Maersk Raises Forecast for 2014

Maersk Raises Forecast for 2014

Danish Shipping Company Improves Outlook as It Posts 62% Rise in First-Quarter Net Profit

 A/S Wednesday upgraded its outlook for the full year after a 62% increase in first-quarter net profit, as aggressive cost cutting outweighed falling freight rates at its container business.

The company, which operates the world's largest-capacity container-shipping fleet, raised its forecast of full-year underlying earnings to about $4 billion from an earlier estimate of $3.6 billion.

Maersk Line—the company's biggest unit, which generates about half of the company's revenue—now expects its full-year profit to beat 2013's profit of $1.5 billion.

 

 Maersk expects global demand for sea freight to rise by about 4% to 5% in 2014.               Bloomberg

The higher expectations for Maersk Line are "driven by improved operational performance and utilization," the company said.

But despite the positive performance, A.P. Møller-Maersk Chief Executive                                               Nils Andersen                                           told The Wall Street Journal that he doesn't expect a strong recovery in container shipping over the next three years.

"There is lingering overcapacity, so there will be pressure in the market in 2015, 2016 and probably 2017," Mr. Andersen said. "So we can't talk about a sustainable recovery in the short term."

For the first quarter of 2014, Maersk reported a net profit of $1.15 billion, compared with $710 million a year earlier. Analysts had expected a net profit of $1.05 billion.

Earnings before interest and taxes were $2.24 billion, compared with $1.86 billion a year earlier and above analysts' estimates of $1.95 billion. Revenue came in at $11.74 billion, 0.9% higher than a year earlier.

The company cited higher container volume and lower fuel costs for the revenue increase, but it said lower average container-freight rates and a lower average oil price partly offset those factors.

Maersk Line, which moves around 15% of the world's containers, more than doubled its first-quarter profit to $454 million from $204 million a year earlier. Freight volume was up 7.3%, while freight rates fell 5.1% and unit costs declined by 9%.

The company expects demand for sea freight to rise 4% to 5% in 2014, but it said excess capacity would continue to put pressure on freight rates.

Like other shipping companies, Maersk Line has been hit by weak freight demand at the same time as the industry struggles with overcapacity on the busiest shipping routes. Analysts estimate that overcapacity in the benchmark Asia-to-Europe trade route is at least 10%, but as the global economy picks up speed and older ships are being scrapped, demand for container ships is expected to grow.

Last year, Maersk's capacity increased 0.2% as it added four giant Triple-E vessels that can move 18,000 containers each. An additional 16 Triple-E's are scheduled for delivery during 2014-15.

Maersk Line is counting heavily on a planned alliance with France's CMA CGM SA and Swiss-based Mediterranean Shipping Co. to further cut costs. The so-called P3 Alliance is to control up to 40% of total cargo moved in containers from Asia to Europe, and across the Pacific and Atlantic oceans.

The P3 Alliance has won clearance by U.S. regulators, but European and Chinese watchdogs have to yet sign it off. The alliance was supposed to start in the second quarter, but Maersk said Wednesday that it now will kick off in the autumn.

"We expect the Chinese and the Europeans to deliver more or less around the middle of this year," Mr. Andersen said. "We haven't had any negative feedback. There has been some delay because we are trying to add some smaller jurisdictions to the network." He didn't elaborate.

If approved, the P3 partners would share ships and facilities in some of the busiest ports on some of the world's biggest trade loops: from Shanghai to Rotterdam, Netherlands, and Bremerhaven, Germany; trans-Atlantic routes from Newark, N.J., Norfolk, Va., and Baltimore to Rotterdam and to Felixstowe, England; and in the Pacific, from Shanghai and Dalian, China, to Los Angeles, Oakland, Calif., and Seattle.

Analysts expect that Maersk Line alone would cut its costs by $1 billion annually thanks to the new network's efficiencies.

Mr. Andersen said that as the P3 comes into play he expects smaller competitors to either merge or join other alliances, which could eventually lead to more balance in supply and demand.

Over the medium term, Mr. Andersen expects the strongest growth in container shipping to come from developing markets in Asia, Latin America and Africa.

"We also see very active trade from Europe to Asia," he said. "While in the past European exports were mainly scrap metal and waste paper, we now see increased exports in consumer products like food, car parts and other commodities."