How Maersk Is Coping With the Trade Slump
CEO Nils Andersen acknowledges the choppy seas but says the shipping firm is preparing ‘for the time that things normalize’
By buying bigger container ships, such as those in the Triple-E class, above, Mærsk and its competitors hoped to squeeze out costs. PHOTO: SEONGJOON CHO/BLOOMBERG
As the world was only just emerging from the global economic crisis, Danish shipping and oil conglomerate A.P. Møller-Mærsk A/S made a big gamble.
In 2011, it ordered 20 of the world’s biggest container ships, called Triple-Es—new designs, each the size of the Empire State Building tipped on its side, and costing $185 million apiece. Shipping executives termed the move as part of a shipping-industry “arms race.”
By buying bigger ships with more efficient engines, Mærsk and its big competitors hoped to squeeze out costs—and smaller competitors. That, they hoped, would winnow down the massive overcapacity of shipping tonnage built up after the crisis, and position them for profit when global growth picked back up again.
Five years later, the wager looks far from a sure bet. Global shipping demand cooperated at first, climbing between 3% and 5% annually from 2011 to 2014, according to analysts’ estimates.
Small shipping firms, however, managed to stay afloat. In mid-2014, they started to benefit from fast-falling fuel prices, enabling them to cut their own shipping prices.
As overcapacity swelled to about 30%, shipping rates per container on the Europe-Asia loop fell from about $1,765 at the start of 2014 to as low as $934 by November of that year.
Then global demand vanished. Going into 2015, Mærsk Chief Executive Nils Andersen was expecting another year of about 3% to 4% demand growth. Instead, it came in at 1%, he said in an interview. Demand on Asia-to-Europe routes fell by as much as 5%, and freight rates fell to an average of $620 a container for the year.
A.P. Møller-Maersk chief Nils Andersen, shown last year, expects a trade pickup this year thanks to the weaker yuan and ‘reasonable economic growth in Europe.’ PHOTO: WU HONG/EUROPEAN PRESSPHOTO AGENCY
The troubled waters at Mærsk, the world’s largest container shipper by volume, underscore the fitful, uneven recovery in the global economy since the crisis. Many parts of Europe remain stalled by high debt and unemployment, slowing growth and trade. Asia—particularly China, which helped power the global economy amid the worst of the crisis—is now petering out, too.Suddenly, the industry was reeling even more than it was in the depths of the global recession. “In 2009, we saw volumes collapse by 30%, and freight rates fell,” he said, “but not as much as in 2015.”
The U.S. has been a bright spot, but not enough of one to make up for the rest of the world. Chinese demand for European luxury goods fell amid slowing growth and a crackdown on corruption there. Europe imports of Asian goods fell, too, Mærsk said.
Russia’s weak ruble and Western sanctions against Moscow also hit world trade. Brazil and other oil-producing countries, particularly in Africa, have been walloped by falling oil revenue.
Mr. Andersen says he expects a pickup this year, thanks to the weaker yuan, which should boost Chinese exports, and “reasonable economic growth in Europe.” That should translate into shipping-demand growth of about 3% this year, he says. “With both oil prices and freight rates down you tend to get very worried with all lines pointing down,” he said. “But this is not the way the world works. We have to prepare ourselves for the time that things normalize.”
The shipping industry serves as a bellwether for global trade. It is responsible for moving 95% of the world’s manufactured goods, from clothing, electronic and toys to industrial equipment.
Despite some fresh signs of consolidation, it remains dominated by just over a dozen European and Asian operators. They have scrambled to seal operating alliances—and in a few cases, full-blown mergers—to help reduce capacity.
The Maersk Kure sits in dock as its freight is unloaded at the Port of Felixstowe in the U.K. late last year. Maersk is weathering a trade slump worse than the one seen during the 2007-09 recession. PHOTO: SIMON DAWSON/BLOOMBERG NEWS
But big ship purchases, such as Mærsk’s 2011 commitment to buy its Triple-Es, are making capacity reduction harder to pull off. New ship deliveries will boost overall capacity this year by 1.3 million containers, or 5%, figures Jonathan Roach, at brokerage Braemar ACM Shipbroking. He expects demand growth, however, to max out at 1.5%, the lowest since 2009.
“It’s a grim picture for container shipping,” said Mr. Roach. “And it won’t change in the near term.”
Mærsk has taken a double hit. In addition to its giant shipping business, it operates a large oil division, which has also suffered amid today’s commodities rout. In November, Mærsk said it would cut 4,000 jobs from its land-based staff of 23,000.
The company hasn’t canceled any of its firm Triple-E orders, from 2011 and others made last year. But it said in November that it was passing up options to buy six more of them, and it was putting off plans to purchase eight slightly smaller vessels.
Mr. Andersen says he doesn’t regret the Triple-E purchases. They came after a long period when the company had refrained from orders.
“Oil prices will eventually recover, along with freight rates,” he said. “Our job [is] to go through the crisis.”
