Last year, A.P. Moller-Maersk A/S’s container shipping unit delivered a whopping $8.7 billion in third-quarter operating profit. This year, it lost money.
Even for an industry accustomed to boom-and-bust cycles, the speed and magnitude of the earnings collapse has been astonishing. On Friday, Maersk signalled it’s battening down the hatches for a grim couple of years .
The Danish giant is axing almost 10% of its workforce and trimming capital expenditures. It may curtail share buybacks too. Its stock fell as much as 14%.
The good news (for those of us who don’t own ships) is that the main problem seems to be supply, not demand. Though Maersk expects global container volume to decline this year, the shortfall may be as little as 0.5% — a remarkable outcome considering the severity of recent interest rate hikes.
But the takeaway for shipping companies and their investors is more sobering. Peers used part of their pandemic windfall to splurge on new vessels — in capacity terms, container-ship orders are around 28% of the current fleet. Freight rates are coming under pressure as those ships are delivered to customers; and so far the industry has been slow to idle or scrap unneeded vessels.
Maersk was comparatively restrained — it has been content to allow rival MSC Mediterranean Shipping Company SA to leapfrog it as the world’s largest container line, for example — but it still must deal with the consequences of others’ excesses.
After Maersk earned around $50 billion of net profit during the pandemic, returned around half to shareholders and paid little tax, cutting 10,000 jobs isn’t a great look. It’s right, then, that shareholder returns are also on the chopping block.
However, calling into question the continuation of share buybacks next year is a nasty surprise, given Maersk still has around $22 billion of cash and an investment-grade credit rating.
Strong balance sheets are also a mixed blessing for investors hoping for a quick recovery in profitability. It may take longer this cycle for bankruptcies to remove excess capacity.
Maersk’s cash reserves give it firepower for takeovers should shipping or logistics rivals get into trouble. But in the meantime, it makes sense to to prepare for a prolonged slump.