“Massive Deterioration,” the CEO called the phenomenon.
“Bellwether for global trade,” that’s how the Financial Times described Maersk Lines, the world’s largest container shipping company. It’s owned by Danish conglomerate AP Møller-Maersk, which also owns, among other divisions, Maersk Oil. The conglomerate reported fourth quarter earnings today. And they were a doozie.
Maersk B shares plunged over 9% to 7,395 Danish kroner, before bouncing off and closing at 7,875, down 3.6% for the day and down a breath-taking 52% from their peak on March 30 last year.
Global economic slowdown — or worse? That’s the question. This is what CEO Nils Andersen told the Financial Times in an interview after the earnings release:
“It is worse than in 2008. The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower. The external conditions are much worse, but we are better prepared.”
“Better prepared,” that is, than the Group had been in 2008.
He called global trade conditions “abnormal.” Containerized imports to Europe, Brazil, Russia, and West Africa all fell – in Europe and Brazil due to various economic reasons; in oil exporters Russia and West Africa due to the collapse in the price of oil.
The earnings report reflected it: in terms of seaborne container freight, the year had started out with some room for optimism and hopes for growth, but in the second half, and particularly in the fourth quarter, those hopes got hammered by an increasingly gloomy reality.
“Massive deterioration,” Andersen called this phenomenon in the interview.
“Acceptable full-year result in challenging times,” is what the Group called the phenomenon in its earnings report.
This “massive deterioration” of its business in the fourth quarter turned into “a perfect storm for the Group,” according to the earnings report: container freight rates collapsed as shipping capacity continued to soar, while growth in global shipping volume came to a halt.
Container shipping rates plunged across all trade routes, on average by 25% for Maersk, and hit an “all time low,” lower even than during the Financial Crisis.
So revenues at container carrier Maersk Line, by far the Group’s largest division, plunged 25% in Q4 to $5.19 billion mostly due to the collapse in rates. Maersk’s shipping volume was flat at 2.4 million forty-foot equivalent (FFE) containers. And this, it said, was “in line with the global container demand which is estimated to have grown 0-1% in Q4 2015.”
That stalled growth in trade is a reflection of the global economic slowdown. The report blamed “weaker imports into Europe” and the “slowdown in emerging markets.”
And yet, as growth in trade is grinding down, “the global container fleet grew by close to 8%,” it said. The global container fleet has been outgrowing demand for years, fired up by cheap money even for risky companies, thanks to pandemic central-bank easy-money policies. Hence overcapacity. Maersk contributed to that glut in ships. It still has 27 ships on order though is has cancelled its options to buy more. The glut of ships in face of weak demand triggered the collapse in rates.
The saving grace for Maersk Line – but not for Maersk Oil – has been the collapse of the price of oil price: Maersk Line’s bunker fuel costs dropped 52%, which lowered its costs per FFE unit by $244. And its “reported profit” swung from a $655 million gain in Q4 a year ago to a loss of $182 million.
The Group’s second largest division, Maersk Oil, got slammed by the oil price collapse. Revenues plunged 29% to $1.3 billion in Q4, and its loss ballooned from $32 million to $2.52 billion. This included impairment charges for “production assets with short lifetime such as Kazakhstan, Kurdistan and the UK as well as full impairment of deepwater assets in Angola and Brazil.”
But here too, a now common theme, played out by oil company after oil company: despite slashing costs and capital expenditures, production actually increased by 21% year-over-year to 333,000 barrels of oil equivalent per day.
In most of the Group’s other divisions, except Maersk Drilling, revenues dropped as well. Consolidated revenues in Q4 plunged 22% to $9.1 billion. In terms of profits, analysts surveyed by FactSet had hoped for $305 million. What they got was a net loss of $2.5 billion.
And the “bellwether for global trade” expects 2016 to be even tougher than last year, with lower freight rates, even more overcapacity, and stalling growth in global trade.
So, what’s booming in this economy? Read…. Bankruptcy & Restructuring Business “Highest Since Great Recession”
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OK, can some of you shipping experts break this down for me?
Is the decrease in the shipping rates due to a decrease in stuff being shipped, OR, due to an increase in available ships?
We might be saying trade is down since the cost of shipping is down, but the downward trend of the costs could be from too many ships and not from the amount of “stuff”.
You got it.
0% growth (so stagnation) in seaborne container shipping volume in Q4.
8% growth in capacity (new container ships)
= glut of container ships in face of stagnating demand = big problems.
What’s worse: The stagnation in shipping volume is new. But capacity has been ballooning for a few years, and overcapacity is now very large.
It is the combined effect of both over capacity and less demand, generating the crash of the freight rates. It is an industry reality that most of the ocean carriers are expected to post losses for the last quarter.
