Those worried that a global recession is looming will take no comfort from the trade update issued today by AP Möller-Maersk.
The Danish company, the world’s biggest name in container shipping, is usually a reliable indicator of what is happening – or about to – in world trade.
And its message today was not encouraging.
“Dark Clouds on the Horizon”
Sören Skou, the company’s managing director, said it was clear that after an exceptional period of trading, freight rates had peaked and started to normalize over the past three months. He said this was driven by both falling demand and easing congestion in the supply chain.
Mr Skou added: “With the war in Ukraine, an energy crisis in Europe, high inflation and a looming global recession – there are plenty of dark clouds on the horizon. This weighs on consumers’ purchasing power, which in turn affects global demand for transport and logistics.”
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His warning sent shares in Maersk, which more than doubled in value between late January last year and mid-January this year, down more than 7%. The company, the second-largest on Denmark’s blue-chip OMX 20 index after pharmaceuticals giant Novo Nordisk, has seen its stock market valuation fall by two-fifths since it peaked on January 13.
Skou continued: “As a result of rising inflation and economic slowdown, demand for ocean shipping began to decline in August and this was clearly observed in both prices and volumes.”
He said Maersk now expected full-year contract prices to be slightly lower than previously expected over the summer – largely because volumes on East-West Sea routes have fallen 10% year-on-year in volumes.
Global slowdown
The comments by Maersk, which employs more than 80,000 people worldwide and has a 17% share of the ocean-bound freight market, are an ominous indication that trade is slowing globally.
Mr Skou said the company had been “expecting normalization” for quite some time and was ready for it.
He continued: “We are withdrawing our outlook for the industry and expect global demand for containers to decline by 2-4% in 2022. From the global market data we can all observe, it should be clear that the risk [to that forecast] is in the red going forward.”
Patrick Jany, the chief financial officer, said freight rates were expected to suffer a “pronounced deterioration” in the coming months.
Costs to come down
He said it would be prudent to assume new contracts will be on lower terms going forward, but said costs could be expected to ease as congestion at ports around the world – caused in part by Chinese COVID-related lock-ups – begin to subside. Unfortunately, he added, this would be matched by ongoing inflationary pressures.
The irony is that Maersk reported record quarterly results, with pre-tax profits for the three months to the end of September of $9.17bn (£7.9bn), up 62% on the same period last year.
It was the 16th quarter in a row that the company had reported an increase in earnings. In the first nine months of the year, Maersk made a pre-tax profit of $24.9bn (£21.6bn), more than double what it made in the same period in 2021.
Sales in ocean shipping, the largest part of the business, were up 38% while those in land-based logistics and services, the second-largest division, were up 61%, although that was partly flattered by acquisitions.
Mr Skou said the positive aspect of normalization of shipping conditions was that global supply chains would begin to improve and also help Maersk deliver a more reliable service in ocean shipping.
He said shipping lines were beginning to respond by taking capacity from the market and this was likely to continue.
He added: “Each carrier will do what they think is right but I note that in both the Pacific trade and the Asia-Europe trade 15% of capacity has come out now so you would expect to see more capacity adjustment to meet demand in the coming quarters – at least that would be our strategy.”
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Maersk’s chief executive said the company did not define itself by its volumes and was not aiming to gain market share in ocean shipping – rather it was looking to get a bigger share of spend from its existing customers.
He continued: “It’s not half a percentage point off [extra] market share that will make us very excited.”
Improved response
These comments highlight that the shipping industry is becoming rather better at responding to prevailing economic conditions than it has sometimes been in the past. There was once a time when shipping operators, rather than cutting capacity, preferred to engage in pointless price wars that simply resulted in a collapse in industry profits.
Signs that lessons had been learned came when Maersk and others at the start of the pandemic took a disciplined approach to draw in capacity in response to an expected collapse in global trade.
In the event, the industry was pleasantly surprised, with demand increasing as households hit by covid lockdowns spent money they would have done on consumer goods instead. That, along with earlier capacity cuts and ongoing port congestion, means shipping containers around the world remain more expensive than they were before the pandemic.
But it feels as if that boom is now over.
As Skou put it in his closing remarks to investors and analysts this morning: “We have one or more challenging years ahead as the world faces a combination of geopolitical uncertainty and inflationary pressures not seen in decades.”
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