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Smedegaard: Low rates collide with 2016 contracts

The downgrading of expectations in Maersk Line comes amidst contract negotiations reaching into 2016. "It’s obviously unfortunate," says Nils Smedegaard, CEO of the Maersk Group, in the wake of Friday’s significant downgrade.

Photo: Miriam Dalsgaard, Polfoto

The significant downgrade in Maersk Line of USD 600 million to an expected result of USD 1.6 for the fiscal year 2015 could be a premonition that 2016 will be another highly challenging year, not just for Maersk Line, but for the entire container industry.

Maersk is not providing a guidance for next year, but the unseasonably weak high season in the third quarter of the year, which is a major contributor to the downgrade, comes at a critical time.

"It’s obviously unfortunate that the (current) low rates collide with our renegotiation of contracts. It’s not the first time we experience this and I wouldn’t over-emphasize the significance of it. We will have to solve it, but the industry clearly needs to see improved rates in 2016," Nils Smedegaard, CEO of the Maersk Group, said at a teleconference immediately following the announcement of the lowered expectations.

"As early as last year, Søren Schou (CEO in Maersk Line, ed.) said we would consider greater exposure to the spot market, and we have taken steps to reduce our contract coverage a bit. We obviously can’t enter into unprofitable contracts and if the current rate level means we can’t sign profitable contracts, we will find ourselves in a situation where we will be more exposed to the spot market. We’ll have to wait and see how we handle the situation, but the current level is definitely not sustainable and it will be something the entire industry will feel," Nils Smedegaard said.

Historically speaking, Maersk Line has had a larger share of long-term contracts than the wider industry, which has protected the carrier from short-term rate fluctuations in the past.

A bit worse than expected

The downgrade of expectations for the entire Maersk Group on Friday morning is mainly contributed to developments in Maersk Line, which looks like it is now severely affected by the miserable container market, especially on the carrier’s most important routes between Asia and Europe where the market and the weak development in volumes have been compounded by the addition of a slew of newer and bigger ships. Rates in the Pacific have also dropped in recent weeks.

Preliminary profit for the entire group for Q3 is at USD 778 million or about half of profit in the comparable quarter last year.

"It’s a bit worse than we expected after the first six months, but it’s still a decent result in light of the circumstances. It’s worse because September in particular has been weak, and weaker than expected."

Maersk Line launched some initiatives in October in the form of adaptations of its network by joining two Asia-Pacific routes, just as the carrier has shut down a service from the Middle East to Asia.

"But it won’t be enough to improve rate developments for the remainder of the year. Generally speaking, we need everyone to adjust capacity to demand. The current rates are a huge incentive for everyone to reduce their networks. It makes no sense to sail with massive overcapacity in a market where you make no money from it," said Nils Smedegaard, adding that there will be additional details on developments in connection with Maersk’s report for the third quarter set to be released on November 6.

For now, there is no sign of Maersk considering a change in its business strategy.

"We had to release this statement. The market is in a slump right now and we have seen that many times before in container shipping when additional capacity enters a market that doesn’t develop as expected. We expect it to sort itself out, but we have to go into a deeper analysis to find out if this is going to be a longer period of weaker growth, or if it’s just a bump on the road for the global economy."

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