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Global Supply Chain News: Maersk Leads Way at Ocean Carriers actually Making Money Despite Falling Demand

 

Carriers have Shown Unprecedented Discpline, Keeping Capacity in Line with Demand

 

 

Sept, 2, 2020
SCDigest Editorial Staff

There have long been financial challenges at ocean container carriers, in a sector that since the Great Recession has seen chronic conditions of supply significantly exceeding demand.

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Now, analysts are projecting big 2020 earnings for the sector, when just a few months ago many of the same analysts were forecasting billions of dollars in losses for the group.  
 

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But even as container volumes drooped as a result of the global virus pandemic, carriers have used a variety of strategies to actually make their bottom lines look good.

Case in point: Maersk Line, the industry largest carrier by capacity. It's parent company saw its Q2 earnings more than tripled, as rising freight rates and declines fuel costs offset lower shipping volumes.

"We took out 20% of capacity and that saved us costs and boosted utilization rates," Maersk Chief Executive Soren Skou said in an interview with the Wall Street Journal. "We managed our network like UPS and FedEx, adjusting capacity to demand."

Maersk raised its full year earnings guidance and now expects to see operating earnings of between $6 billion and $7 billion.

But Maersk isn't the only container carrier seeing unexpected profits, with a string of carriers reporting strong earnings in Q2, defying earlier projections that ocean carriers would see big losses as a result of shipping demand driven by coronavirus lockdowns.

In fact, some container carriers are reporting their best earnings in years.

The typical response of the industry to excess capacity in recent years was to lower rates, leading to red ink for many, or at best weak earnings, with rates often not even able to match operating costs, let alone capable of delivering profits.


This time, however, container lines have pulled back capacity, cancelling sailings and showing an operating and rate discipline they have never been able to achieve until now.


The Wall Street Journal notes that "as demand collapsed from the city lockdowns in March and April, liner companies started canceling sailings and sidelining ships. At the same, falling oil prices because of pandemic-induced lockdowns sent fuel costs for carriers down sharply, a reversal from expectations that bunker costs wlould soar after a mandatory switch to cleaner fuels."


Together, supply came quickly came in line with demand, with that dynamic augmented by huge fuel savings.


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Now, analysts are projecting big 2020 earnings for the sector, when just a few months ago many of the same analysts were forecasting billions of dollars in losses for the group.

That even as most have reported double-digit declines in container volumes.

But now volumes are back on the rise.

The cost to send a contain from Asia to the US West Coast reached $3,639 the week ending Aug. 28, according to the Shanghai Containerized Freight Index. That is a record high and more than twice the rate in January.

Rates for shipping Shanghai to the US East Coast was more than $4,200 per container, a five-year high and up from $2,562 in the beginning of the year.

"Long-held convictions that big fleets and dominant market share would somehow, someday lead to profits have faded," the Wall Street Journal article reports. "Operators now insist they'll deploy capacity only where it will pay."


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