If you were looking for a bearish signal about the global economy, you don't have to go further than Maersk. The Danish conglomerate has signalled a long-term shift in its investment strategy. It's moving away from its historic shipping business and towards the energy sector, where it produces oil and gas, and leases drilling rigs. It's a sad admission for a company that is more than a century old and which not only boasts both the world's largest container fleet, with capacity for 2.2 million TEUs (twenty foot eqivalent units), but which has also ordered some of the biggest container vessels ever built. Maersk has decided that the tide is definitely turning for shipping but at least the Danish giant has other strings to its bow – notably, oil production. The same cannot be said of the world's flag-carrying airlines, which are suffering from the same glut of overcapacity, weak markets and high costs but, unlike Maersk, have no oily tank from which to draw sustenance.
In an interview with the Financial Times, the company's CEO, Nils Andersen, said Maersk would no longer make big investments in Maersk Line, the container business which last year made a loss of $540-million. Instead, it would build up its oil business, which made $2-billion, and bolster its separate drilling rigs and port operations divisions. Maersk is not quitting the container shipping business; It could not do so even if it wanted to, as it owns more than 500 ships and has an order book of vessels of larger size than any currently on the water. Instead, it intends to shift its investment focus such that oil and gas represents half of the balance sheet, with the remainder shared equally between ports and shipping.
Container shipping used to be a cozy business in which the leading competitors would set rates in tandem in "liner conferences," – cartels to you and me – which were tolerated by competition authorities who accepted the argument that shipping was different. However, in 2008, the European Commission ended its exemption for liner conferences, and rate-setting on established routes became illegal. Additionally, the boom in exports encouraged Asian shipping companies to chase volume and market share, which, in turn, encouraged a massive expansion in shipbuilding from new yards in China. Rates collapsed in 2011 but the long tail in the global shipbuilding order book continues to launch behemoths onto the ocean. Meanwhile, overcapacity is a huge issue in the industry. According to AT Kearney's projections, while global trade volumes will have risen by 90 per cent from 2005 to 2014, container ship capacity will have expanded to more than 19.3 million TEUs, 144 per cent above the level in 2005.
If it sounds familiar, it is not unlike the imbalance in the air, where air freight load factors are half the available capacity. In Europe, national flag carriers continue to struggle against the onslaught from budget carriers, who continue to raise their market share. Unlike the shipping industry, companies such as Lufthansa or IAG (the owner of British Airways) don't have a natural hedge against the crippling cost of fuel. For Maersk, the oil and gas activities lessen the burden of owning an energy-thirsty fleet of ships. It goes some way to explaining the exotic investment by Delta Airlines in an oil refinery. Nevertheless, owning a stake in a fuel manufacturer, subject to volatile margin swings, is not quite as good as owning the underlying commodity. Sadly, for most airline companies, the way to ride out the coming global downturn will be ruthless attention to costs, rather than drilling for oil.
Carl Mortished