Stormy Seas Seem to Be Calming for Shipping Lines

Stephen DeAngelis

July 22, 2010

Last year about this time, I was reporting on the financial hit that the shipping industry had taken as a result of the Great Recession [see Shipping Woes]. The blow was especially painful because it was unexpected. Only two years earlier, analysts had predicted a rosy future for the shipping industry. As I noted in the post just mentioned, “Demand for new ships seemed strong [in 2007], container throughput at ports was increasing, and the number of Ultra Large Container Ships, that is, those with a capacity of 10,000 containers (TEUs) or greater, was expected to grow from four to 152 ships in four years.” By December of 2009, shipping lines, including Maersk, were beginning to assess the damage [“Group seeks to clear the decks,” by Robert Wright, Financial Times, 2 December 2009]. Wright reported:

“When traffic in the world container shipping industry started to collapse late last year [2008], AP Møller-Maersk found itself in an unusual position. While other lines had been expanding aggressively in the last years of the sector’s seven-year boom, Maersk Line was already retrenching as it struggled to overcome the problems created by its botched integration of P&O Nedlloyd, the world’s one-time number three line, in 2005. … The key problem is that … areas likely to produce profitable future growth will be overshadowed for years by the bill for the expansion of Maersk’s container ship and tanker fleets. Most of container shipping is in the same or a worse position.”

In March of this year, Maersk was still reporting stormy weather [“Maersk battles to contain losses,” by Robert Wright, Financial Times, 5 March 2010].

“Maersk’s container shipping division recorded a $2.09bn loss for 2009. … In a year in which every large container line haemorrhaged cash, Maersk Line emerged as the biggest loser. The group saw a similar effect in its tanker division, where it is now the world’s largest operator of oil product tankers. The question remains how strongly the industry heavyweight can emerge from a crisis that Maersk itself argues has handed significant advantages to some rivals in the form of state support and cuts in costs for chartered ships.”

Despite the losses, Wright reports that Maersk’s rivals were crying foul because the “line saw volumes carried drop only 1 per cent against a market decline of 13 per cent but average revenue per container fall 28 per cent.” Rivals were charging that to keep volume up Maersk “used its unique financial stability to gain market share by cutting prices.” Wright continues:

“While Nils Andersen, chief executive, accepts that the company decided at the start of 2009 it could not afford to lose market share, he insists it has taken business for other reasons. The company had long neglected the ‘back-haul’ trades – traffic moving in the other direction from the main traffic flow – but won far more such business in 2009. The company has also improved its share of business within Asia, which accounts for more container movements than any other trade. It enjoyed significant advantages through being close to immune to the risk of collapse that threatened many rivals during the year, it appears.”

In spite of the dark clouds hovering over the shipping industry, Andersen indicated last March that there was “more room for optimism” than the numbers might suggest. He also stated that he believed “the key to recovery is likely to lie in containers.” Two months later, Andersen’s predictions proved prophetic as Maersk returned to profitability [“Maersk hints at container revival,” by Robert Wright, Financial Times, 13 May 2010. Wright reported:

“Denmark’s AP Møller-Maersk, owner of the world’s largest container shipping line, announced … a sharp swing back into profit in the first quarter and predicted full-year results would be better than expected. Maersk’s figures provided the latest evidence of the sector’s revival and came as Germany’s Hapag-Lloyd, one of the container lines worst hit by the slump, also claimed it had returned to profitability. … Maersk’s container shipping and related activities division – dominated by the Maersk Line container shipping operation – carried 20 per cent more containers in the first quarter of 2010 than in 2009. It produced net profits of $168m, compared with a $581m loss last year, on revenue up 23 per cent to $5.75bn.”

Wright went on to note that “the main risk for the company was still that large scheduled deliveries of new ships – particularly in container shipping – or reactivation of the hundreds of ships still laid up out of use could bring on a fresh collapse in rates. However, Mr Andersen insisted that operators understood the dangers. ‘It doesn’t serve a purpose to bring in a lot of capacity when the market is the way it is,’ he said.” In June 2010 the situation continued to look rosy. As I noted in a recent post entitled Trouble Predicted for U.S. and Global Transportation Systems, Robert Wright reported that “container shipping demand is rebounding so fast that there might be too few containers available for Asia’s exporters during the coming busy season” [“Shippers facing container shortage,” Financial Times, 18 June 2010]. Wright continued:

“Denmark’s Maersk Line, the market leader, Hong Kong’s OOCL, one of the most admired operators, and another significant line have all said soaring growth – running at about 23 per cent year-on-year in Asia-Europe trade – has wrong-footed them. Partly because they had expected only single-digit growth, none has ordered enough containers to cope with this year’s peak season, which traditionally runs from June to October.”

The latest word from Maersk is that “it now expects to make a bigger profit than it did two years ago” [“Maersk Lifts Profit View Amid Signs of Shipping Revival,” by Ian Edmondson, Wall Street Journal, 9 July 2010]. In another sign that the container industry is recovering, Edmondson reports that “Taiwan’s Evergreen Group said it had placed an order for 10 ships capable of carrying 8,000 twenty-foot equivalent units, its first orders for new vessels since 2003.” He continues:

“The order from the parent of Taiwan’s largest container shipper by revenue, Evergreen Marine Corp., is another indication the container-shipping industry is recovering. Rebounding global demand and aggressive measures to reduce supply in the industry, including slow-steaming and idling of ships, have helped container lines hike freight rates and recover some of the losses they have incurred since late 2008.”

Other sectors of the shipping industry in addition to the container sector are also poised to recover this year. That is good news for at least portion of the troubled Greek economy [“Greek Shippers Weather Storm,” by John W. Miller, Wall Street Journal, 13 May 2010]. Miller reports:

“The top tier of the Greek shipping industry seems poised for a strong year thanks to its focus on tankers that transport oil and chemicals, and dry-bulk ships that carry commodities such as wheat and coal. The industry, second only to tourism in economic importance to Greece, aims to cash in on the boom in shipping commodities to China. … Ironically, Greece’s current financial mess could help shipping companies by deflating wage and real estate costs at home. Other Greeks will have to pay up as the government better enforces the tax code, but Greek shipping companies are exempt from paying corporate taxes, under so-called Law 89. … Greek shipping companies now own roughly 4,800 vessels and control 15% to 20% of the world’s shipping fleet by tonnage, according to analysts. Only Japan has a larger merchant fleet. Since the mid-1980s, over 20 Greek shipping concerns have become public-traded companies. Despite the fact Greek ship owners avoid taxes they comprise a big portion of the nation’s economy. The industry says it contributes about 5% of gross domestic product by employing 250,000 Greeks and using Greek ship-maintenance firms, lawyers, contractors and other service providers. … Greek shipping companies recovered better than others in 2009, primarily because they have relatively little presence in the container market, the market that suffered the most, said Anthony Zolotas of Eurofin Group, an Athens-based firm that advises companies on ship financing. Only 5.6% of the world’s container ships are Greek-owned, compared to about 21% of oil tankers and 18% of dry-bulk vessels, according to Eurofin.”

The global maritime shipping industry is like a canary in a mine when it comes to determining the relative health of the global economy. Fortunately, the once sick canary looks to be on the mend.