Maersk Targets South Korea as Europe-Sclerosis Antidote
As Europe’s economic slowdown reshapes global trade patterns, the world’s biggest container line is accelerating its strategy to tap into Asian growth by starting a new direct route to South Korea.
A.P. Moeller-Maersk A/S (MAERSKB) this month began shipping from the port of Gothenburg, Scandinavia’s largest, to Busan, the world’s fifth-busiest port. The route will support growing Asian demand for European imports almost two years after Korea and the European Union signed a free-trade agreement.
“Europe is standing still and doesn’t help outgoing volumes, while Asia is capturing a larger share,” Magnus Karestedt, chief executive officer of the Gothenburg port on Sweden’s west coast, said in a phone interview. “We expect strong growth in the next two years or so.”
Asia is moving away from just supplying cheap exports as the region’s economic success provides the wealth to import more from Europe. Shipping companies that realign their business to profit from the shift are set to outperform rivals that don’t, according to Stig Frederiksen, an analyst at Carnegie Bank A/S in Copenhagen. He says that will place Maersk at an advantage.
On the Europe-to-Asia leg shipping lines have had to leave some containers behind for the next trip because ships are full, Frederiksen said in a phone interview, adding that Maersk is running at full capacity at times.
All that “provides some evidence that the trade is becoming more profitable,” he said. He has a buy recommendation on Maersk shares.
Shares of the Danish group have risen 5.3 percent in the past 12 months. That compares with a 9.4 percent decline for Kuehne + Nagel International AG (KNIN), the world’s biggest sea-freight forwarder.
The Shanghai Containerized Freight Index, which tracks spot prices on containers exported from China’s South Eastern industrial hub, dropped 14 percent in the year through March 22, when the latest reading was published.
Maersk estimates trade to Asia’s growth economies will increase this year as shipments to crisis-stricken Europe decline.
“Whereas the Far East to North Europe trade is still declining year over year, the other direction is growing,” Peter Martin Leschly, who manages Maersk’s Asia-Europe office from Copenhagen, said in an e-mailed reply to questions. The company expects about 4 percent growth in eastbound traffic this year over last year and a slight decline in the other direction.
Some of those shiploads will go to Busan, while others will go on to other countries, Karestedt said. Most containers shipped to Japan from Gothenburg travel through Busan, while the Korean port is also a nucleus of the high-volume, high frequency trade between ports in China, Japan and Korea.
Korea itself also is importing more goods from the EU. The free trade agreement with South Korea, which took effect July 1, 2011, is the EU’s first with an Asian country. The 27-member bloc’s trade deal is expected to expand the two sides’ almost $100 billion of annual commerce by $4.7 billion a year over the next 15 years, according to a 2010 study led by state-run Korea Institute for International Economic Policy.
Imports from the EU were 10.8 percent of total imports during the first 20 days in March, compared with 9.2 percent in the same period a year earlier, according to an April 1 statement from the Ministry of Trade, Industry and Energy. The import portion from Japan, U.S. and ASEAN nations fell at the same time.
Transport machines arriving in Korea from the EU increased 57 percent while import of European mineral extracts and machinery grew 36 percent and 32 percent each in the period, the statement said.
The economy of the 17-nation euro area will shrink 0.3 percent this year after contracting 0.6 percent in 2012, the European Commission said on Feb. 22. China’s economy will grow 8.2 percent in 2013, the International Monetary Fund said in January. The group of countries the Washington-based fund calls Developing Asia will grow 7.1 percent this year, it estimates.
“Consumers decide where the trade goes, and with Asian consumers rising, more goods will have to flow into those markets,” said Peter Sand, an analyst at shipping association BIMCO in Bagsvaerd, Denmark.
Maersk Chief Executive Officer Nils Smedegaard Andersen said in an interview in November he estimates China’s consumers will dominate the world’s second-largest economy within a decade. To prepare for the shift, Maersk is already expanding in Asia, including investing in Chinese port capacity, “to be ready to help customers who want to export to China,” Smedegaard said. Maersk owns seven container terminals there.
Frederiksen says adjusting business to benefit from Asian demand is especially critical now as lackluster global growth jeopardizes shipping profits. Of the 31 analysts who provide recommendations on Maersk to Bloomberg, 16 suggest buying the stock, eight are telling customers to hold and seven say sell.
Governments in Northern Europe are also responding to the shift in trade patterns. Sweden, the largest Nordic economy, says its exporters should rely less on demand from Europe and instead target emerging markets. The nation ships half its $500 billion annual output abroad and estimates exports to Asia will surge 30 percent by 2016. That’s double the growth to Europe.
SSAB AB (SSABA), a Swedish maker of sheet and plate steel that has so far relied most on the ports of Gaevle and Oxeloesund to send goods to Asia, sees the new route between Gothenburg and Busan as a “very positive opportunity,” Per Bondemark, head of the company’s logistics office for Europe, the Middle East and Africa, said in an e-mailed reply to questions.
Sweden’s state-backed lender to the export industry is also backing a shift in trade toward the east. Asian import demand is “on a roll,” Marie Giertz, chief economist at SEK, said in an interview. “It’s important that we’re there.”
Maersk Line cut capacity on the Asia-to-Europe route -- its biggest -- by about 21 percent last year. The shipping line said Feb. 22 that profit this year will be higher than the $461 million reached in 2012 as the company cuts costs and as growth in global container demand accelerates. An April 2 note on its website says it is seeking an increase in freight rates of $100 per 20-foot container from northern Europe to Far East Asia including Japan as of May 1.
Maersk Line operates 600 ships with capacity of 2.6 million standard containers, making it the world’s No. 1, according to Paris-based Alphaliner.
According to Leschly, the Port of Gothenburg to Busan route -- which also includes stops at European ports including Rotterdam and such Asian ports as Hong Kong, Singapore and Shanghai -- will attract exporters that had previously relied on other hubs. Goods from the Nordic region’s largest harbor had typically been transported on smaller feeder ships to larger European ports transfer to bigger ships bound for Asia.
“We hope and expect customers will want to make use of this opportunity going forward,” Leschly said.
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