Rising bunker prices pull Maersk Line to loss

Rising bunker prices pull Maersk Line to loss

Maersk Madrid, seen here calling at Tianjin, is the first of eleven 20,600-TEU, second-generation, Triple-E ships that will be delivered over the next 18 months. Credit: Maersk

Maersk Line reported a $66 million loss in the first quarter of 2017 but remains confident that steadily rising container rates will keep the carrier on track to meet its goal of the full-year net profit beating the 2016 loss by more than $1 billion.

Soren Skou, CEO of Maersk Group, said the liner division’s earnings were pulled down by bunker fuel prices that increased by 80 percent compared with the first three months of last year, but the carrier’s profit goal was still in play.

“Maersk Line is on track to deliver a result improvement of above $1 billion for 2017 compared to 2016, despite an underlying loss of $80 million in the first quarter, driven by a $381 million higher fuel bill,” he said in a statement.

“Both spot freight rates and contract rates have increased during the quarter, lately also on the North-South trades. Maersk Line is focused on restoration of profitability and maintaining market share in the next quarters, as industry fundamentals improve.”

The Maersk Group reported a profit of $253 million with revenue reaching $8.9 billion in the first quarter, and expects to achieve an underlying group profit for 2017 that will be above the $711 million recorded in 2016.

Global demand for seaborne container transportation was still expected to increase by 2-4 percent this year. Maersk Line’s transported volumes rose by 10 percent, partly because of improved demand but also reflecting an increased market share that was maintained from the second half of 2016.

Volume mainly increased on backhaul (16.1 percent) and less on headhaul (7.4 percent) with the increase driven by improved demand growth and market share gains that were maintained from the second half of 2016. There were also volume increases in the North America and West Central Asia trades.

Skou told reporters and analysts that he expected to see improvements in all of the three drivers of the bottom line — prices, volume, and cost — but most of the improvement would come from higher freight rates.

“This year, our contract portfolio has been renewed at much higher rates than last year. Spot rates today are also much higher than what they were last year when the market bottomed out, so we are confident we can deliver on the $1 billion profit improvement guidance for 2017,” he said.

Maersk Line reported a 2016 annual loss of $376 million despite recording greater container volumes and lower unit costs during the year. Not even a 9.4 percent increase in container volume to 10.4 million TEU could offset the effect of poor rates that fell to record levels in the first quarter of 2016.

It was a different story in the first three months of 2017. Average freight rates in the first quarter increased by 4.4 percent to $1,939 per FEU with 2.6 million 40-foot containers transported during the three month period, driven by an increase in the East-West rates of 23 percent and especially from Asia to Europe, while North America was on par with last year. The rates are tracked weekly at JOC.com's Market Data Hub.

However, the 80 percent rise in bunker prices pushed up unit costs per FEU to $2,087, with the carrier effectively losing $148 per FEU transported. Compared with the fourth quarter of 2016, total unit costs increased 5.8 percent, mainly because of lower utilization and higher bunker prices.

The Transport and Logistics division, created last year as the Maersk Group integrated its businesses, achieved consolidated revenue of $7 billion, up 10 percent compared with the first quarter of 2016 and driven by revenue growth in all businesses, with the exception of Svitzer.

Maersk Line on May 5 confirmed it is paying 3.7 billion euros ($4 billion) cash for Hamburg Sud, and Skou said the acquisition was progressing as planned and would be closed in the fourth quarter, subject to regulatory approvals. The US antitrust authorities have approved the acquisition and the EU commission has approved subject to conditions.

Maersk Line intends to divest the Brazilian carrier Mercosul with the purpose of securing approval from the Brazilian competition authorities (CADE) for the acquisition of Hamburg Süd. The divestment will ensure that the cabotage market in Brazil remains competitive.

“The acquisition will deliver substantial revenue, volume, and market share growth as well as operational synergies of $350-400 million per year from 2019,” Skou said.

By end of the first quarter, the Maersk Line fleet consisted of 284 owned vessels (19 million TEU) and 355 chartered vessels (1.3 million TEU) with a total capacity of 3.2 million TEU, an increase of 8.1 percent compared with the first three months of 2016 but on par with the fourth quarter of 2016. Four vessels with a total capacity of 35,000 TEU are being idled.

During the first quarter, Maersk Line scrapped seven Panamax vessels and postponed the delivery of three 3,600 TEU ice-class vessels from 2017 to 2018. Maersk Line has 27 vessels in the order book (386,000 TEU) for delivery in 2017 and 2018 consisting of eleven 20,600 TEU second-generation Triple-E, nine 15,000 TEU vessels, and seven 3,600 TEU ice-class vessels for the intra-European market. The carrier’s total order book corresponds to 12 percent of current fleet, compared with an industry order book of around 15 percent.

The container ship fleet doubled between 2000 and 2016, from 2,541 to 5,066 vessels, quadrupling capacity to more than 20 million TEU from just less than 5 million in 2000, according to IHS Markit data. Container capacity in 2016 rose 1.2 percent to 20.1 million TEU, and it was the first year there were more vessels retired then there were vessels delivered.

The first-quarter performance of Maersk Line’s peers has been mixed. Cosco Shipping Holdings bounced back from its huge 2016 loss with a profit of $39 million in the first quarter driven by its container division that reported surging volumes and a solid increase in revenue.

Cargo volume at Cosco Shipping Lines, which operates a fleet of 327 container ships, shot up by 54 percent compared with the first three months of 2016 with the liner unit carrying 4.65 million TEU. Revenue from container shipping rose 11 percent year-on-year to $500 million as the market maintained its steady recovery that began in the fourth quarter of last year. In the first quarter of 2017, the average China Containerized Freight Index reached 825 points, up 8 percent quarter-over-quarter. The weekly rate movements can be tracked at JOC.com’s Market Data Hub.
In its first-quarter operational update, Orient Overseas Container Line also reported dramatic increases in container volumes and revenue on the Asia-Europe and trans-Pacific trades. Trans-Pacific volume in the first three months of the year was 393,469 TEU, a 20 percent increase over the same period of 2016, while Asia-Europe liftings reached 251,289 TEU, up 17.6 percent year-over-year.

The three Japanese carriers — Mitsui OSK Lines, NYK Line, and "K" Line, which are planning to merge their container divisions into a new joint venture after this financial year — posted combined operating losses of $550 million in the year ended March 31 but remain optimistic that the market is staging a gradual recovery and expect to be profitable this year.

Hapag-Lloyd has not yet released its first-quarter results, but the carrier said in March that long-term contracts limited its ability to cash in on rising spot market rates in the run up to the launch of THE Alliance on April 1.

Hapag-Lloyd closed the year with a net loss of 93.1 million euros ($100.5 million) against a profit of 113.9 million euros in 2015. “We expect some market improvement in 2017, but our success will largely depend on our ability to achieve more sustainable freight rates,” said CEO Rolf Habben Jansen.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.