Analysis | Maersk’s raging profit fest ends in a hangover

Remark

If I had told you three years ago that Danish shipping giant AP Moller-Maersk A/S would report an operating profit of $31 billion in 2022 and promised to return almost half of that to shareholders, you would have thought I was crazy . It did. But the Covid-era bonanza in the shipping industry is over and the hangover looks grim.

On Wednesday, Maersk forecast operating profit would fall to just $2 billion this year (or $5 billion if all goes well) as global consumers cut spending, driving down shipping volumes and freight rates. While Maersk is well positioned to navigate the storm, its days as one of Europe’s most profitable companies are numbered.

What sounds like a catastrophe is actually a return to normal. In fiscal 2019 prior to the pandemic, Maersk reported $1.7 billion in operating profit. From the customer’s perspective, this standardization is certainly a good thing.

During the interlude, exporters and importers paid sky-high prices in a desperate attempt to secure space on ships, resulting in a huge windfall for ship operators.

But by 2023, Maersk predicts container demand could shrink by as much as 2.5%, in part because retailers overordered goods during the pandemic and now have excess inventory. Port congestion has eased, forcing fleet managers to shut down their ships. A burgeoning capacity overrun could worsen towards the end of this year, when Maersk’s rivals start taking delivery of new ships.

It’s up to new Chief Executive Officer Vincent Clerc to chart a course through the oncoming storm — predecessor Soren Skou stepped down in early January, timing the top of the market almost to perfection.

Clerc’s first major decision – to form a ship-sharing alliance with Swiss-based Mediterranean Shipping Co. from 2025.

But it heralds even more competition on the high seas, which will not please investors. The reshoring trend, which involves moving industrial supply chains from Asia to Europe and the US, is a further headwind.

Maersk has tried to hedge against a shipping slowdown by moving customers to long-term contracts and building its overland logistics business through acquisitions. Neither is a panacea.

Long-term contract rates are trending towards low short-term rates, while Maersk’s less profitable logistics arm is feeling the same pressure from weak demand. Maersk’s terminal business is now making less money from offering storage to customers who experience port congestion (which is again something customers will not be dissatisfied with).

A silver lining to the three years of pandemic chaos is that shipping companies are on a much sounder financial footing: Maersk had $12.6 billion in net cash at the end of December, compared to net debt of nearly $12 billion in 2019.

By keeping its current fleet size and not spending on new ships, Maersk has been much more conservative than some of its rivals.

Even after returning $14 billion in cash to shareholders through dividends and buybacks in 2023 and pursuing further investments in logistics and decarbonisation, the balance sheet will be in good shape.

Maersk remains a vital cog in global supply chains, but we won’t talk about it that much. And maybe that’s a good thing.

Analysis | Maersk’s raging profit fest ends in a hangover

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