Three months ago, executives of Maersk expected the container shipping market to peak and turn downward sometime in the fourth quarter. Just a few weeks later, they were proven wrong. It peaked sooner.
“Demand for ocean shipping began its decline in August, and this was clearly observed in both rates and volumes,” said Maersk CEO Soren Skou during a quarterly call on Wednesday.
Third-quarter profits marked yet another record high for Maersk — net income was $8.9 billion — but it will be the last hurrah of the boom era. “We have now seen the peak in extraordinary earnings,” said Maersk CFO Patrick Jany. “Halfway through the quarter we began to see the long-expected normalization of freight rates.”
Maersk has lowered its estimate for 2022 global container demand to minus 2% to minus 4%, down from plus 1% to minus 1% in early August. “Clearly, the risks are to the downside going forward,” said Skou.
The world’s second-largest ocean carrier did not lower its full-year earnings guidance, despite current visibility on fourth-quarter bookings.
Earnings before interest, taxes, depreciation and amortization came in at $10.9 billion for Q3 2022, handily topping the analyst consensus forecast for $10.1 billion. Guidance for full-year EBITDA was kept unchanged at $37 billion, implying Q4 2022 EBITDA of $6.7 billion.
That means Maersk projects a steep 39% sequential drop in EBITDA from the high-water mark in the third quarter. Even so, projected Q4 2022 EBITDA would still be the sixth-highest quarterly total in the company’s history — and 4.6 times EBITDA in Q4 2019, pre-COVID.
Contract coverage pays off
Maersk has benefited from its focus on annual contracts over spot business. Contracts account for 71% of its volume, spot 29%.
Spot rates in the third quarter fell sharply compared to the second. Yet Maersk’s average Q3 2022 rate (including both contract and spot) came in at $5,046 per forty-foot equivalent unit. That was its highest-ever average and up 1.3% from the second quarter.
The fact that average rates rose quarter-on-quarter despite falling spot rates “demonstrates the value of the our strategy of signing lots of contrast,” said Skou.
Commenting on fears that existing contracts will be renegotiated lower, he said, “I know there’s been a lot of talk about customer contract behavior. But the reality is that the vast majority of our contracts are holding and our contract portfolio has performed as expected.”
The issue is not that rates are being negotiated down mid-contract, it’s that contract volumes are pulling back. “When the customers suffer the effects of the economic decline, volume can’t be conjured out of thin air,” said Skou.
Next year’s contract rates to ‘slide’
In early August, Maersk said it expected average contract rates to increase $1,900 per FEU in full-year 2022 versus 2021. On Wednesday, it lowered that projected increase to $1,700 per FEU.
Jany explained: “In the current environment, we see lower volumes. Those lower volumes are principally in the [trade lanes] that had the higher prices. Therefore, you have a different mix.” This negative contract mix effect, together with falling spot rates, explains Maersk’s projected Q4 EBITDA decline.
Looking to 2023, Asia-U.S. annual contracts generally renew in May, whereas Asia-Europe contracts often renew at the beginning of the year.
“We are back in our annual contract negotiation cycle,” said Jany. “New contracts will be negotiated with current spot rates as a reference. It is prudent to assume that new contracts that go into effect next year will reflect that mechanism. As you can see from the indexes, [spot] rates have come down pretty drastically. So, we would expect a slide in [future] contract rates.”
Managing capacity as demand declines
Shipping lines are reacting to falling demand by removing capacity, seeking to prevent an even more extreme deterioration in rates. Spot market indexes fell sharply in August and September. In recent weeks, spot indexes have shown much lower declines, hinting at a possible stabilization. The Freightos Baltic Daily trans-Pacific actually rose on Tuesday.
According to Skou, “We aim to deploy the capacity that’s needed to serve the customer demand that’s out there — and not more than that. If demand drops, we will take capacity out to the same percentage. As far as the whole market is concerned, obviously every carrier will do what it thinks is right. In both the Pacific and Asia-Europe trades, around 15% of capacity has now come out. And I would expect we will see more capacity adjustments in the coming quarters. At least, that will be our strategy.
“Our strategy is not to gain market share in ocean [shipping],” he continued. “Our strategy is to gain share of our customers’ wallet of logistics spend. We expect to grow [the logistics] side of the business significantly faster than the market, despite the slowdown.”
Strong balance sheet to cushion fallout
Maersk used the unprecedented 2020-2022 shipping boom to heavily bolster its balance sheets. It had $6.9 billion in net cash as of the end of September.
Jany said Maersk has “enough headroom” in its balance sheet “to tackle what could be two to three years of a troubled economic environment,” while still having enough money to “continue to implement our [logistics growth] strategy and take advantage of opportunities.”
Skou said: “No doubt we have a challenging year or years ahead of us. The world faces a combination of geopolitical uncertainty and inflationary pressure that we haven’t seen in quite a number of decades. It gives us very strong comfort that we enter this period with a very strong balance sheet. We are prepared to weather the storm.”
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