Maersk moves show the ship­ping in­dus­try is far from sunk

Com­pany to fo­cus on its mar­itime op­er­a­tions af­ter $7.5bn sale of oil unit, re­ports Alan Tovey

The Sunday Telegraph - Money & Business - - Business -

It’s al­most ex­actly a year since the cri­sis in the ship­ping in­dus­try made global news with the col­lapse of Han­jin Ship­ping. The com­pany’s ves­sels and sailors were stranded at sea as ports re­fused to let them dock, fear­ing they wouldn’t get paid, while cus­tomers were left bat­tling to get their goods off the ships. The sit­u­a­tion brought home to many the fact that the vast bulk of the world’s goods are trans­ported by sea.

Han­jin’s fail­ure was caused by a unique set of cir­cum­stances that saw new ves­sels flood­ing the mar­ket while cargo de­mand stalled, driv­ing down the prices ship­ping lines could charge to trans­port goods.

De­scrib­ing the dire state of the mar­ket at the time and the des­per­ate lengths ship­ping lines were go­ing to to win trade, one ship­bro­ker said: “They keep slit­ting each other’s throats with lower prices.”

How­ever, those cut-throat prac­tices seem to have ended and there are signs the storm is abat­ing, with ship­ping rates edg­ing up re­cently as trou­bles work their way through the sys­tem. Last week came the strong­est sig­nal yet that ship­ping isn’t the bas­ket case many had thought. AP Moller-maersk, owner of the world’s big­gest ship­ping lines with 600 ves­sels, said it was dou­bling down on the sec­tor by end­ing its sta­tus as a global con­glom­er­ate. The Dan­ish group an­nounced the sale of its oil unit to France’s To­tal for $7.5bn (£5.9bn), leav­ing it to fo­cus solely on the mar­itime op­er­a­tions it is best known for.

The deal means Maersk chief ex­ec­u­tive Soren Skou is bet­ting on ship­ping as the fu­ture of the busi­ness, de­spite some still pretty choppy seas.

It’s a change of tack for Maersk. Early last year, his pre­de­ces­sor Nils An­der­son had de­liv­ered a much gloomier view de­scrib­ing the mar­ket as worse than the down­turn un­leashed by the fi­nan­cial cri­sis. “The oil price is as low as its low­est point in 2008-09 and doesn’t look like go­ing up soon. Freight rates are lower,” said An­der­son.

So what has sud­denly given Maersk such con­fi­dence? For a start, the fun­da­men­tals of the in­dus­try are strong, ac­cord­ing to Andi Case, chief ex­ec­u­tive of FTSE 250 ship­bro­ker Clark­son.

“De­mand grows as pop­u­la­tion grows,” said Case, adding that be­tween 85pc and 95pc of goods travel by sea. “In 1990, 0.8 tons of goods per per­son were trans­ported by sea. That fig­ure is now 1.5 tons and the global pop­u­la­tion is only ris­ing.”

In other words, as pop­u­la­tions grow and be­come richer, peo­ple want more prod­ucts, and in an in­creas­ingly glob­alised world these goods are trans­ported by sea, mainly in the ubiq­ui­tous 20ft stan­dard ship­ping con­tain­ers – known as TEUS. Jonathan Roach, a con­tainer ship­ping an­a­lyst at ship­bro­ker Brae­mar, agrees: “The rule used to be de­mand for con­tain­ers rose at about 2.5 times global GDP growth – but that went out the win­dow a few years ago.”

The prob­lem was sim­ple sup­ply and de­mand – too many ships were chas­ing too lit­tle cargo. In the run up to the fi­nan­cial cri­sis, boom­ing trade meant huge or­ders for ship­yards. The high oil price also en­cour­aged con­struc­tion of new ships be­cause own­ers wanted ves­sels which burnt less fuel, while in­com­ing pol­lu­tion reg­u­la­tions also fed the de­mand.

At the peak of de­mand in 2007, 2,905 ships over 20,000 tons were or­dered, about three times the av­er­age of the pre­vi­ous decade. Clark­son’s

Clark­sea In­dex – a mea­sure that gives a broad snap­shot of earn­ings for ships – was av­er­ag­ing in the low 30s at the same point, hav­ing hov­ered in the mid-teens un­til a few years prior.

