Maersk Views 30-Year Horizon
Company figures smaller shipping firms will leave the business
Nils Andersen concedes investing in new vessels is risky but points to Maersk’s big market share, high profitability and strong balance sheet. PHOTO: MIKKEL HERIBA FOR THE WALL STREET JOURNAL
COPENHAGEN—Danish conglomerate A.P. Moller Maersk A/S is a global energy player and the world’s leader in seaborne trade.
It transports containers aboard giant ships, which, if stood straight up, would be as tall as the Empire State Building.
Container shipping grew rapidly over the past two decades, but a ship-building boom that coincided with the global economic crisis reduced shipping rates, and the industry is still trying to recover.
Maersk Line, the group’s shipping arm, has spent about $5 billion on a fleet of ultra-large vessels, called Triple Es, to move cargo from Asia to Europe, the world’s busiest trade line. Their efficient engines reduce transport costs compared with older ships. But some skeptics say that the big investment may backfire if the market continues to be weighed down by all the excess tonnage.
Maersk is betting that smaller shipping firms will leave the business in coming years, unable to compete with the big shipping companies. Those giants are increasingly forming alliances to cut costs further. Last year, Maersk Line teamed up with Geneva-based Mediterranean Shipping Co., pooling ships and port operations.
Maersk Chief Executive Nils Andersen sat down with The Wall Street Journal at Maersk headquarters here. Edited excerpts:
WSJ: What do you see happening in shipping in the next 12 months?
Mr. Andersen: We’ll see relatively slow growth, around 3% to 5%. Volume at the start of the year was slow. There is overcapacity, of course, but also rewards for those who run their network relatively tightly and are realistic in their market forecasting. In the longer term we shouldn’t expect overcapacity to disappear.
WSJ: How long can Maersk hold out with unsustainable freight rates, especially in Asia-Europe?
Mr. Andersen: The Triple Es are specialized ships for Asia-Europe. They are still a relatively small part of our total tonnage, so in that sense I don’t think they add to our risk.
WSJ: Skeptics say your investment in Triple Es could backfire? Could it?In terms of holding out, it’s difficult to estimate. The rates go up and down all the time. But in 2014, our profitability was around 9% above the average of the industry. So we can hold on a lot longer than the industry. We don’t feel any particular pressure.
Mr. Andersen: Investing in new vessels entails risk, but our risk is lower compared to the competition, because we have a larger market share, high profitability and a strong balance sheet.
We have to see these things in a 30-year horizon. We add [Triple E] capacity of 3% to 5%, in line with annual growth, and we also want to grow our owned fleet at the expense of chartering vessels, which will grow less.
WSJ: How do you expect smaller competitors to stay afloat?
Mr. Andersen: I can’t speak for other companies, but small and mid-size carriers controlling a 3% to 5% market share—with very few exceptions—have been unprofitable for the last seven years. After such a long period of not being profitable, it defies logic to continue to invest in adding capacity into the business.
WSJ: Will the rising consumer class in Asia and South America change trade patterns?
Mr Andersen: Trade to developing markets will increase. So imports to destinations like China, Africa and Latin America will grow. It won’t happen every year because those consumer markets are very volatile, but fundamentally we believe this is the way the direction will be.
WSJ: What about the oil price?
Mr. Andersen: Generally, the higher the oil price, the higher profitability for the group because of our oil production and oil services.
In the short term weak oil prices can be an advantage to the group because of the lower bunker costs for Maersk Line. But in the longer term it’s a disadvantage. For Maersk Oil, $55-$60 per barrel is the break-even point. We are not uncomfortable, but a higher oil price is better for our earnings.
Now we have a period of low oil prices, which make it less expensive to expand our oil business as you can buy into fields at lower prices and the cost of capital expenditure is going down.
We have large investments ahead of us—between $3 billion and $5 billion a year to the end of 2019—in Norway, the U.K., potentially in Qatar. So at this point in time the lower oil price is not bad.
WSJ: How do you see oil prices going forward?
Mr. Andersen: I would not exclude oil prices going down again, something like $55 in the short term. But in coming years we may see an oil price of around $70, which is a realistic level.
