A.P. Moller – Maersk upgrades outlook despite container fears

A.P. Moller – Maersk upgrades outlook despite container fears

   The A.P. Moller – Maersk Group on Wednesday painted a fairly gloomy picture for the immediate prospects of its core container shipping business, which includes the world’s biggest ocean carrier, Maersk Line, during the announcement of its first half results.

   On the bright side, the Copenhagen, Denmark-based conglomerate has upgraded its outlook for 2008 due to the continued strength of its oil and gas activities, which are benefiting from the high oil prices.

   Group Chief Executive Officer Nils S. Andersen said the container shipping and related activities division — comprising Maersk Line, Safmarine, Maersk Logistics/Damco, and container inland services — marginally improved in “difficult market conditions” during the first half, but will come under severe pressure in the remainder of the year what with the global economic downturn, falling freight rates, high bunker costs, and potential excess vessel capacity.

   The group’s net result from container activities after six months of 2008 was $73 million, an improvement from a loss of $219 million in the same period a year ago. However, the container unit is still a loss maker when excluding one-time gains on ship sales and other factors totaling $327 million.

   “With the continued economic slowdown in the U.S. and Western Europe, the continued high bunker prices and on top of that significant new tonnage entering the market, we see the second half to be highly challenging for the container business. To summarize you could say we are happy with the first half but we are very conservative in our expectations for the second half. We do not see any reason for real optimism,” said Andersen in a teleconference.

   The container segment total includes a non-recurring loss of $172 million related to its streamLINE reorganization plan that has seen the division workforce reduced by about 15 percent, or 3,000 staff. Also listed were the profits for Safmarine ($56 million) and Maersk Logistics/Damco ($10 million).

   Earnings before interest and taxes (EBIT) from the container business increased 249 percent to $380 million, while revenue improved 15 percent to $14.04 billion, representing about 46 percent of group sales, still the largest single contributor towards the group total.

   Maersk uses the U.S. dollar as its functional currency for some 70 percent of its entire business activities.

   Maersk Line’s total transported volume in the first half grew 4.1 percent to 6.2 million TEUs, below the growth of the global container market, which was given as 7 percent for the first half 2008, down from 9 percent in corresponding period last year. Volume on the trades between Asia and Europe at the half-year point increased 1 percent, but experienced a drop in volume of 2 percent in the second quarter. Transpacific trade volume decreased 7 percent after six months although the second quarter witnessed a 5 percent rise. The Africa and Latin America trades were up 18 percent and 5 percent, respectively. Sister company Safmarine’s total volume for the period rose 22 percent to 720,000 TEUs.

   Andersen said the company is prepared to lose some market in the short term if it improves profitability. “Given the present market conditions, we are quite pleased that we don’t have the largest order book coming on stream for the next couple of years. That means we will have to accept some loss of market share. We want to make it as little as possible, but we want to reach that objective through a better utilization rate. Of course, over time we want to grow with the market but it’s not a short-term priority,” he said.

   Maersk Line’s average rates, including bunker surcharges, increased by 12 percent, helped by “considerable” rate increases, especially in the Asia to Europe trades, realized during 2007 and early 2008. With the addition of new tonnage and low growth in volumes from China to Europe, the Asia to Europe market has softened and freight rates are now decreasing, the company said.

   Maersk added that vessel utilization was roughly the same as in the first half of 2007, positively impacted by vessel sharing agreements on transpacific and Oceania trades and negatively by lower utilization on Asia to Europe trades.

   The average price for bunkers consumed on Maersk Line's vessels in the first half of 2008 increased 64 percent leading to an additional expense of about $1.1 billion. Bunker costs now account for 26 percent of total unit costs, compared to 18 percent a year prior. Increased collection of fuel surcharges and initiatives to reduce fuel consumption, including slow steaming, have neutralized a significant part of the increase in bunker prices, Maersk said.

   APM Terminals, which now operates independently outside of the container segment, posted net profit of $185 million, up from $49 million, positively affected by sales gains, general tariff increases and exchange rate development. APMT’s first half revenue rose 27 percent to $1.52 billion with sales from customers other than Maersk Line accounting for 38 percent compared to 34 percent for the full year 2007 and 33 percent for the same period last year.

   At group level, the Danish conglomerate achieved net profit of $2.45 billion, a 58 percent rise against $1.56 billion from the comparable period last year, due mainly to impressive performances from its oil and gas, and offshore activities. EBIT jumped 93 percent to $6.93 billion, while revenue increased 30 percent to $30.44 billion.

   The company said that as a result of the higher oil price and increased oil production, as well as better than expected gains on sales of ships and rigs, it is now expecting group-wide net profit of between $4 billion to $4.6 billion for the full year, instead of $3.6 billion to $4 billion as previously forecast. Revenue for the year is anticipated to be $65 billion, some $14 billion more than recorded in 2007, and $5 billion higher than the 2008 estimate given in the first quarter.

   Maersk also stated that is has abandoned plans to sell some of its non-strategic assets that were expected to net the group about $800 million. ' Simon Heaney