Maersk – Higher Rates Will Offset Impact of Cyber-Attack

World’s largest container carrier Maersk Line reported a highly profitable second quarter based on stronger-than-expected rates, but expects to lose $200 million to $300 million recovering from June cyber security breach.

Source: www.americanshipper.com

The A.P. Moller-Maersk Group’s container shipping arm, Maersk Line, has experienced a stronger-than-expected recovery in rates, evidenced by a $500 million swing in operating profit in the second quarter of 2017 compared to the same period a year ago, according to the Danish shipping conglomerate’s most recent financial statements.

Maersk Line reported earnings before interest and tax (EBIT) of $376 million, compared to a $123 million loss in the second quarter of 2016. The average freight rate increased 22 percent year-over-year to $2,086 per FEU helping revenues to grow 21 percent to $6.1 billion for the quarter.

To underscore the extent to which rates have strengthened, Maersk’s volume grew only 2 percent year-over-year to 2.7 million TEUs. The lack of volume growth is intentional, as the carrier is turning its focus to profitability after focusing on growing market share in previous quarters, Maersk Group Chief Executive Officer Soren Skou said in an earnings briefing with analysts and press Wednesday.

Skou also addressed the cyberattack Maersk faced in late June as a result of the global NotPetya virus. Maersk estimates the financial damage of the attack to be in the range of $200 million to $300 million and that it lost 70,000 TEUs worth of volume over the two weeks following the attack. The company said the attack didn’t result in the loss of any data to third parties, however.

Skou said he also doesn’t believe Maersk will have lost any customers long term.

“Most business leaders see this type of cyberattack as ‘this could happen to us,’” he said. “Companies try to help each other.”

The financial impact of the cyberattack won’t reflect much in Maersk’s second quarter results as the attack took place with only days left in the period.

Maersk executives seemed to imply that the recovery in rates – an unexpectedly strong recovery – helped to offset the financial damage of the attack. Both unforeseen events effectively contributed to a result that Maersk had forecast earlier in the year.

The strong results on the liner side were not matched by Maersk’s terminal operating arm, APM Terminals, which slumped to a $118 million loss for the quarter compared to a $141 million profit in the same 2016 period. Skou said the terminal business faces two underlying challenges: revenue per move due to competitive pressure and a lack of growth in volumes.

Maersk said APMT negotiated 18 new volume agreements globally in the first half of 2017, and lost 5 during that same timespan. The positive impact of those new agreements are expected to reflect in the second half of the year, Skou said.

The group announced in 2016 that it was more tightly aligning its transportation business units, including Maersk Line, APMT and freight forwarder Damco, into single division. As such, APMT is giving more priority than in years past to Maersk Line volumes.

Skou also touched upon the rumors of CMA CGM placing an order for up to nine 22,000-TEU vessels. He said the global orderbook is 13 percent of the existing fleet, so the so-called “runoff” of that orderbook is “very fast.” If no further ships were ordered, the orderbook would be down to 7 percnet by the end of 2018 and 1 percent by the end of 2019.

“That’s positive,” he said. “Even though ship order costs are low now, there’s no incentive to order more capacity right now. It’s a hard case to make to go out and order ships right now versus what’s available in charter market. There have been no large ships ordered since the third quarter of 2015.”

Skou didn’t discount the possibility of ships being ordered, but said Maersk has no plans to order big ships in 2017 or 2018.

At the group level, Maersk, which has a oil, gas, and drilling interests outside of its transportation division, saw operating profit fall 54 percent in the second quarter to $302 million, based on impairments amounting to $732 million incurred by APMT, Maersk Tankers, and its towage and salvage division Svitzer.

Group revenues rose 8 percent year-over-year to $9.6 billion in the second quarter.