The root cause of the situation is that, ship orders are placed 2-3 years before they are delivered to the owners. You can find the answer, if you check the global economy forecasts that had been made up back in 2013-2014, and compare with what we have been experiencing since 2 years.
And china is still piling on Malacca max container and oil tanker vessels from state subsidized ship yard’s supplying state subsidized shipping companies. In an effort to break the European shippers in both container and oil transport.
Just as it is now piling on diesel exports, in an effort to take over the regions diesel supply industry’s by driving the others into bankruptcy.
This is just more of the chinese unfair trade, massive state supported regional takeover..
Then there was the Hong Kong flagged ultra large cargo ship that ran aground in Germany’s Elbe River. That’s just about perfect for the current global condition.
No growth is a slowdown in global trade. First term is more informative than the other, IMO.
ZH says trucks over 33k are down 48% for January.
http://www.zerohedge.com/news/2016-02-03/its-probably-nothing-january-truck-orders-collapse-48
There is number of MEGA ships being built/finished right now and they are entering service as of now, or in coming months and future years.
Many ships have been converted to oil storage tankers and floating offshore, also there is significant slow down in shipping of goods.
So having all this in mind it is not hard to come to conclusion.
Cheers.
That impairment charges stuff is interesting. See here.
http://www.investopedia.com/articles/analyst/110502.asp
Despite low oil prices, demand for oil is way down. It’s not just a glut. This reflects a general global economic slowdown. Not only is shipping down but trucking in the US is down. We are witnessing the global economy grind to a halt.
This economy slows down anymore, I’m gonna get off and start walking.
Nooooo. Why walk when you can purchase a nice, new hoverboard……they are selling like hotcakes….on fire!
Ptb & polecat: I needed a chuckle. Thanks.
Why walk? My Chevy Avalanche “tank”, which gets 12 MPG, is great to drive, now that it only costs me $39 to fill its 25 gallon Tank!
I’m lovin’ it. I’m looking for a muscle car that gets about 8 mpg, like the ol’ Pontiac GTO, so I can relive my youth…………………
“goodwill” is mostly a bullshit entry on any business balance sheet. Most companies use it, and it is meaningless, except to hide ‘lost’ money.
Impairment charges are to account for the mis-placed “goodwill.”
Yes, we need a cleansing. Perhaps a double-enema will assist in cleansing the dead from the near dead. Should have been allowed in 2008. No, extend and pretend was the order of the day. This time, Ban kms, and their employees should be allowed to fail, go bankrupt, and investors, Bond holders suffer the consequences. Yup, depressing isn’t it?
We don’t have any cargo to ship, but at least bunker fuel is cheap. For God’s sake, somebody buy something! Please.
Uh, buy what exactly? People all around the world are saturated to the brim with good enough made in China stuff. Is an iPhone 6S really that better in the real world than compared to the 5 four years ago? All these “economists” really think there is no diminishing returns of utility in durable goods and people will just keep buying more and more of them forever. This underlying assumption is stupid to begin with.
You are so right. My family discussed this the other day. We really don’t “want” nor “need” anything !!! Sure, it would be great to pack the driveway with Corvettes (burnt orange is awesome), but we really don’t care to buy more “stuff” (hat tip to George Carlin).
I think Western society has reached a burn-out phase. We want peace, contentment and silence. Consumerism turns into “stuff” which turns into “junk” which turns into “hoarding”. AHHHHH!!
Actually, in the last couple of months I was in the market for a monitor, some computer memory, and SSD, and found supplies were limited, much less variety than in previous years. Less places to shop, less inventory, less variety, and higher prices. Notice these are all Asian imports.
Better to shop for the trailing edge hardware rather than the leading edge for that stuff. It’s usually on sale, too!
So! To ship a FFE container from China to Southampton costs under$1,000. To get the container from thence down to Exeter – about 100 miles – costs the same.
And they’re still building more ships!
We can only hoard so much oil.
Ian
“thence”…..?…….sounds like something out of Chaucer, knoweth thou.
I’d lik to add a twist to the story.
HSH-Nordbank has been one of the main movers behind the container freight boom in the last decade as it has happily provided capital to everybody with a ship and handful of sailors to his name.
It’s a SOE, with ownership split between the City of Hamburg and the Lander of Schleswig-Holstein, and has never been particularly good with money, like most German banks.
When global trade dried up in late 2008, HSH immediately entered troubled waters and required a bailout as shipping companies started defaulting on their obligations. It was taken as a one time freak event, with an innocent bank being caught in the fire. No lesson was learned.
