Weaker global economic environment pulls on volume growth at Maersk

5/20/2018

A slowing economic outlook and prospects of trade wars have put a dampener on Maersk’s efforts to reorganise itself as a global integrator of container logistics, with the world’s largest container carrier reporting weak figures for the first quarter.

Rising oil prices, which have seen the cost of a barrel of oil touch $80, have also hit Maersk’s unit costs, eating into profitability.

The result was a performance that chief executive Søren Skou described as “unsatisfactory”.

Maersk said global container demand grew by around 3%-4% in the first quarter of 2018, demonstrating a slowdown compared to the strong growth rates recorded in 2017.

“This development reflects a weakening momentum of the global economic environment, driven by soft global retail sales,” the company said. “Container demand on the east-west trades softened in the first quarter, partly driven by weaker imports in the US following high growth rates in previous quarters. European import growth was also slowed down, mainly reflecting the drop in retail sales growth.”

Meanwhile, Asian imports from the US and Europe declined significantly, reflecting the ongoing Chinese ban of waste and scrap materials as well as a gradual slowdown of the Chinese economy.

Elsewhere the threat of trade wars and new sanctions being imposed on Iran would also have an effect.

“With the sanctions the Americans are to impose, you can’t do business in Iran if you also have business in the US, and we have that on a large scale,” Mr Skou told Reuters in an interview.

Maersk said a number of short-term initiatives were being implemented to improve profitability, but that it was maintaining its guidance for the rest of the year.

But while container demand growth was at 3%-4%, when Hamburg Süd’s contribution to Maersk’s volumes is stripped out, the Danish company’s volumes were up only 2.2%.

And despite recording higher freight rates, largely due to including Hamburg Süd’s traditionally higher rates on its north-south trades, Maersk has had to contend with higher unit costs as a result of foreign exchange fluctuations and rising fuel costs.

Rates on the north-south and intra-Americas trades have been higher this year, but on the critical Asia-Europe trade the situation has been “more tense”, according to chief commercial officer Vincent Clerc.

“Significant capacity increases on the east-west trades have been a significant impediment,” he said during an analyst briefing following the group’s results

He added that it had been difficult to pass on fuel price rises to contract customer who had signed their contracts ahead of the rise in the oil price.

“We have not been able to recover the totality of the bunker price increase,” chief commercial office Søren Toft said. “That has had a lot to do with the contracts we have negotiated recently on the Pacific. You have the double impact of capacity introduction on the Pacific, which has depressed rates, and the continuing increase in bunkers, which has made the quantum that we needed to achieve bigger than anticipated.”

Nevertheless, Mr Skou remained committed to the company’s guidance for the year, reiterating expectations for 2018 of an underlying profit above the $356m it made in 2017, but “noting increased uncertainties due to geopolitical risks, trade tensions and other factors impacting freight rates, bunker prices and rate of exchange”.

He was also positive on the supply side.

“We continue to have a view that we will see a better supply/demand balance,” he said. “If you look at the long-term view, we have come from a situation in 2008 where the orderbook was 60% of the existing fleet. That is now down to 12% and we are working through the excess.”

Maersk itself has enough tonnage to meet demand and has no plans to order anymore ships for at least 12 months, he added.

After a raft of deliveries in the first half on 2018, Mr Skou said he expected this to taper off in the second half of the year, with supply growth falling to 2%.

Maersk’s results showed a first-quarter net loss of $239m in its first quarter reporting under its new structure.

Revenues for its up four new business segments were up 30% to $9.3bn, which includes revenues from its Hamburg Süd acquisition.

"In the first quarter of 2018, we reported a 30% revenue growth and the integration of the business is well underway with a successful start to the Hamburg Süd integration and the closing of Maersk Oil transaction in March with an accounting gain of $2.6bn,” Mr Skou said. “At the same time, on the short-term performance, our result especially in the ocean related part of the business was unsatisfactory.”

Ocean earnings were up 5% to $492m but the group's underlying loss increased 70% from $139m in the first quarter of 2017 to $239m in the first three months of this year.

Maersk introduced its new financial reporting structure for the first time this quarter as part of its move to become a global integrator of container logistics. The four new business segments (Ocean, Logistics & Services, Terminals & Towage and Manufacturing & Others) are aligned with the strategic focus on growing the non-ocean part of the business disproportionally to the ocean.

“The new format reflects that we are an integrated global container transport and logistics business focusing on our customers' value chains, and it allows us to follow our progress, particularly in those parts of the business which are not purely ocean freight, which we need to grow in order to minimise the cyclical part of our business," Mr Skou said.

The non-Ocean parts of the business reported revenue growth with 6% in Logistics & Services and 11% in Terminals & Towage, reflecting growth in volumes driven by commercial wins and new terminals and services, Maersk said.

“Further, synergies have been realised from increasing collaboration especially between Ocean and gateway terminals, leading to volume growth significantly above the market growth.”

Revenues grew by 30% to $9.3bn, but excluding Hamburg Süd, this would have been only 10%.

Earnings before interests, tax, depreciation and amortisation increased by 5% to $669m, but were hit by adverse exchange rate developments of $100m.