The World’s Shipping Companies Keep Growing

The hulking container ships that transport sneakers, bananas and Barbie dolls around the world keep getting bigger. So are the companies that own them.
A massive consolidation is underway in the $500 billion global industry and the survivors now enjoy big economies of scale and increased demand, one year after excess capacity caused the sector’s worst-ever crisis — the bankruptcy of South Korea’s Hanjin Shipping Co.
Asia’s largest container line, China’s Cosco Shipping Holdings, last month said it would pay more than $6 billion for rival Orient Overseas International, owner of the world’s biggest vessel — a carrier longer than the Empire State building. Denmark’s A.P. Moller-Maersk A/S is in the process of buying a German competitor and boasts its own fleet of mega ships, including one that can carry about 180 million iPads.
These super-sized shipping companies wield much more pricing power over manufacturers and retailers like Wal-Mart Stores and Target Corp. The five biggest container lines control about 60 percent of the global market, according to data provider Alphaliner. Shipping rates are climbing, and an index tracking cargo rates on major routes from Asia is about 22 percent higher than it was a year earlier.
“Container shipping is now a game only for big boys with deep pockets,” said Corrine Png, chief executive officer at Crucial Perspective, a Singapore-based transportation research firm. The rising market concentration will “give the liners greater pricing and bargaining power,” she predicts.
Hanjin’s collapse, in August last year, upended the industry in much the same way that the bankruptcy of Lehman Brothers roiled the financial sector during the 2008 crisis. One of the world’s largest shipping firms at the time, Hanjin faced a cash crunch as supply outstripped demand in the industry, weakening pricing power and profits for carriers. It is now in the process of being liquidated after a South Korean court declared it bankrupt in February.
“Since the demise of Hanjin Shipping, flight to quality has become more noticeable in the container shipping business,” said Um Kyung-a, an analyst at Shinyoung Securities Co. in Seoul. “That’s why the market is becoming more and more dominated by top players with big ships and those that don’t have could become more and more obsolete.”
The growing use of mammoth ships is key to the turnaround. Companies who own them are able to deploy fewer vessels and move more cargo on a single journey to benefit from higher rates, said Um.
By her estimates, there are now about 58 of these huge carriers worldwide that can transport more than 18,000 containers, and the number is expected to double in two years. About half the new vessels will be added by the biggest firms.
Higher Demand
The excess supply that derailed growth last year hasn’t completely disappeared as new entrants expand and as older vessels still remain. Capacity in the container shipping industry is expected to grow 3.4 percent this year and 3.6 percent in 2018, according to Crucial Perspective.
Still, recovery in demand seems to be on track. After posting losses in 2016, companies are seeing signs of business picking up. A.P. Moller-Maersk, which owns the world’s biggest container shipping business, said in May that it has seen strong demand toward the end of the first quarter. Cosco said earlier this month that as conditions improve it expects to report a first-half profit of about 1.85 billion yuan ($276 million), compared with a loss a year ago.
“We forecast global demand growth to outpace supply growth in 2017-2019,” Hong Kong-based analyst Andrew Lee at Jefferies Group LLC said in a note last month.
Holiday Season
Earlier this year, Maersk, South Korea’s Hyundai Merchant Marine Co. and other shipping lines reached agreements with their customers to raise annual rates from May for cargo headed from Asia to U.S. stores like Wal-Mart and Target. Retailers in the U.S. usually increase inventory during the third quarter, ahead of the year-end holidays, and Lee said freight rates are expected to rise further as the peak season for the container shipping industry kicks off.
For retailers, “if container costs go higher, obviously it’s a headwind,” said Brian Yarbrough, an analyst at Edward Jones. “Retailers have three choices: They can pass that through to the customer or find efficiencies to offset that within the organization, or they come out and say gross margins will be pressured due to higher freight costs.”
Big Shipping Deals
  • In 2015, Cosco Group and China Shipping Group announced a merger to create Asia’s biggest container line, Cosco Shipping Holdings Co.
  • In 2016, CMA CGM SA bought Singapore’s Neptune Orient Lines Ltd.; Maersk agreed to buy Hamburg Süd and Japan’s three shipping companies agreed to consolidate their container shipping businesses.
  • In 2017, Hapag-Lloyd AG completed its acquisition of United Arab Shipping Co. and Cosco Shipping offered to buy Orient Overseas International of Hong Kong.

