The CEO of Moller-Maersk, Soren Skou, announced on 12th December that the new strategy for the company would be to separate its energy activities from the transport and logistics operations. His plan is to develop the transport area for containerships. At first glance this seems odd, given the recent rally in oil prices and forthcoming deals with OPEC to control global output.
The container business has seen a serious deterioration in earnings this year, with the slump expected to continue for some time yet. Maersk has introduced a number of cost-cutting measures this year, which have helped reduce its losses significantly, but for the new strategy to work effectively, much more will need to be done. Freight rates have risen slightly recently, which will help, but there’s no guarantee that rates will improve further in the near future.
The purchase of Hamburg-Süd reported here recently should help, too, but it is uncertain how quickly this will show in the books. The principal problem facing all companies in the containership market is that there is excess capacity available, with several new ships on order or nearing completion. Scrapping or mothballing many of the less-efficient vessels would help reduce this, but it seems uncertain which company will blink first and accept their losses are too much. Maersk themselves believe that it will be 2022 before capacity will exceed supply.
Although Skou is slashing capital expenditure it is not clear that this will help long-term. He is expecting the average return on capital to increase from 7% up to 8.5%, but over an extended time scale. This may yet not be enough to reassure investors.
Moller-Maersk’s credit rating was put under review last September by Moody’s, and on 20th December was downgraded from BAA1 to BAA2, with a negative outlook. Last month Standard & Poor downgraded the company’s credit rating to BBB, with a negative outlook. Maersk acknowledged that its debt to operating profit ratio had climbed to 2.5 over the 12 months to the end of September. The company plans to reduce its capital expenditure from $6 billion in 2016 to $4 billion by 2018, and is looking at reducing the annual dividend again.
As part of the company’s planned savings, it is to scrap eight panamax ships in yards at both Alang and in China. Several are already being demolished, with the others to follow by mid-March 2017. They plan to reduce their fleet still further, as ships reach the end of their economic life. However, Maersk is committed to only using yards that meet or exceed the Hong Kong Convention on standards and safety.
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