By Mateusz Frączek| 23rd February 2021
It is no surprise that the financial markets can be severely volatile. And they prove to be so especially at times when no one expects them to dramatically change their course. The 2007-2008 financial crisis and the recent outbreak of the COVID-19 pandemic pushed many industries at the very brink of profitability and even existence, while for the very few, like for Amazon last year, such objectively catastrophic environment seems to work perfectly. For number of years, the shipping industry belonged to the first group, though in 2020 this could not be said with certainty. Let us take a closer look at how the sector was impacted by the recent economic developments and why, to the great surprise of its investors, the industry giant Maersk managed to buy back $1.6bn worth of its shares.
During the past two decades, container shipping was not a market you approached when you looked for low but stable and almost guaranteed returns. For several years now, the industry struggled with continuous overcapacity, accepting orders below marginal costs and producing negative returns on invested capital. Interestingly, even after major consolidations, these issues did not vanish. In 2004, when Maersk completed the acquisition of P&O Nedlloyd, its EBIT from combined operations plummeted by a staggering 14.7%. According to McKinsey & Co report from 2018, such mergers and buyouts “destroyed $110billion of shareholder value in the past 21 years”.
As could be easily predicted, the outbreak of the COVID-19 pandemic which sent supply chain shockwaves across whole economies could not make matters better. UNCTAD, in its Review of Maritime Transport released on the 12th of November 2020, estimated that the global shipping trade would plunge by almost 5%, while the maritime intelligence service VesselsValue reported that the demand for Chinese crude tankers dropped to almost 0 tonne miles per day in mid-February 2020. In response to the dim figures and industry outlook, Maersk updated its 2020 EBITDA forecast, reducing it by over 20%, to $5.5bn.
However, the last quarter of 2020 caught the whole sector by surprise as demand for online, typically shipped, purchases surged. The biggest cargo players were not prepared for such a quick uptake with empty containers scattered across China, Europe, and the US, while ports had their processing capacities reduced due to increased sanitation and safety measures. “That would have been unmanageable even under normal circumstances”, experts say.
What followed were the basic economies of supply and demand. Due to insufficient supply of shipping, prices almost quadrupled in the three months between October and January. Unable to receive their deliveries on time, some big-name manufacturers, like Honda, had to pause their production lines in the UK, whereas Jaguar Land Rover decided to have its components flown in. “I didn’t know it was going to be this bad. I hadnever before seen such expensive shipping rates”, said Dean Reynolds, the commercial director for Globelink Fallow. We can clearly identify the effects of such unusual market circumstances in the financials of major shippers. Despite a 4% drop in cargo volume, Maersk changed its forecast once again, now to a $8bn-$8.5bn worth of profit for the whole year. Crushing oil prices helped to reduce freight costs too.
The skyrocketing of cargo shipping prices and the positive fallout in the company’s financials could decisively convince Maersk’s management tolaunch its 15-month, $1.6bn share buyback programme. However, it would be unwise to pinpoint the rising global maritime shipping demand as the sole cause of this decision. A few years earlier, back in 2017, in order to focus more on its shipping and transportation units, Maersk sold its oil and gas exploration and drilling assets to France’s Total. In the aftermath of the move towards greater business integration, the Danish giant received $4.95bn in Total shares,three quarters of which it later sold back. This significant influx of funds is also quoted by the company itself as the source of capital for the planned share buyback. The economic circumstances of Q4 2020 were just the final touch to make things happen.
Although it might seem as if Maersk and others in the industry have finally finished with their troublesome history, the coming years may push the sector to the grimmest times it has ever experienced, when the whole business models may have to be redefined. As the FT notes, the new surcharges, cancelled bookings and significantly prolonged delivery times spark manufacturers to seek for other, less expensive, and more reliable supply chains links. They usually try to cut their length at the same time, focusing on relatively more local vendors.
Clearly, for the cargo shipping industry the past year was like no others. From the dark outset of virtually no demand, to a 400% increase in shipping prices, all players had to fight tough to effectively stay afloat. Some of them were fiercely trying to capture revenues, while others spot the chance to reduce overcapacities. Now, the very few left are very well positioned to reverse the trends of the past two decades. The question remains whether there will be enough customers to serve.