Additional Information:

  1. The World’s Shipping Companies are going Super-sized (Bloomberg)

Final Bill for Hanjin Shipping Bankruptcy: $10 Billion

Hanjin was a container carrier of shipments of export cargo and import cargo in international trade.

HANJIN was once the seventh largest container carrier in the world: The company has been selling off ships and other assets to pay off creditors.
Source: www.globaltrademag.com

The bankruptcy of South Korean shipping company Hanjin Shipping is costing creditors over $10 billion.

That’s because the bankruptcy trustee in Seoul has raised about $220 million, according to reporting in the Wall Street Journal, about two percent of the $10.5 billion that creditors claim.

Hanjin filed for bankruptcy nearly a year ago after it failed to renegotiate its debt with creditors. The shipping line had at least 180 creditors. Hanjin’s collapse was the biggest ever to hit the shipping industry.

Hanjin, once the seventh largest container carrier in the world, has been selling off ships and other assets to pay off creditors. Earlier this year, Hanjin Pacific Corporation (HPC) sold its 100-percent stake in terminals in Tokyo, Kaohsiung, Taiwan, and Algreciras, Spain, for $13.15 million Hyundai Merchant Marine, also a South Korean shipping company.

In March a US bankruptcy judge allowed Maher Terminals in the port of New York and New Jersey to sell Hanjin containers to pay off claims owed by Hanjin.

Additional Information:

  1. Hanjin Shipping Co. Says Bankruptcy Claims Top $10 Billion (WSJ)
  2. Hanjin Shipping raises fraction of $10.5 B in bankruptcy claims (ManilaBulletin)

Port of Long Beach Sets New High-Water Mark for Container Traffic

The 720,310 TEUs that moved through Long Beach’s terminals last month surpassed the previous record of 703,652 TEUs set in August 2015, according to recent data from the Southern California port. The number of containers the Port of Long Beach moved in July was an all-time monthly high for the Southern California seaport.

Source: www.americanshipper.com

 The peak season shipping is resulting record monthly container volumes to the Port of Long Beach. In July, the Southern California port handled a total of 720,310 TEUs of containerized cargo, the most that have ever moved through Long Beach’s terminals in a single month, surpassing the previous high mark of 703,652, set in August 2015.

“These numbers are great for Long Beach and good news for the economy,” Port of Long Beach Executive Director Mario Cordero said in a prepared statement. Including last month’s record volumes, cargo traffic has increased for five consecutive months in Long Beach, and in six of the first seven months of 2017, according to port figures. Volume is up 6.4 percent for the calendar year compared to 2016.

“Given the unprecedented change in the industry, we are pleased to see shippers choosing Long Beach,” Harbor Commission President Lou Anne Bynum said. The number of overall container shipments through Long Beach was 13.1 percent higher in July compared to the same month in 2016, according to port data. Imports jumped 16.3 percent to 378,820 TEUs, which was also an all-time monthly record.

Additionally, the recent wave of imports helped bring the empty containers moved through the POLB up 27.7 percent to 215,394 TEUs.

The news wasn’t all good, however. Exports slipped by double digits last month, falling 11.7 percent to 126,098 TEUs.

For the fiscal year to date, Long Beach has handled 5.7 million TEUs through the first 10 months of FY 2017, a 1.4 percent increase from the prior fiscal year. The port’s fiscal runs from October through September.

For the calendar year, Long Beach moved 4.1 million TEUs through July, a 6.4 percent jump from the same seven months last year. By comparison, the adjoining Port of Los Angeles, the only North American seaport busier than Long Beach, also saw record monthly volumes in July, handling 796,804 TEUs last month. For the calendar year to date, Los Angeles has seen 5.3 million TEUs, a 9.5 percent jump over 2016’s numbers, according to port data.

Last month’s increased container numbers for both Southern California seaports come during the start of peak shipping period, when overseas manufacturers send goods to U.S. retailers so that they may build up inventories ahead of the back-to-school and holiday shopping seasons.

