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The shipping business is in crisis. The industry leader is not exempt
Sep 10th 2016 | COPENHAGEN
THE collapse of Hanjin Shipping, a South Korean container line, on August 31st
brought home the extent of the storm in shipping. The firm s bankruptcy filing
left 66 ships, carrying goods worth $14.5 billion, stranded at sea. Harbours
around the world, including the Port of Tokyo, refused entry for fear of going
unpaid. With their stock beyond reach, American and British retailers voiced
concerns about the run-up to the Christmas shopping period.
Hanjin is not alone. Of the biggest 12 shipping companies that have published
results for the past quarter, 11 have announced huge losses. Several weaker
outfits are teetering on the edge of bankruptcy. In Japan three firms, Mitsui
OSK Lines, NYK Line and Kawasaki Kisen Kaisha, look vulnerable. Activist
investors are now pressing for them to merge to avoid the same fate as the
South Korean line.
Even the strongest are suffering. France s CMA CGM, the world s third-largest
carrier, announced a big first-half loss on September 2nd. Maersk Line, the
industry leader, and the largest firm within A.P. Moller-Maersk, a
family-controlled Danish conglomerate, will be in the red this year, having
lost $107m in the six months to June. The industry could lose as much as $10
billion this year on revenues of $170 billion, reckons Drewry, a consultancy.
Two powerful forces have rocked the industry. The first is the ebbing of world
trade since the financial crisis. Two-thirds of global seaborne trade by value
is carried in containers, but in 2015, for the first time since they were
invented in the 1950s, (apart from the 2009 recession), global GDP grew faster
than worldwide box traffic. Insipid economic growth and moribund trade
liberalisation play their part; so too do shifts in manufacturing.
Multinational firms are increasingly building factories in local markets;
General Electric, for example, now makes engine parts where they are needed
rather than shipping them from America.
The second factor is a surge in the size of the global container fleet
following a ship-ordering binge that began around 2011. Overcapacity has
crushed freight rates. Sending a container from Shanghai to Europe now costs
half what it did in 2014, according to figures from the Chinese city s shipping
exchange.
Shipping has been through many crises but few as severe as this one. The
industry may still resist doing what many recommend, which is to tackle
overcapacity directly by scrapping vessels. But the depth and length of the
downturn mean that firms will start doing things differently.
Eyes are trained on changes at Maersk Group in particular, which has long set
the course for the industry. The Danish line has probably lost only $11 per
container moved this year, less than the $100 figure for companies like Hanjin,
but that is still unacceptable to its bosses and to the family that owns it.
They are considering splitting up the conglomerate, and are due to announce
details this month.
Maersk Group has invested in all sorts of assets since the 1960s: supermarkets,
airlines and recently oil drilling, as well as shipping. The idea was to
construct a hedge against falling freight rates and spikes in oil prices. When
fuel is dear, squeezing container profits, drilling for oil and gas would keep
it afloat, or so the thinking went. But since 2014 oil prices and freight rates
have fallen together, throwing both the shipping and energy units into a sea of
red ink (see chart).
In June Maersk Group s chairman, Michael Pram Rasmussen, fired Nils Smedegaard
Andersen, its CEO, and replaced him with Soren Skou, the head of the container
line. Mr Andersen, a former boss of Carlsberg, a Danish brewer, and the first
CEO to be brought in from outside the company, was keen on retaining some
diversification. Mr Skou, who has worked in shipping since he joined the group
in 1983, is believed to be more sceptical.
Breakers ahead
The main part of his review of the group s operations will seek to determine
whether it should break itself into two: a separate, publicly listed shipping
business, encompassing Maersk Line and the group s port terminals and logistics
arms, and another listed firm concentrating on its oil exploration and drilling
businesses. That would reassure investors, worried that their money is being
used to prop up failing divisions. It could widen its pool of potential
investors as well as boost its value, says Neil Glynn of Credit Suisse, a bank.
The outcome of the review is still far from certain, but it is thought likely
that Maersk Group will end up more focused on its roots in shipping. Mr Skou,
who remains CEO of Maersk Line as well as the overall group, has said he wants
to see the group s revenues grow, and its oil division will struggle to play
its part in this. One short-term but serious problem for Maersk Oil, for
example, is that production could halve by 2018 because its licence to operate
Qatar s largest offshore oil field is expiring in July next year.
Maersk Line, in contrast, starts from the position of being the biggest
shipping firm in the world. Yet it too has lots of work to do if it is to boost
revenues and profits from shipping. A favoured cost-cutting strategy among
shipping firms so far has been to form alliances. In January 2015 Maersk Line
and Mediterranean Shipping Company (MSC) launched 2M, a partnership to share
space on their vessels. This April four others got together, followed by six
more in May. These three groups now account for nearly three-quarters of the
global market. But alliances do not solve the problem of overcapacity and they
have not stopped freight rates from falling.
Another tack has been to build bigger ships. When oil prices were high we
built bigger ships and pioneered slow steaming to save bunker costs, says
Soren Toft, Mr Skou s COO and right-hand man. Maersk Line built 20 huge
Triple-E class vessels that could carry just under 20,000 containers each; its
biggest rivals, MSC and CMA CGM, followed its lead. But with fuel prices much
lower in 2015 they accounted for less than 13% of Maersk Line s costs the
savings are slim. After the last Triple-E ship entered service last year, it
cut back on ordering new vessels.
Maersk Group s big new idea is to make its existing ships smarter. Mr Toft says
Maersk Line will focus on using these ships better by embracing the age of
digitisation . This is an area in which shipping lags well behind other
sectors, such as aerospace. Whereas a modern jetliner creates several terabytes
of data a day, it takes the average cargo ship 50 days to produce a single one.
Most ships do not even have basic sensors to ensure their hatches are closed
before leaving port. Until very recently the industry resisted using data
properly, says Martin Stopford, president of Clarkson Research, part of a
shipbroker. Now it cannot afford to ignore systems that offer the chance of
reducing costs by up to 30% by better co-ordinating the interaction of ships
and shore, he says.
Maersk Line is retrofitting its ships to collect more data. Last year it
installed sensors on its containers that track their location and contents.
That makes it easier for port terminals to handle them, so ships can leave and
start earning money again more quickly. Software also works out how to stack
containers on ships more efficiently.
Empty containers are another drain, costing shipping lines up to $20 billion a
year, according to BCG, another consultancy. Maersk Line is not the only one
using data to deal with this problem. Japan s NYK saved over $100m by getting
better at spotting and using empty containers. A new website called xChange,
which started operating last November, allows shipping lines to swap spare
containers among themselves to maximise efficiency.
The Danish firm s three-year-old analytics team has also worked on discovering
the optimal speed and course for its ships. They are trying to cut its big
repair bills, too. The hope is that predictive maintenance could achieve this
quickly. Instead of waiting for ship engines to break down, sensors will report
when they need care.
What Maersk Line does in digitisation is likely to be followed by the rest of
the industry in fairly short order. As an executive at one of Maersk Line s
rivals admits: We just watch what Maersk does and copy it. And although few
shipping outfits have the resources to build ever bigger ships, even the
smallest of them can learn to use data better. Data crunching alone will not
save the industry from the current storm; that will require ships to be
scrapped. But it may prepare it better for the next one.