Maersk Group became the latest major container line to fall victim to a tough first-quarter market, with its results hit by lower-than-expected volume, pressure on freight rates, and rising bunker fuel prices. That exact kind of vulnerability to ocean revenue and cost volatility is what the company is trying to escape from in declaring a goal to become “less dependent on freight rates” and ocean business overall relative to landside opportunity.
“As part of the transformation towards becoming one integrated container and logistics company less dependent on freight rates, the focus will over the coming years be on growing the non-ocean part of the business disproportionally to the ocean business,” the company said in its first-quarter interim report.
Maersk said that in its logistics business the company achieved strong 6 percent top-line growth but failed to convert that to profit, due to digital investments. Still, what came through in the results was a focus on offering end-to-end logistics, a move that has triggered a debate about where and how container carriers will compete with forwarders. “The customer wins and strong pipeline [in logistics services] is part of the execution of the strategy of providing customers with end-to-end solutions,” it said in the interim report. That is a direction that mirrors that of CMA CGM, which in April announced plans to acquire a 25 percent stake in logistics provider Ceva — also with an eye on growing in the end-to-end market. However, it is not a strategy that has yet been followed by other major carriers Mediterranean Shipping Co. and Hapag-Lloyd. The challenge in making the Maersk business less vulnerable to rate volatility was illustrated in late April when Maersk CEO Soren Skou, in a speech in Singapore, criticized state subsidies for container ship construction, saying "I don't think any government needs to throw money at container shipping, building ships that are not needed."
The Danish group reported an underlying loss of $220 million in continuing operations, following Hapag-Lloyd, which reported a loss of $40.5 million, Yang Ming Line, which lost $67 million, and Hyundai Merchant Marine, which reported a loss of $164 million. It also follows the integration of Hamburg Süd into the group, with the newly acquired carrier’s profit and volume incorporated into the results.
Maersk Group CEO: performance is ‘unsatisfactory’
Soren Skou, CEO of the Maersk Group, was not pleased with the figures, describing the performance as “unsatisfactory.”
“In the first quarter of 2018, we reported a 30 percent revenue growth and the integration of the business is well under way with a successful start to the Hamburg Süd integration and the closing of Maersk Oil transaction in March with an accounting gain of $2.6 billion,” he said.
“At the same time, on the short-term performance, our result especially in the ocean-related part of the business was unsatisfactory. In response to the current challenging market conditions we are implementing a number of short-term initiatives to improve profitability and we reiterate our guidance for 2018.”
Maersk expects its 2018 profit to be above the $356 million achieved in 2017, with volume expected to grow slightly below the market growth of 2 to 4 percent.
Maersk Line transported 3.2 million FEU on all the trades it covered in the first quarter, with the Hamburg Süd liftings pushing the year-over-year growth up by 23 percent. Hamburg Süd’s volume also made the north-south trades the largest in the Maersk Line portfolio.
Average freight rates were up 7 percent, but on the east-west trades the average rate actually declined slightly compared with the first three months of last year. For example, the average Shanghai Containerized Freight Index rate from Shanghai to the US West Coast per FEU was down 25.1 percent in the first quarter to $1,346.83, according to Shanghai Shipping Exchange data. Average rates on the Asia-Europe trade were down 9.5 percent to $948.25 over that same period. Ocean shipping spot rates can be found on the JOC Shipping & Logistics Pricing Hub. To do its part to strengthen freight rates, Maersk said it will abstain from any new ship orders for the next 12 months.
Skou said that the existing global container ship orderbook is about 12 percent of the global container ship fleet compared with 60 percent a decade ago and it has now reached a satisfactory level, given expected rise in demand and deletions of old ships. A large part of the orderbook is due for delivery in the first half of this year, but the pace should decrease after this to create room for an improvement in the balance between supply and demand.
The company as of first quarter 2018 will report numbers based on the following segments: Ocean, Logistics & Services (including Damco), Terminals & Towage, and Manufacturing & Others.
In its review of the market, Maersk said goal container demand grew by 3 to 4 percent in the first quarter, which was a slowdown compared with the growth rate of 2017, as the market was affected by softening global retail sales. Container demand in the United States and Europe fell year over year, while Asian imports from the United States and Europe fell significantly, reflecting China’s ban on waste and scrap material, as well as a slowdown of the Chinese economy.
Maersk: first-quarter global container demand up 3 to 4 percent
“Global container demand grew by around 3 to 4 percent in [first quarter] 2018 against [first quarter] 2017, demonstrating a slowdown compared to the strong growth rates recorded in 2017,” the company said. “This development reflects a weakening momentum of the global economic environment, driven by soft global retail sales. Container demand on the East-West trades softened in [first quarter] 2018, partly driven by weaker imports in the US following high growth rates in previous quarters.”
Meanwhile, it was a different story on the north-south trades, where container demand continued to strengthen, mainly in parts of South America and Africa. The development reflected an economic stabilization in countries such as Brazil, Argentina, and Nigeria, but also came on the back of a strong correction in inventory dynamics following sharp reductions in preceding years, Maersk said.
Unit costs were 12 percent up on the first quarter of 2017 at $2,072 per FEU, largely a result of the average bunker fuel price rising 19 percent, but also because of higher terminal and feeding costs, the company said.
Through April, the average price per ton of IFO 380 bunker fuel across the ports of Rotterdam, New York-New Jersey, and Shanghai has risen 21.6 percent from the start of 2017 to $387.48, according to IHS Markit data.
Hamburg Süd reported volumes of 563,000 FEU with an earnings before interest, taxes, depreciation, and amortization of $88 million, and Maersk said synergies are starting to be realized within procurement, network optimization, and increased volume at gateway terminals operated by APM Terminals. Total synergies of $350 million to $400 million are still expected by 2019. The integration costs in the first quarter were $13 million.