A.P. Moller-Maersk, the parent of global container shipping lines leader Maersk Line reported both fourth-quarter and total FY16 financial performance this week and the company’s shareholders were not pleased. The shipping industry further gained another reality check as to the ongoing implications of container shipping overcapacity.
For the recently concluded quarter, financial headlines included a $2.68 billion-dollar quarterly loss along with $2.6 billion in asset impairment charges. Revenues fell 2.6 percent to $8.9 billion.
Maersk Line reported an underlying loss of $155 million in Q4 due to continued lower freight rates and higher costs of fuel. Total revenues were up 2.4 percent from the year-earlier quarter, the first improvement since Q4 of 2014.
Average rates were reported as flat on a quarter-to-quarter basis in Q4, but with a reported positive upward trend recognized towards the end of the quarter from higher spot rates on East-West trades. Global container demand was estimated to have grown around 4 percent in the quarter, while the global container fleet grew around 2 percent, but impacted by high scrapping rate.
Average freight rates declined 7.1 percent in Q4. Volumes for the container shipping group increased 12 percent during Q4. Maersk Line’s capacity at the end of Q4 2016 grew by 9.4 percent to 3,239 million TEU’s.
For the entire year, A.P. Moller reported profitability of $3.1 billion but further indicated that the operating losses of Maersk Line negatively impacted earnings. Included was the statement: “Lower container rates and weaker market growth severely impacted earnings of Maersk Line during the year but with a positive underlying trend recognised through the fourth quarter.” In FY16, Maersk Line losses amounted to $376 million vs. $1.3 billion reported in FY15. Maersk Line had around 50 percent of total volume scheduled on North-South trades and around a third of total volume on East-West trades in 2016. Approximately 40-60 percent of Maersk Line’s volume reportedly was on long term contracts in 2016.
In an interview with analysts, A.P. Moller CEO Soren Skou reportedly indicated that the shipping industry has hit bottom and a recovery will become apparent next year. That is not the first time that Mr. Skou has called an industry bottom in prior year briefings, yet the picture of financial stress continues.
Because of recent performance, the parent company indicated it would cut its annual dividend by one-half in the coming year. A.P. Moller Maersk shares reportedly closed down 5 percent after the announcement of performance.
Today, The Wall Street Journal features a report indicating that the German banking sector is reeling from recent losses associated with shipping loans. Some of these loans are impaired while indications are that future loans directed at shipping may be significantly curtailed.
Moving forward in 2017, Maersk will begin to consolidate five existing businesses including Maersk Line to form a Transport and Logistics unit. Management expects to gain $150 million in cost savings during 2017 from this move.
Company officials re-iterated the intent to take on services previously performed by third-party logistics (3PL) firms such as loading containers on ships, clearing customs or moving containers inland to end users. The strategy includes routing more ships into and out of its owned port operator APM Terminals, and more inland cargo routed through owned logistics supply management firm DAMCO. We cited such strategies under 2017 Prediction Five- Continued Global Transportation Turbulence.
Maersk is in-essence now attempting to emulate a business model like FedEx or UPS, that coordinates global transportation movements with those of logistics and delivery to consignees.
Company management further indicated more stringent capital expenditure plans in 2017 including the postponement of any new shipping capacity for 12 months. The company further expects to begin integrating its recent acquisition of Hamburg Sud lines later in 2017.
This week’s announcements further included the appointment of former SAP co-CEO Jim Hagemann Snabe as the new chairman of Maersk’s board of directors. In its reporting, The Wall Street Journal cited informed sources as indicating that Mr. Snabe’s initial priorities will likely be in assisting with the corporate realignments for both Energy and Transportation being planned this year.
This Editor has already declared a positive viewpoint toward Snabe’s management abilities and we view his appointment as a rather positive move for Maersk. Snabe further brings a seasoned information technology investment perspective, one that could greatly benefit ongoing efforts especially related to becoming a more integrated global transportation services provider.
As transportation and logistics teams readily know, Maersk is force to be reckoned with in global container shipping. While financially stung by the ongoing effects of too much global capacity to support ocean movements, other lines stand to feel a far larger financial impact. That may open the door for yet further alliance, merger or acquisition activities in the coming months that could well yet again involve Maersk. The planned movement into integrated transportation services, if successful, provides other industry threats as well, but this will be an area where Maersk management needs to be open about the need for advanced technology.
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