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THE
chief executive of the Danish shipping group
Maersk Line Soren Skou admits that, despite
leading the pack in terms of profitability,
he's still a worried man and is kept awake
at night thinking about how to make money
in the east-west trades.
Even
though the shipping line produced very strong
results at a time when a number of other
global carriers are still in the red, Mr
Skou is clearly far from complacent and
sees many obstacles in his way as he strives
to achieve the line's long-term target of
a 10 per cent return on invested capital.
"It's
a big worry for me that north-south trade
growth is not near what it should be, because
of course as the big ships are phased into
the east-west trades, the smaller ships
have to cascade into the north-south trades,
and if we are not seeing any growth there,
that's a worry."
Mr
Skou pointed out that the Asia-Europe and
transpacific trades, which are the two biggest
in the world, are of particular concern
describing them as structurally unsound
- despite unexpected growth over the last
few months in European imports - and with
little prospect of a return to profit.
That
reflects the number of very large ships
that are due to enter service, and the risk
of those lines that are growing faster than
the market trying to fill their new vessels
by cutting prices, according to London's
Lloyd's List.
He
has already said that he does not expect
any sustained freight rate recovery, and
warns others in the industry against assuming
that higher prices will eventually come
to their rescue.
And
then there are the many geopolitical and
other events that hit any global industry,
including shipping, from the conflict in
Ukraine and related trade sanctions, to
civil war in Syria and associated terrorist
threats, the Ebola outbreak in West Africa
and weak markets in parts of Latin America.
Maersk
Line achieved an ROIC of 10.8 per cent in
the second quarter, thanks in part to inventory
restocking that pushed up volumes. The next-best
performer was the much smaller Wan Hai,
showing that success is not simply a matter
of scale.
But
Mr Skou refuses to get too carried away
by these latest results and Maersk Line's
net operating profit of US$547 million.
"It was just one quarter - there are
a lot of things to worry about and I am
not going to build a strategy based on the
hope that freight rates will go up - hope
is not a strategy."
The
Maersk Line boss produces some compelling
data in support of the view that freight
rates are on a downwards trajectory. Over
the past decade, Maersk Line has seen average
prices fall by 2.1 per cent per year. In
the last five years, the annual decline
averaged 5.1 per cent, while over the past
36 months freight rates have shrunk by 3.1
per cent per year.
So
while there may be the occasional year when
prices recover for one reason or another,
Maersk Line thinks that over the long term,
freight rates will continue to fall.
However,
not everyone agrees. Others point out that
once more of the elderly panamax fleet is
scrapped, tonnage supply will come back
into balance with demand.
But
whether or not the world's largest containership
operator is deploying scare tactics in the
hope of persuading weaker players to quit
the market, there is no doubt that Maersk
is achieving the sort of financial results
of which others can only dream, as costs
are squeezed across the business.
The
turnaround has been rapid: Maersk Line was
losing $9 million a day when Mr Skou was
appointed chief executive in early 2012,
and AP Moller-Maersk's container shipping
division was out of favour with the group
as investments were directed towards other
divisions.
Having
placed orders for its 20 Triple-E 18,270
TEU ships in 2011 when newbuilding prices
were high, and then continuing to lose vast
sums of money, Maersk Line was effectively
barred from any more capital expenditure
until the business was back in good shape.
Now,
however, the line is likely to start talking
to shipyards in the next year or two about
another round of contracting in preparation
for deliveries in 2017 when it will need
new capacity.
New
vessels may keep the line at the top of
the league table in terms of fleet size,
ahead of fast-growing Mediterranean Shipping
Co (MSC), which has a large orderbook, although
neither would ever publicly admit that being
number one matters.
Nevertheless,
Maersk's fleet stands at 2.5 million TEU,
ahead of MSC's slot capacity of 2.2 million
TEU.
Mr
Skou spent 15 years with Maersk Line before
joining Maersk Tankers in 1998. He was then
promoted to chief executive in 2001, a position
he held until returning to the container
division 10 years later.
From
the moment he returned to Maersk Line, Mr
Skou has spent just about every waking hour
thinking about how to take costs out of
the system. But what Maersk has done goes
far deeper than the usual round of budget
cuts, say those who know both the company
and Mr Skou well.
"It's
incredibly hard to balance a high-quality
service offering with the lowest possible
vessel network costs. But Soren and his
team seem to have got it right," says
ex-Maersk executive, Jesper Kjaedegaard,
who is now a partner in the consultancy
firm Mercator International.
Another
former colleague describes him as "a
great strategist and analyst," while
a third says Mr Skou is the "blue-eyed
boy" within Maersk after delivering
such good results.
Slow-steaming
is one key element, but now being managed
in a far more sophisticated way than at
first. Hull cleaning and propeller polishing
add to operating efficiency and ships' masters
have a role to play, as well, in keeping
fuel bills down.
Working
with the charter owners to ensure they maximise
fuel efficiency is another priority.
However,
it is in China where Mr Skou may really
have his work cut out. For not everything
has gone his way in recent months. China's
Ministry of Commerce vetoed the planned
P3 Network between the world's top three
container lines, a decision that is said
to have come as a real shock to Maersk.
The
alternative "plain vanilla" 2M
vessel-sharing agreement with MSC should
be more acceptable to antitrust regulators.
The
Federal Maritime Commission in Washington
has given the green light, but China experts
warn that there could still be resistance
in Beijing to a powerful alliance that does
not include a Chinese partner.
One
solution may be to place ship orders with
Chinese yards when the line resumes its
newbuilding programme in the near future.
The
line revealed at the group's recent Capital
Markets Day that it expected to invest an
average of $3 billion a year between 2015
and 2019 on new equipment, retrofits and
newbuildings, with Maersk needing an estimated
425,000 TEU of additional capacity from
2017 to grow with the market.
However,
Mr Skou will not discuss what ship sizes
Maersk will be after when it places its
first orders since the Triple-Es, other
than to say that there are no plans right
now for more 18,000 TEU vessels.
He
makes a point of explaining how the line
has managed to carry much more cargo in
recent years while only expanding fleet
capacity by two per cent in total since
2012.
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