It “would have a very negative effect on our business”: Maersk CEO
A.P. Moller-Maersk – a conglomerate that includes the largest container carrier in the world, transporting about 19% of all seaborne containerized cargo, plus large port operations, an oil driller, and other units – got caught in two industries that saw prices collapse: seaborne container freight and oil.
So it reported a doozie of a “surprise” today: a loss of $2.67 billion in the fourth quarter, and a loss of $1.9 billion for the year 2016, its first annual loss since 2009, when shipping had come to a near standstill during the Global Financial Crisis, and its second loss since World War II.
It could have been worse: bunker fuel rates, as a result of the oil price collapse, were 29% lower in 2016 than in 2015, the company said, and this helped bring costs down.
But it’s doing a heck of a lot better than Hanjin, one of its big competitors that went bankrupt last August and is now being liquidated, with Maersk picking up some of the pieces.
The loss included write-downs in Q4 of $2.76 billion, mostly for its oil related businesses. One-time items? No. An annual occurrence: In 2015, write-downs amounted to $3.18 billion, most of it in Q4 (though it still managed to eke out an annual profit of $925 million); in 2014, $2.7 billion; in 2013, $369 million; in 2012, $499 million. And so on. In total, $10.7 billion in write-offs since 2010.
Revenues have been on a downward spiral since peaking in 2012 at just under $50 billion. By 2014, they were $47.6 billion. By 2015, $40.3 billion. And in 2016, revenues dropped another 12% to $35.5 billion.
From 2012 through 2016, revenues have plunged 29%! Most of the revenue action is taking place in its two largest units:
Revenues of Maersk Line, the container carrier unit, dropped from $27.4 billion in 2014 to $23.7 billion in 2015 and to $20.7 billion in 2016. A 24% drop in two years.
Revenues of Maersk Oil peaked in 2012 at $12.6 billion. By 2016, they were down to $4.8 billion. A 62% plunge in four years.
In 2016, as the industry was consolidating, with some of its members keeling over, wrecked by overcapacity among carriers and lackluster demand growth for manufactured goods around the world, freight rates plunged 19% year-over-year, Maersk said.
In this scenario, Maersk “unexpectedly lost money in 2016,” as Bloomberg put it. “Unexpectedly,” because analysts had forgotten to expect the annual write-offs. Instead, they’d expected the company would make $963 million.
So there are some changes. Maersk is trying to spin off its four beleaguered energy units and concentrate on its beleaguered container carrier unit, port operations, etc. Its chairman, Michael Pram Rasmussen, is stepping down. It’ll cut its annual dividend. And it issued soft guidance for 2017. And on the Copenhagen stock exchange, shares dropped 5%.
The company estimated that demand for containers edged up 2% to 3% in 2016, and it expects the market to grow 2% to 4% in 2017. That’s the number of containers to be shipped, not dollar revenues, which depend also on freight rates.
Through its acquisition of the German carrier Hamburg Süd and by picking up pieces here and there, Maersk expects to carry 9% more containers in 2017 than it did in 2016.
CEO Soren Skou said in a phone interview on Wednesday that “the price war among container lines” had ended in Q3 2016, that the industry has hit bottom, and that a recovery should become apparent in 2018.
“Things are looking a lot better now than they did a year ago,” he said. “We are starting this from a strong position.”
But there’s a big risk to this rosy forecast: a trade war with China.
Trade issues with NAFTA partners have little impact on the company. “But when the talks come to a potential trade war with China, we sit up and listen,” Skou said. “That would have a very negative effect on our business.”
A trade war between the US and China would muck up his forecast. Goldman Sachs analysts estimate that if the White House imposes tariffs of 10% against China, its exports to the US could plunge by as much as 25%. Even a fraction of this would crush the results of Maersk and other container carriers, prolong the collapse of the shipping industry, and provide fertile ground in the financial media for the word “unexpectedly.”
