High Shipping Costs Are Here to Stay, Says Bloomberg
By Henry Ren (Bloomberg) Stubbornly high shipping expenses for businesses are getting sealed into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers....
COPENHAGEN—A.P. Moller-Maersk A/S cut its full-year forecast, warning of industrywide overcapacity for the next couple of years, as the company’s container-shipping business posted a third-quarter loss.
The Denmark-based shipping and oil company on Wednesday said overall profit fell 82% to 1.64 billion Danish kroner ($304.7 million), from 9.2 billion kroner a year earlier.
Sales slipped to 80.79 billion kroner from 81.25 billion kroner as higher shipping volume partly offset weak freight rates and reduced output from oil and gas operations.
The company’s container-shipping unit, the world’s largest, swung to a loss of 1.58 billion kroner from a profit of 5.9 billion kroner last year. Maersk Line’s shipping rates fell 12%, and its fuel costs rose 48%.
Maersk forecast that the container business would post a loss for the full year and said it didn’t expect rates to improve until next year. The company previously forecast that the container business would record a moderate gain.
“We are standing at a quite solid bottom at the moment,” Chief Executive Nils Smedegaard said. “The high season just ended, so we don’t expect volume growth in the next months. Realistically, we will continue to see low rates, but I find it difficult to believe that we won’t experience some rates improvement during the course of 2012.”
He said, however, that Maersk Line will continue to operate at full capacity at sea, setting the stage for a rate war. “Some capacity will have to come out. We’re not telling competitors what to do, but this is not an environment for small operators with weak balance sheets,” Mr. Smedegaard said.
His comments signaled an extended, costly battle in the industry, said Philip Damas, director at maritime research firm Drewry Shipping Consultants. “Overcapacity has already dragged all shipping companies into the red. Maersk’s decision not to pull out capacity indicates it’s determined to win the future market. It may make sense for Maersk individually, but not for the industry as a whole,” he said. “We estimate rates will continue to decline at least until the end of next year, which means the industry will be in red all next year.”
Lars Jensen, managing director at maritime research firm SeaIntel, noted that Maersk increased its volume on Europe-Asia routes by 24% in the third quarter as average rates on the routes declined 26%. Overall market growth was merely 4%. “The key to success in the industry is to win Europe-Asia, and Maersk Line’s third-quarter results show it has been extremely aggressive. It was one of the driving forces behind the negative rates development in the quarter,” he said.
Europe-Asia routes, which are Maersk Line’s most important in terms of revenue, will be dominated in coming years by a few large players, Mr. Jensen said. “Those with large ships, such as Maersk Line, may have an interest in keeping the market weak, because it also keeps the smaller, less cash-strong players from investing in larger ships,” he said.
Maersk forecast profit at the group level of between $3.1 billion and $3.5 billion—below the $4.71 billion posted for last year.
(c) 2011 Dow Jones & Company, Inc.
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