'The Best Quarter Ever' For Container Shipping Giant Maersk

As the saying goes: "Never let a good crisis go to waste."

Before COVID struck, AP Moller-Maersk embarked on a transformation to become a global end-to-end logistics provider. The pandemic created an unexpected and unprecedented surge in cargo demand — which Maersk is now using to accelerate its corporate transformation.

Unlike some other carriers that are increasing their exposure to the red-hot spot market, Maersk is going in the opposite direction: increasing long-term contract exposure, including more multiyear deals.

"Our focus has not been to maximize short-term income, which we would have done if we had just gone for the spot market," said Maersk CEO Soren Skou on the conference call with analysts on Wednesday.

"For us, this is about building an integrated logistics business and selling end-to-end services. We see this as an opportunity to build a portfolio of longer-term business and create long-term partnerships and relationships."

Record Quarter Across The Board

The heightened focus on long-term contracts — first reported by American Shipper in March — comes amid a period of historic market strength.

"It is the best quarter ever in ocean," said Skou of Q2. "It is the best quarter ever in logistics. And it is the best quarter ever in terms of net profit for AP Moller-Maersk — and by some margin."

Maersk reported net income of $2.7 billion for Q1 2021 compared to $197 million in Q1 2020. This year's first-quarter earnings were not far below earnings of $2.96 billion for the entire year of 2020.

Total revenue was $12.4 billion. The ocean segment's revenue increased 36% year on year to $9.48 billion. The increase was driven by a 35% rise in freight rates, to an average of $2,662 per forty-foot equivalent unit (FEU), and a 5.7% increase in quarterly volume, 3.2 million FEUs.

Contract Coverage Details Revealed

Maersk has now finalized 80% of its contract negotiations for this year, with the remainder to be signed in the coming weeks.

Long-term contract coverage will increase 20% versus 2020 and will account for around 6 million FEU in volume. Maersk said contracts would have a positive impact of $550 per FEU this year.

Importantly, of total contract coverage, 1 million FEU represents multi-year contracts. Skou explained that there are two types of multiyear contracts being signed: some with fixed rates and others with fixed rates for the first year and index-linked rates for the second and, in some cases, third year.

"We now have a fundamentally different approach to the way we provide our services to our customers," said Maersk CFO Patrick Jany of long-term strategy.

The change locks in more revenue stability. The counterargument is that by decreasing spot exposure, Maersk is leaving some profits on the table in 2021.

According to Skou, "It has always been the case that some carriers have a bigger contract portfolio than others. A number of the carriers that we normally compare ourselves to have quite a similar approach, with a large part of their business being long-term contracts.

"Then you have other, typically smaller carriers, that are much more exposed to the spot market. That's why in some cases they have really extraordinary earnings today, particularly smaller carriers that are focused on the U.S. market," said Skou. He didn't mention any carriers by name, but that's a good description of carriers like ZIM (NYSE:ZIM).

Demand Boom Drives Bottlenecks

Skou also commented on congestion and its causes. The takeaway for shippers: Don't expect the capacity crunch to let up anytime soon.

"Globally, but particularly driven by the U.S. market, there is very strong basic demand. And on top of that we have an inventory replenishment cycle," explained Skou. "If you look at the U.S., inventory-to-sales ratios have never been this low.

"Customers are basically trying to do two things at the same time: cater to strong basic demand because of all of the stimulus packages and the savings that were going up over the last year and are now being consumed, and at the same time, replenish inventories that are too low.

"That is driving very, very strong demand to the point where the ports are really not able to meet all the demand and we get bottlenecks."

Ongoing Suez Canal fallout

The fallout from the Ever Given accident in the Suez Canal is not over yet, Skou added.

"What the blockage meant was that our journey towards a more reliable network was halted in its tracks," he said.

"We had a total of 50 ships sitting around the Suez Canal, waiting for it to open up. That creates quite a mess in the network. Unfortunately, it will take a few months to restore the reliability of the network as a consequence of that.

"When the ships are sitting for a week in the Red Sea, then obviously, they're missing somewhere else. We are going to be digging ourselves out of that hole for a while."

In general, said Skou, "The current supply chain issues that are driving up freight rates will continue well into the fourth quarter of the year."

Jany was pressed by an analyst on whether current market conditions — and thus high spot rates — could persist even further, into 2022.

"It's too early to call," Jany replied. "We were expecting a normalization after Q1 but that didn't happen because of the Suez element and also because of the continued inventory replenishment cycle. Obviously, every inventory replenishment cycle will finish at one point in time. But we just don't know when it will finish."

Source : https://amp-benzinga-com.cdn.ampproject.org/c/s/amp.benzinga.com/amp/content/20962441