SHIPPING giant AP Møller-Maersk, whose profits declined by nearly $1 billion in the second quarter, received more bad news this week when Citibank announced it was downgrading its recommendation on the company’s stock from “buy” to “neutral.”
In its advice, Citibank said the “strategic review” currently being undertaken by the Danish conglomerate, the parent company of the world’s largest container shipper Maersk Lines, “can do little to fix poor markets,” and that profitability would continue to be a challenge for the foreseeable future.
The news follows the collapse of the world’s seventh-largest carrier Hanjin, which filed for court receivership on Wednesday, after creditors rejected a voluntary restructuring plan for the second time.
Global shipping slump
The source of Maersk’s woes, as it was for the ill-fated Hanjin Lines, is the slump in global trade rates. According to a report earlier in the year by the London-based Center for Economic Policy Research (CEPR),
the volume of global trade has been stagnant at best since January 2015. And according to maritime research and consulting firm Drewry, as of mid-July about 800,000 TEUs (20-foot equivalent units) of shipping capacity was lying idle around the world, a figure that Drewry reported last week had risen to more than 1 million.
The huge overcapacity in shipping has driven down freight rates as carriers compete for cargo to fill ships, and almost every shipping line has seen its financial performance suffer as a result. As a report by Bloomberg wryly noted, Maersk has done better than most; despite its unprecedented drop in profits, the shipper still managed to register a profit of about $151 million in Q2, a figure the company’s president, in a statement accompanying the Q2 financial results, still deemed “unacceptable.”
Last week, Maersk also issued a global shipping warning, expressing concern that a shift in US policy following November’s election could further weaken the market, which an analysis from Port Technology suggested was further evidence of Drewry’s view that carriers were having an increasingly harder time finding a way to balance the mismatch between capacity and demand.
Even before the announcement of Maersk’s Q2 results, the company had issued a profit warning and said it would conduct what it called a “strategic and structural review” of the group’s businesses this month.
In an email, Maersk’s head of media relations Louise Muenter said, “As our chairman previously has said, we want to evaluate all options. The structure of the group is one of the options being evaluated, but we want to stress that it is just one option, and that the group’s structure by itself will not guarantee continued growth.”
The most likely move by Maersk, according to several sources, will be to separate its terminal operator APM Terminals and logistics business Damco, which would then be sold.
In an analysis following news reports of the rumored divestment, however, Alphaliner recommended against it and explained, “The symbiotic relationship between Maersk Line and AMT suggests that a divestment of the terminal operations should likely be avoided at this stage, especially since the weak state of market weighs heavy on the valuations of APMT and other terminal operators.”
Although Maersk would not confirm that was being considered, according to Journal of Commerce, the company did acknowledge it is studying the possibility of separating the company into a transport business and an energy business, one part consisting of Maersk Lines, APM Terminals, and possibly Damco, while the other part, to be called Maersk Energy, would consist of Maersk Drilling and Maersk Oil.
The Manila office of Maersk Shipping declined to comment on the reports, saying that it had not yet received information from the company regarding the matter, and that so far its local business has been unaffected.