by the sovereign debt crisis.
The economy of the 17-nation euro area shrank 0.1 percent in the third quarter as the region slipped into recession for the second time in four years. A gauge of services and manufacturing output in the euro area was at 47.3 in December, staying below the 50 mark that indicates contraction for an 11th month, London-based Markit Economics said on Dec. 14. The European Central Bank forecasts the economy will shrink 0.5 percent this year and 0.3 percent in 2013.
The weakness of Europe’s economy and its debt turmoil is also affecting the rest of the world, curbing global trade growth to 2.5 percent this year from 5 percent in 2011, according to the World Trade Organization’s September forecast.
Global merchandise trade volume rose 2.7 percent in the first three quarters of 2012 from a year earlier, according to the Geneva-based WTO. By comparison, European Union exports were unchanged and imports posted a 2.7 percent drop during the same period.
Next year, global trade will expand 4.5 percent, the WTO forecast in September. World container growth in 2013 will be driven by trade on secondary routes, such as between northern and southern hemispheres and within Asia, as well as by Middle East and Indian volumes, according to Clarkson.
“Shorter trade routes, more suited for smaller vessels, will become increasingly important as the growth of emerging-market demand for goods continues to outpace developed markets,” said Brandon Oglenski, an analyst at Barclays Plc in New York. “We believe supply fundamentals may improve over the next 12-18 months as container scrapping has picked up and the delivery schedule is set to run off to more manageable levels.”
Maersk estimates “single-digit growth” in global container volumes in 2013, which “includes the possibility for marginal positive growth in Europe,” spokesman Hursh Joshi said in an e-mail response to questions. “Maersk is absolutely committed to maintaining capacity discipline” and “Maersk Line does not plan to offer any new capacity” on routes between Asia and Europe in 2013, Joshi said.
Rates to ship a full 40-foot box from Shanghai, China’s busiest port, to Rotterdam, Europe’s biggest, have dropped 50 percent from a peak reached in May, according to Drewry Shipping Consultants Ltd.’s World Container Index.
Carriers will take delivery of ships capable of holding 1.4 million 20-foot boxes, or TEUs, increasing the total global supply to 17.7 million, according to Clarkson. The imbalance in demand and supply has damped Maersk’s shares, which have climbed 10 percent this year compared with a 14.5 percent gain in the Stoxx Europe 600 Index.
Maersk will next year start receiving the first of 20 new 18,000-container vessels built by Daewoo Shipbuilding & Marine Engineering Co. (042660) The ships will be the largest cargo-box carriers afloat. Shipping lines are deploying bigger vessels to boost fuel efficiency and to cut operating costs. The biggest ships are mainly used on Asia-Europe routes as U.S. ports generally can’t handle them.
“Aggressive 2013 global vessel delivery plans should drive rate weakness at Maersk Line, curtailing recovery,” said Neil Glynn, an analyst at Credit Suisse Group in London with an underperform rating on Maersk. “We expect global net supply to exceed demand” next year, “with the burden heaviest on Maersk Line’s key Asia-Europe lane,” he said.
While excess capacity in the global fleet will continue in 2013, this may be positive for Maersk’s container division as it takes advantage of economies of scale, according to Robin Byde, an analyst at Cantor Fitzgerald in London with a buy rating on the shares.
“Its business can bear a fairly muted rate environment, taking advantage of its unit cost advantage to remain cash positive while others struggle,” Byde said. “We expect container shipping demand and rates to remain fairly subdued in 2013, but Maersk should be able to take advantage of its lower unit costs and market position to support margins.”
Carriers’ 2013 earnings will depend on whether Maersk and its rivals are able to resist the temptation to pursue market-share-driven strategies, according to Mark McVicar, an analyst at Nomura International Plc in London with a neutral rating on Maersk.
“We believe Maersk Line will need to exercise continued capacity discipline to remain profitable,” he said. Still, “we expect demand growth in 2014 to exceed capacity growth for the first time in four years, triggering improved market conditions.”
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