MV Maersk Mc-Kinney Moller

Profit Targets Missed as Giant New Containerships Ply the Ocean

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October 15, 2013

MV Maersk Mc-Kinney Moller arrives at the harbour of Rotterdam August 16, 2013, (c) REUTERS/Michael Kooren

Oct. 15 (Bloomberg) — Kuehne & Nagel International AG, the world’s biggest sea-freight forwarder, reported third-quarter profit that missed analysts’ estimates as volume stagnated and the use of giant container ships depressed rates.

Kuehne & Nagel fell the most in three months after posting earnings that were 3 percent lower than analysts anticipated. A.P. Moeller-Maersk A/S, the world’s top-ranked container- carrying line and a provider of space to Kuehne & Nagel, put the first three of its 400-meter (1,300-foot) Triple-E class vessels into service this year. The ships, the largest in the world, are exacerbating the effects of a freight-industry slowdown, Kuehne & Nagel Chief Financial Officer Gerard van Kesteren said.

“There is structural overcapacity in the market, and now the 18,000 container ships are being put into production by Maersk, creating extra overcapacity” on routes linking Asia and Europe, Van Kesteren said today by phone. “The shipping lines are trying to get business back. It’s cutthroat competition.”

Maersk has ordered 20 Triple-E class container ships that can each carry 18,000 20-foot boxes, which would stretch for 68 miles (110 kilometers) if laid end-to-end. The Copenhagen-based company operates the vessels on Europe-Asia routes as ports in the Americas are unable to accommodate ships that size.

Kuehne gave up some volume in sea freight, which contributed more than half of its operating profit in the third quarter, to focus on profitability, resisting following competitors’ price cuts on Asia-to-Europe routes, the company said. Rates for a 40-foot container on the lanes have plunged by half to about $1,000 since July, van Kesteren said.

Pricing ‘Volatility’

“Price increases by the shipping lines are imminent, but we doubt they will stick,” the CFO said. “Volatility of freight rates remains extremely high.”

Second-quarter earnings before interest and taxes rose 8.3 percent to 195 million Swiss francs ($265 million) from 180 million francs, Schindellegi, Switzerland-based Kuehne & Nagel said today in a statement. Profit was less than the average analyst estimate of 201.9 million francs. Sea-freight volume rose less than 1 percent, which the CFO estimated was the weakest advance in about four years, while air-freight volume in the quarter increased 2.6 percent.

Kuehne & Nagel dropped as much as 3.1 percent, the steepest intraday decline since July 16, and was trading down 2.7 percent at 114.50 francs as of 12:04 p.m. in Zurich. That pared the stock’s gain this year to 4.1 percent, trailing a 19 percent increase in the 26-member Bloomberg Europe Transportation Index.

Reorganizing Locations

Subdued economic activity is weighing on shipping companies as countries sharing the euro struggle in the aftermath of the longest recession since the currency was introduced more than a decade ago. Kuehne’s contract-logistics business is pulling out of 19 countries by year-end to focus on profitable regions. The company is also trying to make its road and rail logistics unit profitable for the first time.

China’s gross domestic product grew 7.5 percent in the second quarter, remaining close to the slowest pace in about four years. Economists estimate the gain will accelerate to 7.8 percent in the third three months of the year.

Kuehne & Nagel reiterated a forecast that its sea-freight volume will rise 3 percent this year, outpacing market growth of 2 percent. Air-freight will increase by 3 percent to 4 percent, compared with a global market that Kuehne forecasts won’t expand.

“With low market growth, forwarder competition seems to be getting more intense, with each targeting the same niches,” Damian Brewer, an analyst at RBC Capital Markets in London, said in a report to clients. He has a “sector perform” recommendation on the shares, which he estimates will fall to 110 francs in a year.

– Richard Weiss, Copyright 2013 Bloomberg.

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