So what happened to Hanjin’s 98 containerships – and their “opaque” ownership? And what happened to container freight rates that had plunged to historic lows in early 2016 and caused already listing Hanjin to keel over entirely? Read… What the Heck Happened to Hanjin’s Ships and the Collapsed Freight Rates?
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
You would think after their biggest rival went bankrupt they would either get much more business and/or could raise rates…
There may not be all that much business to get. To compound the problem, there is an awful lot of carrying capacity out there. I have a bad feeling about this.
They did raise rates, starting last summer, by quite a bit, but rates were so low that they’re still low, even after they’ve managed to push them up quite a bit
Researcher the word glut.
Then add to that the FACT that china is trying to bankrupt all other shippers in the region.
By continuing to build and supply mega container carriers to cosco for free and giving cosco as much money as it need’s top stay in business and bankrupt all other asian reigon shippers.
All indirectly and clandestinely off course.
Just shows how much capacity is out there, but hey the markets are at all time highs, hilarious.
Hmm… hilarious, indeed, that’s the word for them!
There won’t be a trade war with China. Jared Kushner had a meeting with the Chinese ambassador and the Golden Girl herself visited the embassy with their daughter (the later even sang some song in Chinese). I am sure backdoor diplomacy is being exercised right now. You can bet there will be a flurry of deals the Chinese will suddenly make in the US to make Murica great again.
There were rumors that the Russian had asked the Chinese to join forces to kick Murica to Timbuktu and beyond during the last GFC, but the Russians would never understand that the Chinese has always loved money more than anything else. A way will be found for both sides to make moolah.
Under the current administration ” Backdoor Diplomacy ” tends to take on a much more anatomical meaning …. if you catch my drift. LOL Rolleyes.
Any sort of Nafta redraft and/or China tariff would whip out half the remaining carriers in a Q.
The global economy is already contracting (has been since 2012 – regardless of the numbers JOC publishes)
Canary in the coal mine, I would say. Getting better is not an option, only downhill now and probably forever.
Aloha friends..hate to muck things up..WHY no mention of the ‘New silk road’..? China’s massive RAIL effort to Massively Reduce shipping time,as well as Cutting the Need for even the Current Container Traffic…? thanks for reading,aloha
Evidently the “fake” news is doing a great job covering that up as it doesn’t fit the narrative of a collapsing Russia/China
land transport is multiple times more expensive than sea transport (can’t remember how much off hand, but it’s a lot). a new eurasian railway will only ever occupy a small niche – it’s not going to replace or put any kind of significant dent in container shipping
Tell that to Warren, he woulnt necessarily agree. I read a piece over 10 years ago, that the Panama canal lost its strategic influence with the upgrades on the USA rail system. Thus it was sold to China.
“I read a piece over 10 years ago, that the Panama canal lost its strategic influence with the upgrades on the USA rail system.”
Explain how you move a carrier battle group, by rail from the Atlantic to the pacific faster by rail, than by the canal??
You need multiple trains longer than the longest train in the world to shift the cargo carried on 1 super container carrier.
The mew silk rail is about Strategy the ability to trade and import weapons if sea lanes are cut. It is only economically efficient for urgent or small volume trade. As it is faster from Beijing to Europe by rail.
Revenue from 50 bio to 35.5 says it all
Oversupply of Ships and global growth in a pickle.
Let’s hope that the Chinese are not able to use this opportunity to kill all competitors.
“Let’s hope that the Chinese are not able to use this opportunity to kill all competitors.”
The chinese CREATED this container shipping situation, to do just that.
Speaking of shipping: last Christmas the Taiwanese (Nationalist Chinese to oldtimers like me) government announcement a “massive” US $1.9 billion aid package for the local shipping industry, which includes heavy hitters such as Evergreen Marine, Wan Hai Lines and of course the largest fish in the pond, YangMing Marine.
Interesting is how the Nationalist government, through the Ministry of Transports and Communications (MOTC), has already announced it will expand its ownership of YangMing “well beyond” the present 33.3%.
