Elly Maersk Line shipping containership

MAERSK: Deteriorating global economy putting pressure on shipping industry

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August 17, 2011

Elly Maersk Line shipping containership

Image courtesy Maersk

By Flemming Emil Hansen, Dow Jones & Co

COPENHAGEN—Shipping and oil company A.P. Moller-Maersk A/S warned Wednesday that new shipping capacity and deteriorating world economic prospects are pressuring freight rates, and it’s unclear when they’ll recover.

The Danish company issued a more cautious forecast for the full year, after reporting a 5.8% decline in first-half net profit. Maersk, which operates the world’s largest container shipping firm, Maersk Line, didn’t include any freight-rate improvement for the second half in its adjusted full-year forecast, Maersk Chief Executive Nils Smedegaard Andersen said.

“Our competitors are very nervous,” Mr. Smedegaard Andersen said. “They’ve bought a lot of new ships at a time where it was expensive, and now they are nervous that they won’t be able to fill them. That means they are very aggressive with their pricing on the Asia-Europe and Asia-U.S. routes.”

The weakening global economy, exacerbated by sovereign-debt problems in Europe and the U.S., has added to the pressure on rates as shippers worry over demand, Mr. Smedegaard Andersen said. He played down the likelihood of a direct effect on Maersk’s trading volumes, however.

“There’s no doubt that the weak economic development makes shippers more nervous and adds to the price competition,” the CEO said. “But generally speaking, we don’t see any signs currently that the weaker economy and the financial crisis influence the trading volumes.”

Data from the Organization for Economic Cooperation and Development, or OECD, last week indicated that most of the world’s largest economies are heading for a period of slower growth, and that it’s increasingly likely that the U.S.—a key driver of global trade—will share that fate.

Mr. Smedegaard Andersen said Maersk is closely monitoring the situation and its impact on trade. Maersk doesn’t see freight rates falling further, he said, but they’re already in the doldrums.

“We haven’t seen a further rates decline in the past few months, but the rates are simply at a level where the industry can’t make any money,” Mr. Smedegaard Andersen said.

Maersk still anticipates 6% to 8% growth in 2011 shipping volumes, which Mr. Smedegaard Andersen said he hopes will lend some support to freight rates.

But the latest reading of dry bulk commodities shipping costs, expressed by the Baltic Dry Index, shows rates have fallen by almost 30% so far this year. Market participants expect freight rates to slide even further as an oversupply of vessels and economic concerns take their toll.

Among others, the Baltic and International Maritime Council, or BIMCO, shipping association has said it expects depressed freight rates over the coming months.

“Summer has been slow, so freight rates are likely to bottom out now, but only a little upside is visible for owners,” BIMCO analyst Peter Sands said.

Global ratings company Moody’s also dealt a blow to the shipping industry earlier this month when it downgraded the industry to negative status for the next 12 to 18 months.

Dry-bulk ships make up about 46% of the shipping industry’s tonnage. About 80% of dry-bulk vessels on shipbuilders’ order books will be built and delivered over the next two years. That tilts the dry-bulk shipping market toward excess supply, which will continue to depress freight rates, Moody’s said.

Considering the tough shipping environment, Mr. Smedegaard Andersen said, Maersk’s first-half results were satisfactory.

First-half net profit fell to 12.61 billion kroner ($2.32 billion), from 13.40 billion kroner, short of analysts’ forecasts.

Earnings before interest and tax, or Ebit, rose 13% to 34.60 billion kroner, from 30.52 billion kroner in the same period a year earlier, topping analysts’ expectations.

Sales rose 4% in the six months to 159.23 billion kroner, from 153.53 billion kroner, helped by higher oil prices for its oil production business.

Neena Rai and Paul Hannon in London contributed to this article.

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