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Maersk Line Seeks to Cut Unprofitable Contracts

Maersk Line, the world’s biggest container-shipping company by capacity, plans to cut unprofitable long-term contracts and raise its shipping rate again as weak demand and persistent overcapacity are likely to continue for at least two more years, a senior official at the company said.

Maersk Line Seeks to Cut Unprofitable Contracts
20 November 2014 - 21:54

Maersk Line, the world’s biggest container-shipping company by capacity, plans to cut unprofitable long-term contracts and raise its shipping rate again as weak demand and persistent overcapacity are likely to continue for at least two more years, a senior official at the company said.

Silvia Ding, who heads South China operations at the unit of Denmark’s A.P. Moeller-Maersk A/S, said in an interview that the current spot rate for shipments moving from Asia to Europe, the world’s busiest trade route, is unprofitable, and that Maersk Line will raise its shipping rate again, though she declined to provide more details. “We need to be more disciplined in pushing the general rate increase to make sure it is sustainable,” she said.

Several attempts by large operators such as Maersk Line and France’s CMA CGM SA to push through freight increases have failed. Maersk Line last month announced a plan to raise its Asia-north Europe rate starting Nov. 1.

She added that the company would consider cutting some of its unprofitable long-term shipping contracts when they come up for renewal. The Asia-Europe yearly contracts begin in April and the Asia-U.S. contracts start in May.

Long-term shipping deals typically offer operators lower margins in exchange for steady revenue and volume. “If we can’t get the rate up to a sustainable level, then in some cases it might mean we have to walk away from certain businesses,” Ms. Ding said.

Low freight rates due to overcapacity cloud the entire industry’s outlook. Prices between Asian and European ports fell 21% per 20-foot container to $934, compared with $1,175 at the beginning of last week, according to the Shanghai Containerized Freight Index.

Container-shipping volumes are considered an important barometer of the global economy. The ships move everything from household goods and apparel to electronics and food. The industry’s peak season is between August and the end of October, when imports to Europe from Asia are at their highest for products such as electronics, clothing and toys ahead of the year-end holidays.

Shipping consulting firm Drewry Maritime Research said in a note that it expects dozens of large container vessels will be added on the Asia-Europe trade route starting this year, which it predicts will lead to a nearly 13% boost in capacity through the end of 2015, putting further pressure on freight rates.

Ms. Ding said demand for shipments on the Asia-Europe route increased 8.2% for the first nine months of 2014 compared with a year earlier, higher than the low-single-digit percentage growth initially estimated. But the improvement was driven by preholiday restocking by retailers, Ms. Ding said, rather than a broader consumption rebound.

“It isn’t really driven by structural improvement on the demand side,” she said, noting that demand for container shipments dropped substantially after the peak September-October period.

Ms. Ding’s comments come after A.P. Moller-Maersk reported last week a 33% rise in third-quarter net profit, partly driven by Maersk Line’s 24% net-profit rise to $685 million, up from $554 million year earlier, thanks to stringent cost control.

Maersk Line widened its forecast range for shipping-demand growth for this year to between 3% and 5%, from 4% to 5% previously, reflecting increased uncertainty in global trade and higher volatility of its freight rate, a key profitability measurement.

With freight rates remaining weak, Maersk is counting heavily on a 10-year alliance clinched in July with Switzerland-based Mediterranean Shipping Co. to further cut costs. Ms. Ding said the alliance, which has secured all the necessary approvals from the U.S. and European regulators, plans to roll out services in January next year. Industry executives have said the alliance is set to carry about 35% of all cargo between Asia and Europe, with a combined 185 ships. The partners expect the alliance will cut operational costs by a combined $1 billion annually.

Maersk Line will continue to manage its capacity growth by running its ships at slower, steadier speeds to reduce fuel costs, she said. The company has taken deliveries of 12 fuel-efficient megaships—so-called Triple-E container vessels—and returned some smaller chartered ships to shipowners to better manage its capacity. Maersk Line will receive eight more of the megaships before the end of 2015.

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