Market normalization hits Maersk’earnings as demand woes and phasing in massive orderbook challenges loom

As the demand in the container shipping sector normalizes after a massive surge during COVID-19, the industry majors are reporting lower earnings and bracing for the upcoming period trying to keep discipline in Capex spending.

Industry major Maersk reported a better-than-anticipated quarterly profit, raising the financial outlook for the year.

The company’s revenue for Q2 stood at $13 billion, a significant decrease from $ 21.7 billion in the same period in 2022. However, Maersk’s profitability remained strong at 12.4%, albeit notably lower compared to the extraordinarily robust Q2 2022.

Maersk now expects underlying EBITDA to range from $ 9.5 to $11 billion, compared to the previous estimate of $8-11 billion. Similarly, underlying EBIT is now projected to be $3.5-5 billion, compared to the previous estimate of $2-5 billion, despite a weakened market outlook for the second half of the year.

Despite the challenges brought on by the market normalization, Maersk’s actions on cost containment and a well-managed contract portfolio cushioned some of the impacts.

The Ocean segment experienced a significant decline in revenue, decreasing to $8.7 billion from $17.4 billion. This decline was driven by lower freight rates and loaded volumes. While the volume and rate environment stabilized at a lower level during Q2, Ocean continued to be impacted by lower demand, primarily due to a significant inventory correction in North America and Europe.

“The Q2 result contributed to a strong first half of the year, where we responded to sharp changes in market conditions prompted by destocking and subdued growth environment following the pandemic fuelled years. Our decisive actions on cost containment together with our contract portfolio cushioned some of the effects of this market normalisation,” says Vincent Clerc, CEO of Maersk.

“Cost focus will continue to play a central role in dealing with a subdued market outlook that we expect to continue until end year. While we step this agenda further up, we are unwavering in our transformation and continue to invest in and deliver truly integrated logistics solutions to our customers and amplify their supply chain resilience for the uncertain times ahead.”

Similarly, the French shipping group CMA CGM reported a second-quarter net profit of $1.3 billion, a considerable drop from $7.6 billion in the year-earlier period and $2 billion in the first quarter. CMA CGM attributes the decline in profits to the slump in freight rates from record highs and the weak global economy, which have put a strain on the company’s financial results.

Despite the challenging conditions, CMA CGM expects container freight demand to improve from next year. However, the group anticipates that its profits will continue to ease throughout the current year, with the first quarter being the most profitable in 2023.

On the other hand, Singapore’s Ocean Network Express (ONE) has experienced a massive hit in earnings. In the first quarter of 2023, the company recorded a profit of $513 million, down by $4.9 billion from a profit of $5.499 billion in the same period last year.

The decline in earnings for ONE is attributed to the significant drop in short-term freight rate levels, which has been affected by an ongoing imbalance in supply and demand in East-West trades.

Looking ahead, Maersk anticipates a prolonged inventory correction lasting through the end of the year, with global container volume growth now expected in the range of -4% to -1%, compared to the previous projection of -2.5% to +0.5%. Despite the challenges, the company believes it will be able to navigate the market conditions and continue to grow in line with the industry.

The global order book for containerships is likely to put additional strain on the market.

Looking at the anticipated influx of new container shipping tonnage to the market, it is unclear how this might impact the ongoing demand headwinds. Namely, prolonged demand challenges are likely to result in an oversupply of capacity, impacting freight rates and profitability.

Market estimates from Alphaliner show the current order book represents a staggering 30% of the existing tonnage, surpassing the previous record set in 2008 when 6.6 million TEUs were ordered. As of now, the container ship order book stands at an unprecedented 7.1 million TEUs for the years 2023-2024, which translates to 2.6 times higher deliveries than the average.

Leading operators in the industry are heavily invested in this surge of new vessels. Mediterranean Shipping Company (MSC) leads the pack with a share of 17.4% of the existing fleet and 110 ships (1.5 million TEUs) on order. Maersk follows closely with 16.5% of the existing fleet and 34 ships (395 thousand TEUs) on order, of which several had been delivered already. CMA CGM, COSCO, Hapag-Lloyd, Evergreen Line, Ocean Network Express (ONE), HMM, and ZIM are also actively adding to their fleets.

A large share of these investments has been driven by the need for renewing fleets with more efficient tonnage as the sector embarks upon a decarbonization journey and a transition to alternative fuels. That being said, Maersk’s entire newbuilding fleet, standing at 25 ships, will be powered by green methanol.

“We know that there is a large orderbook that will need to be phased in over the next 12 to 24 months. It is clearly a problem whether it’s gonna be a big problem or a relatively small problem; we don’t know yet,” Clerc said.

“We have seen quite a lot of discipline so far, but whether it’s going to continue or not is something that we will have to see in the course of the next couple of years. So, our expectation is that you will see a challenged environment for the next couple of years in the ocean. Whether you will have quarters that go into negative territory in the second-half year – I think it’s it’s possible. Whether it goes deep into that territory I think is everybody’s guess at this stage.”