Then the fi­nan­cial cri­sis struck, ush­er­ing in a sharp down­turn in trade. Ship or­ders dropped to 1,874 in 2008, then just 580 the fol­low­ing year, while earn­ings, ac­cord­ing to Clark­sea, fell to low dou­ble dig­its – a level where they have pretty much stayed since.

How­ever, ship or­ders – while not as strong – re­mained high, mean­ing a mas­sive over­sup­ply of ves­sels look­ing for cargo to trans­port.

The sit­u­a­tion was ex­ac­er­bated by the long lead times of ship­build­ing, mean­ing new ves­sels were be­ing launched while the sit­u­a­tion was wors­en­ing. Mean­while, low scrap metal prices meant own­ers of older ships were re­luc­tant to send them for de­mo­li­tion.

It was this mis­match – a “chronic over­sup­ply” ac­cord­ing to Roach – that trig­gered a long-run­ning price war that drove Han­jin un­der and led to a wave of con­sol­i­da­tion, as smaller play­ers were snapped up.

It’s only in the past 18 months that ship sup­ply has fi­nally got back into line with de­mand – 217 new ships were or­dered in 2016 and so far this year the level is 267 – and the in­dus­try is be­gin­ning to think that the worst just might be over.

“There’s been no large con­tainer ship or­ders since 2015 and own­ers are show­ing re­straint,” says Roach, adding that ship­ping lines sim­ply haven’t needed new ves­sels. This fall in or­ders has also con­trib­uted to a num­ber of bank­rupt­cies in ship­builders who had in some cases been left hold­ing can­celled ves­sels.

“Con­tainer rates are fi­nally be­gin­ning to rise and this year has been bet­ter than last,” adds Roach. “But then you look back at last year and re­alise it was just ter­ri­ble with no growth at all.”

The sit­u­a­tion may be get­ting bet­ter but Clark­son’s Case says it’s a long way un­til nor­mal­ity is re­stored.

“The sat­u­ra­tion of the mar­ket is now turn­ing into a more nor­mal over­sup­ply,” Case said, point­ing to ship­yards fail­ing as a sig­nal that the mass of new ships en­ter­ing the mar­ket might just be end­ing.

While Maersk’s sale of its oil as­sets sig­nals con­fi­dence, some of its smaller peers face a less cer­tain fu­ture. Many in the in­dus­try think con­sol­i­da­tion is likely to con­tinue as ship­ping lines seek to join forces to strip out costs.

A few years ago there were 20 big ship­ping lines. Now there are 12. Maersk’s Skou him­self be­lieves the num­ber could fall to just half a dozen in 10 years’ time. It’s not yet time to hang out the bunting though, ac­cord­ing to Jeremy Penn, chair­man of Lon­don In­ter­na­tional Ship­ping Week, the event be­ing held next month which cel­e­brates and pro­motes the UK’S lead­ing po­si­tion in the mar­itime trade sec­tor.

“It’s hard to pre­dict the move­ment of the ship­ping mar­ket but we have seen a great re­duc­tion in the or­der book and that’s the cru­cial thing,” said the for­mer chief ex­ec­u­tive of Lon­don’s Baltic Ex­change – a global cen­tre for mar­itime trade and clear­ing house for ship­ping con­tracts. “It’s the over­hang of or­ders that drives the mar­ket down.”

“There are rea­sons to be pos­i­tive but that is a long way from say­ing ‘yippee, it’s all over’. It’s been a tough pe­riod of time since the col­lapse in 2008,” he said. “Peo­ple tend to look back to the glory days of 2003 on­wards and say ‘when are we go­ing to get back to those fab­u­lous mar­kets when it was $150,000 a day for a cap­size ship?’ The an­swer is prob­a­bly never be­cause that was a very un­usual mar­ket sit­u­a­tion.

“But if you can get back to a po­si­tion where you are ahead of op­er­at­ing ex­penses for your ship most of the time and mak­ing rea­son­able re­turns, then that’s an OK po­si­tion to be in. Fi­nally that’s hap­pen­ing more fre­quently.”

Con­tainer driv­ers: Maersk is putting its re­sources into mov­ing freight around the world af­ter sell­ing its oil con­cern

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