Maersk Achieves Record Quarter While Warning of Recessionary Signals
Maersk cautioned of increasingly challenging times ahead for the shipping industry reporting that its volumes were off in the latest quarter and that is clear that freight rates have peaked. Seen as a bellwether for global trade and the economy, Maersk’s latest quarterly financial report added to the growing fears for a global recession.
”Our third quarter result was another record and the 16th quarter in a row with year-on-year earnings growth. Ocean freight rates, which have driven the exceptional results we have delivered in 2022, were again up both year-on-year and compared to the second quarter. However, it is clear that freight rates have peaked and started to normalize during the quarter, driven by both decreasing demand and easing of supply chain congestion,” said Søren Skou, CEO of A.P. Moller - Maersk.
Elaborating on his comments, Skou told the Financial Times “every indicator we are looking at is flashing dark red.” He said that the shipping giant sees a recession looming that will confirm if the shipping industry has become more rational due to consolidation. He also points to Maersk’s decision to maintain its capacity in the 4.1 to 4.3 million TEU mark as opposed to competitors that placed large newbuild orders during the recent surge in shipping volumes.
Given the unfolding economic slowdown, Maersk told shareholders that it has lowered its outlook for 2022 growth in global consumer demand. The company is now forecasting an overall decline in demand of between -2 and -4 percent. It had previously said that it expected demand to range between 1 percent positive and 1 percent negative for 2022.
The slowing demand took a toll on loaded volumes during the most recent quarter, which were down 7.6 percent year-over-year. In particular, Maersk said it experienced declines in AsiaEurope and the Transpacific markets. Despite that, Maersk said its utilization of offered capacity remained strong at 90.4 percent in the quarter, while Skou noted that the company was prepared to reduce offered capacity to reflect future market trends. It has been widely anticipated that Maersk like other large carriers would begin to layup containerships to reduce the capacity in the market.
Adding further pressure, Maersk also reported a 16 percent increase in bunker costs as well as other cost increases. They cited higher time charter equivalent cost, transportation and storage costs for containers, and net slot charter cost in addition to the lower volumes.
Despite the looming issues, Maersk still reported a strong increase in profitability for its ocean shipping operations in the quarter. They said it was driven by higher freight rates on both contract and shipments. The average freight rate was up 42 percent year-over-year and even with weakening demand during the quarter they still achieved a 1.3 percent increase in average loaded freight rates versus the prior quarter.
Maersk’s ocean shipping business saw revenues increase by more than a third in the quarter to $18 billion while the overall corporate revenues reached $22.8 billion with strong growth in logistics revenues due to acquisitions. Earnings reached $9.5 billion (EBIT) for the quarter. Over the past 12 months, the shipping business has delivered an EBIT margin of nearly 47 percent versus a target under normalized conditions for a 6 percent margin.
Despite the expectations for further weakening in the fourth quarter, Maersk confirmed its earlier forecast for the year. The company continues to expect earnings of around $31 billion (EBIT) and that the businesses would generate about $24 billion in free cash flow for the year.