In short this means YangMing will become to all effects a State-owned enterprise, just like COSCO across the Formosa Strait. Wan Hai and Evergreen haven’t announced what will become of them yet, but it’s likely they will follow suit, especially as inflation and reality won’t stop biting merely because Maersk has increased rates.
As reported by Mr Richter previously, the three largest Japanese shipping companies (Mitsui OSK, Kawasaki Kisen Kaisha and Nippon Yusen) have announced they will merge their container shipping business in a yet to be named venture that will start operations in 2018. This new combined fleet will include a number of “New” Suezmax container carriers Mitsui OSK ordered just before the merging was announced.
This is a classic case of Japan Incorporated at work: the new ships will be built by Imabari Zosen, which just last year completed new dry dock facilities to build container carriers “in excess of” 20,000 TEU’s. Engines will be obviously supplied by Mitsubishi Heavy Industries, one of the three worldwide manufacturers of the big two stroke diesel engines which are the prime movers of maritime trade.
And the dredging operations of the Suez Canal which allowed most ships previously classified as Capesize (meaning they had to go around the Cape of Good Hope to get from the Indian Ocean to Europe) to pass through Suez were led by Kajima, a giant construction company.
Asia is gearing up for some monumental changes, her way. I am waiting for Europe’s reply.
“(Mitsui OSK, Kawasaki Kisen Kaisha and Nippon Yusen) have announced they will merge their container shipping business in a yet to be named venture that will start operations in 2018.”
Formally merge it, they have been running them as a cartel for over 37 years in my experience.
I would suggest the formal public merger, is about staff and overhead cuts more than anything else.
3 corporate head offices are expensive. When nobody is making any money.
For those with capital to risk, it might be a great time to buy. DJT being the big risk. I’m betting on no trade war. A couple of big Chinese investments in the USA and the Donald can declare us great again.
To many condos, to much oil, to many container ships, just to much capacity in most everything. Yet there are plenty of people to buy except people don’t have the money or credit.
The multi nationals kept going after the lowest costs but that means cheapestate labor. A person working in a call center in India only makes $100 a month. And compared to those with no job, it is good pay. Yet that leaves the world with cheap production with few able to afford anything beyond survival.
Stockman pointed out over 2 years ago that the Baltic Dry Index (which maintains a measure of worldwide freight activity), had dropped to it s lowest level since it was put in place in (I believe) the early ’80’s.
Then it dropped more…then Hanjin went down.
World trade / demand has collapsed, hasn t it. Retail in the us is diminished and consumer spending here has dropped from 70% to 67% of GDP, from what I ve read.
…why…it s all so…..unexpected!
The curse of free money is malinvestment on a global scale resulting in a glut of commodities and services. At least initially. Once we get wage inflation, we’ll be off to the (inflation) races. Watch wages.
So what’s the driver of wage inflation?
We may have wage inflation in China and India but i don’t think we have to worry too much about that in the USA or Europe.
Actually, this populist $15 hr. minimum wage that has kicked off in some larger west coast cities has to be hurting small businesses, especially restaurant and retail.
In my opinion, the financial press does not spend enough time covering the small business landscape. After all, we know it’s a huge one.
The small business landscape has been greatly diminished over the past 20 years as a consequence of “industry consolidation” based on cheap credit to favoured large enterprises.
Everything from the corner grocery stores, to the independent mechanics, and family restaurant have been largely consolidated. We no longer have small business owners spending profits in Main Street… Instead we have underpaid local managers supervising McEmployees at minimum wage. Corporate profits and executive compensation are verging on the obscene… and supressing the minimum wage only adds to the obscenity.
Small business will continue to be gobbled up (even more so under Trump..as credit to Wall Street will be expanded and corporate “profits” will soar.
Main Street will continue to shrink… and a scapegoat will be offered…”greedy unions? underemployed millenials demanding minimum wage hikes?, Mexicans?… always the weakest amongst us….