Maersk Line sees shipping overcapacity lingering for five more years

OVERCAPACITY in the shipping industry will remain for the next five years, according to a senior executive of Maersk Line, who stressed the need to remove capacity to create demand.

"We will without doubt in five years time from now have an industry with plentiful capacity," Maersk Line CEO Soren Skou told the Reuters Nordic Investment Summit recently. "We cannot create demand by lower prices. It is more important to remove capacity," he said.

When the economic crisis hit in 2008, global trade and shipping companies' orders for new vessels were as much as 50 per cent of the existing fleet. The overcapacity has driven spot rates on the main routes between Asia and Northern Europe to loss-making levels, according to Reuters.

Maersk Line cut its fleet container capacity by about 1 per cent between the second quarter of 2012 and the same period this year, but it has not announced any plans to cut further.

Shipping analyst Jacob Pedersen from Sydbank described the current market as brutal. "If competitors follow Maersk Line's strategy and adjust capacity it will benefit the entire industry via significantly better freight rates," he said.

Only two of the 12 big container shipping lines, Maersk Line and France's CMA CGM, reported an operating profit in the first six months of 2013. Before the crisis, Maersk Line and other container shipping companies had growth in demand for seaborne containers of more than 10 per cent a year. But those days will not return, Mr Skou said.

"Growth in the container industry in the future is more related to global economic growth," he said. He said he expected global demand for seaborne containers to increase 2-3 per cent in 2013.

Parent AP Moller-Maersk Group lowered a near-term profitability target (return on invested capital) for Maersk Line to 8.5 per cent per year from 10 per cent last week. The long-term profitability target for the container business was held at 10 per cent.

To cope with the tough market conditions, Maersk Line managed to reduce total costs per container by 12.7 per cent in the second quarter from a year earlier. The decrease was mainly driven by lower fuel costs and logistical route efficiencies.

In addition, the company has ordered 20 Triple-E class mega vessels with a capacity of 18,270 TEU each. The vessels use 50 per cent less fuel per container than the average container ships deployed on routes between Asia and Europe. "And they are 20 per cent more fuel efficient than Emma-class ships that are the biggest and most efficient at the moment," said Mr Skou.