Wedding Bells for COSCO & OOCL

Image result for cosco and oocl

COSCO finds even with a ‘perfect bride’ like OOCL, getting married is expensive.
Source: www.americanshipper.com

Rare is the day in the corporate world where an unprofitable business can afford to, and then does, buy and take over a competing company that has a lengthy history of profitability.

But that’s exactly what began to happen in early July, when COSCO Shipping Holdings announced that it and partner Shanghai International Port Group (SIPG) made a $6.3 billion all-cash offer to purchase Orient Overseas (International) Ltd (OOIL). Under the terms of the offer, which still requires approval from shareholders and regulatory authorities, COSCO would acquire a 90.1 percent stake in OOIL, and SIPG would hold the remaining 9.9 percent.

It’s the latest blockbuster development in what for the maritime shipping industry has been a crazy couple of years filled with acquisitions, alliances and even a large-scale bankruptcy.

Even though COSCO posted a net loss of over $1 billion in 2016 and has only had one profitable year so far this decade, the firm is now poised to take ownership of OOIL, which for decades has reported consistent yearly profits of anywhere between tens and hundreds of millions of dollars.

The key factor here is that 48-year-old, Hong Kong-based OOIL has been privately owned up to this point, while COSCO is operated by the Chinese government, which has made it clear that it’s less concerned with economic performance in the the short term than it is with scale.

The deal would further consolidate the Asian shipping market, as COSCO and OOIL subsidiary OOCL are among the 10 largest container shipping companies in the world. Following its merger with fellow state-run line China Shipping (CSCL) last year, COSCO currently ranks fourth in the world behind only Maersk Line, Mediterranean Shipping Co. (MSC) and CMA CGM—all European companies—and OOCL seventh in terms of vessel capacity.

The combined entity would sport an operating fleet with an aggregate capacity of 2.31 million TEUs, still just shy of the recently merged CMA CGM-APL and its subsidiary lines with 2.38 million, according to current data from ocean carrier analyst BlueWater Reporting.

OOCL’s current fleet of 100 containerships has a total capacity of 640,260 TEUs, an average age of 9.5 years and average nominal capacity of 6,403 TEUs, according to BlueWater Reporting. The company is set to receive its first 21,000-TEU vessel, with five more still to be delivered and options for another six.

After the purchase, COSCO Shipping Lines and OOCL will continue to operate under their respective brands, providing both container transport and inland logistics services, the companies said in announcing the deal.

COSCO has said the company is committed to retaining OOIL’s current pay and benefit system, and that it won’t lay off any OOIL employees for at least two years after the sale closes. OOIL’s current global headquarters and presence in Hong Kong will also be retained.

For Richer, Poorer. Financially speaking, COSCO and SIPG’s offer price of $78.67 Hong Kong (U.S. $10.07) per share represents a 31 percent premium on the last closing price for OOIL’s stock prior to the offer announcement of HK$60.00 a share, its highest in five years.

That number, however, may already have been slightly inflated. The firm’s stock has been surging since mid-April on speculation surrounding a potential sale to COSCO, despite consistent denials and “no comment” statements from OOIL. According to an analysis of the deal from Seatrade Maritime, in the 30 days leading up to the announcement, the average share price for OOIL was HK$50.69, meaning the offer price was actually more like 55 percent higher than the current market valuation.

New York-based analytics firm Panjiva Research noted that as of a few days after the deal was announced, shares were still trading 8.8 percent below the formal offer price. This could reflect concerns that the deal may not be completed, or assumptions about an extended regulatory approval period.

“I don’t know that it’s worth $6 billion. I think the general consensus around the industry is that that number was a little bit inflated versus what the actual value of OOIL was,” Michael Bentley, a partner at pricing and revenue management consulting firm Revenue Analytics, said in a recent interview with American Shipper. “My hope is that now that this [acquisition] is taking place, everyone will kind of stop for a few minutes and let the dust settle and see what the market looks like, because there’s just been so much change in the market in so many different areas.

Hopefully this, long term, will provide a little more stability to the industry and a little more rational pricing, so the industry can get healthy again.”