In 2014 the HSH leadership entered a hare-brained scheme to purchase bonds issued by now defunct Austrian basket case bank Hypo-Alpe-Adria, betting on a federal bailout which never came. Already in April 2015 the bank was reporting serious losses due to this folly, but everybody had a good merry laugh instead. They expected Super Mario or Mutti Angela to come to the rescue with suitcases full of freshly printed euro.
Then came the freight rout. Aside from huge players such as Maersk and Evergreen, the world trade is populated by smaller freight companies which just struggle to stay alive. Squeezed between ever lower spot prices and competition with Maersk and CMA/CGM last generation mega carriers, they started doing what they shouldn’t: defaulting on their obligations.
In October, as the stock market rally had everybody’s attention, HSH entered in negotiations with the competent EU Commission and the German government to avoid being shut down by regulators. The suitcases full of euro had just failed to materialize.
In less than a week, a deal was struck: the Municipality of Hamburg and the Lander of Schleswig-Holstein, as the bank owners, agreed to take on their books a mass of NPL’s from HSH. As is usual when it comes to European banks, details are sketchy, but these “troubled assets” ran into several billions. In short it was an old fashioned bailout passed as a bailin: taxpayers will be on the hook one way or another. This is how the German banking system has been operating for years now: when management is in trouble, just unload troubled assets upon the owners (local governments, hence taxpayers) and press ahead like nothing happened. Being technically a bailin, EU regulators are satisfied and don’t object in the very least.
Now, like HSH there are many banks out there who made loans to shipping companies their main line of business. If major players such as MSC and APL are more or less solid because of their sheer size and the ability to contain losses without affecting cash flow too much by mothballing their less efficient ships, the others have no such luxury.
Many smaller freighter companies must operate their fleet at full capacity just to maintain cash flow and those fleets are made up of far from efficient ships, sometimes at or very near obsolescence.
These are the so called “sea clunkers” which often ply their trade on routes the big companies shun because volumes just make no sense as, say, shipping crude from Shuaiba to Amsterdam or containers from Shanghai to Oakland.
As they stop honoring their obligations due to the present squeeze, troubled assets will pile on their creditors’ books. They can be ignored for a while (see Italy) but once they reach a certain mass or are combined with some genius decision (like HSH buying Austrian financial toxic waste) , they blow up the whole Potemkin Village.
Oil demand is down a tad Q on Q, but expected to rise in the future. The rate of rise is slowing, but demand is still rising. The containers/ships were overbuilt correlating with the commodity supplies that were overbuilt. The world is seeing more deflationary pressures in this area.
This is not 2008, but the world economy is still only poor to fair. Some places are in depressions, some are doing pretty well. The lack of uniformity is normal.
The next few weeks and months will tell a lot. Either we continue on a punk “recovery” or do slide into recession. As of now, the best recession indicators have not been triggered.
“We are on road to nowhere, common inside”
The emerging markets consume half of the global oil output. With the oil glut and the collapse of the oil price and other commodities they are in recession and consume less oil, goods and services.
The American, European and Chinese economies have after years of QE and ZIRP massive industrial over-capacity and trillions of dollars of bad debt on their balance sheets and can not grow any more.
So what are the central banks going to do now ?
Less money from selling oil, means less money to spend on anything else.
Layoffs of 330,000 tech workers means less consumer demand.
Layoffs of 250,000 oil and gas workers means less consumer demand.
This “trickles down” to every job, and then next thing you know
millions can’t afford to shop for anything but bare minimums.
I know ppl who are moving in with friends and family, and ppl
who are downsizing to save money.
In a personal view, the last time I saw this many ppl I know directly
in declining straits was the 2001 crash.
According to this Op-Ed in Forbes the baltic dry index does not matter and global trade is not collapsing.
http://www.forbes.com/sites/timworstall/2016/02/09/whatever-the-baltic-dry-index-says-global-trade-is-not-collapsing/#2715e4857a0b3bdaa1d97cd2
They neglect to mention any other method of measuring trade which would show the sam thing.
I haven’t read the Forbes article, but yes, the premise as you describe it is correct. Global trade (in volume of containers shipped, for example) is NOT collapsing. It’s stagnating. In Q4 there was zero growth. But freight rates (in dollars) have collapsed.
Grim as all this might be, there may lurk a silver lining in the back ground.
The turmoil in the world economy has drowned out all mention of Climate Change. It’s still there. the biggest driver of CC is burning fossil fuels. For all the hoopla surrounding the Paris Accord, there has been no effort to address this problem. In fact CC emissions have been increasing world wide.
The slow down in the world’s economies, and consequentially trade is the only brake on CC emissions. That this is happening is hard on many ,many folk, but it may save us from ourselves