As for why the Tung family would sell a company it has owned since it was founded in 1969, long-time container shipping analyst Charles de Trenck said the reason is obvious.

“Price,” he told American Shipper. “The Tungs always said they would only sell at top dollar. And this is top dollar.”

Earlier reports speculating on a potential purchase by COSCO suggested the valuation of the deal would be closer to $4 billion.

“At $6.3 billion, the price does seem a bit steep,” London-based maritime research consultancy Drewry said. “OOIL’s book value stood at $4.5 billion, based on FY16 numbers, meaning OOIL was able to extract a sizeable premium.”

For that premium price, de Trenck said, COSCO would benefit from OOIL’s “better technical knowhow,” something with which Drewry concurred.

“OOIL and its container unit OOCL have a good track record for above-average profits in a challenging market and a reputation for being a very well-run company, earning the moniker ‘The Perfect Bride,’” Drewry Maritime Financial Research said in a statement after the purchase was announced. “Retaining the management team, processes and systems is a wise move and could be of enormous value to COSCO, in our opinion.

“Operationally, fitting OOCL into the bigger company should not be too difficult as both OOCL and COSCO already belong to the OCEAN Alliance (alongside CMA CGM and Evergreen) that operates mainly in the east-west container trades,” the firm added. “OOCL is not a major player in the north-south trade lanes that fall outside the scope of the carrier group.”

Regional Chemistry. The biggest impact, according to Drewry, is expected to be felt in the intra-Asia trades, where both carriers already have a large presence, as well as in the Asia to Middle East trade lane.

“From a marketing perspective, the acquisition of OOCL will enable COSCO to broaden its customer base, having previously [been] perceived, rightly or wrongly, as China-centric,” Drewry said. “OOCL’s reputation and history with global shippers will provide COSCO with an inroad to a wider selection of big Western shippers with volume.”

But from a revenue perspective, the “cross-selling” opportunities may be minimal, according to Panjiva Research, because the two groups’ revenue streams have a similar geographical mix.

An analysis of OOIL’s financial statements conducted by Panjiva found that COSCO is slightly less exposed to transpacific traffic—14.8 percent of the firm’s total revenue compared with 26.3 percent for OOIL—but more exposed to the Asia-Europe trade—21.6 percent compared with 16 percent.

However, as Panjiva noted in its analysis, “The move would not address shortfalls in both companies’ transatlantic operations. Presumably more details will emerge as the deal progresses through its regulatory approvals.”
Bentley said COSCO may have made the move to overpay for OOIL now because such opportunities are starting to dry up after all the big mergers, acquisitions and alliance reformations of the past couple of years.

“I think everybody’s kind of felt that this era of consolidation amongst the industry is reaching its end; I hope that’s the case,” he said. “I think that [COSCO] felt that if they didn’t do something now, they were going to miss the opportunity, and that the merger and acquisition craze of the last few years was coming to an end.”

“The sale of OOIL/OOCL means there aren’t many other takeover candidates left on the shelf,” Drewry said in its analysis. “Such is the scale of the carriers within the top seven that any merger within that group would find it difficult to pass regulatory approval.

“There could still be some minor regional acquisitions but the big wave of container M&A looks to have been concluded with this deal,” the research consultancy said.
Bentley agreed.

“I think that any further consolidation, the governing bodies will have some issues with from an anti-competitive nature,” he said. “There’s an awful lot of noise in the market. People need to let the dust settle and do some price experimentation and see where the market really is. If people don’t get a handle on what is really driving performance or lack of performance, I think they’re going to start making some bad decisions.”

Regarding the deal’s impact on the industry, Drewry said the consolidation that’s already occurred, as well as brighter market prospects and a recent moratorium on new ships, offers carriers “a golden opportunity for far greater profitability” in the near future.

“With fewer carriers, that in time will become financially stronger, the pendulum is swinging back towards those that have grown to survive,” Drewry stated.

Terminal Interest. Another likely factor in COSCO’s decision to pursue OOIL is that it will now gain access to the most state-of-the-art automated container terminal in Southern California, OOCL’s Port of Long Beach facility, which is undergoing a massive redevelopment that will see the existing one-berth Long Beach Container Terminal at Pier F shuttered and replaced by the three-berth Middle Harbor Redevelopment Project.

Phase I of Middle Harbor went live in April 2016 and is now in full operation; the second phase is expected to be operational by the end of 2017.

“COSCO already has two terminals in LA/LB so this will be a third, and by 2020 these three terminals will account for nearly 30 percent of the capacity of LA/LB,” Drewry said. “So, while the capacity in LA/LB remains physically fragmented, the ownership is at least consolidating.”

Panjiva said the biggest issue for the deal could be regulatory approvals, which at the time of writing COSCO had not yet set a deadline for completing.

It’s still too soon to know whether there will be any specific regulatory obstacles, but Drewry said that since recent mergers and acquisitions like Maersk Line’s takeover of Hamburg Süd and the proposed ONE merger of Japanese carriers have encountered minor issues, it’s possible some conditions could be applied by non-Chinese competition authorities.

“I don’t know that it’s worth $6 billion. I think the general consensus around the industry is that that number was a little bit inflated versus what the actual value of OOIL was.” Michael Bentley, partner, Revenue Analytics

Safety In Numbers. In general, shippers seem to be taking a matter-of-fact approach to the rampant consolidation in the container shipping industry. Most realize that although it may not be what’s best for their business, carriers were left with few options after rates fell to below operating expenses on several trades last year and the industry as a whole sunk deep into the red.

As Drewry pointed out, just because OOCL will remain a separate brand, that doesn’t mean it will remain independent from an operational and customer service standpoint.

Fewer carriers to choose from, coupled with the ever-increasing size of containerships, may mean fewer options for shippers when it comes to direct port pairs, transit times and other important service differentiators like visibility tools and data analytics capabilities. And if the carriers are to achieve their stated goal of returning to profitability, rates will at some point have to not only increase, but stay up for an extended period of time.

“Effectively, shippers will be losing yet another carrier from the pool that increasingly resembles more of a puddle,” the firm said.

According to Drewry, once the latest mergers and acquisitions have been consummated and the newbuild vessels currently on order are delivered and deployed, “the top seven ocean carriers will control approximately three-quarters of the world’s containership fleet. Back in 2005, the same bracket of carriers held a combined share of around 37 percent.”

In January 2015, 21 different carriers operated vessels in the transpacific trade and 16 operated vessels in the more highly consolidated lane between Asia and North Europe, Drewry said. After OOCL is absorbed into COSCO, those numbers will have fallen to 15 in the transpacific and just eight in the Asia-Europe trade.

“The accelerating trend towards oligopolization in container shipping will reduce shippers’ options and raise freight rates,”the consultancy said. “It is the unfortunate price to be paid for years of non-compensatory freight rates that have driven carriers to seek safety in numbers.”

Bentley said the consolidation could be indicative of a shifting mindset in the industry.

“What I think we’re seeing in the industry is that people that have done all these operational things are suddenly tasked with making commercial decisions and for the first time, they’re thinking commercially,” he said.

Looking ahead, Bentley said he thinks carriers and other industry stakeholders will finally begin to unlock some of the true value behind so-called “big data” initiatives.

“Through this digitalization, there’s a huge amount of data being created and I think that it’s a really exciting time because we’re going to see people start to leverage that for the first time,” he said. “Looking at it in terms of the industry and its progress in general, I kind of see it moving more towards this data-driven decision making.” This could lead to a period of rapid change for the entire industry, Bentley said.

“I’m excited to see what will happen. I think there’s the potential to really make some gains and get the industry healthy again, but I think it’s going to require people making the right decisions, and really to me, that boils down being able to isolate the signal from the noise,” he said. “Right now there’s a lot of noise and I think people need to start leveraging that data to isolate the signal and determine what the brave new world looks like and how they need to compete in it.”

All that will take time to play out, but perhaps the more immediate lesson from this particular acquisition is the one that COSCO—like almost anyone that has ever gotten married—had to learn the hard way: no matter how “perfect” the bride might be, weddings are expensive.