Remarkably AP Møller - Mærsk A/S (APMM) has said that it expects to have a higher second quarter income than it achieved in the first quarter and higher than the second quarter of last year, an astonishing achievement in the midst of a global pandemic with demand having crashed as a result.
In a statement, Maersk said that it expects earnings before interest, tax, depreciation and amortisation (EBITDA), and before any restructuring and integration costs for the second quarter this year to be slightly above the level for Q1 2020 (US$1.5 billion).
However, Maersk went on to say that current Q2 demand “is developing more favourably than originally expected” and that even with a decline in volumes, which APMM now anticipates to be in the range of 15-18% rather than the original forecast of 20%-25% fall, the company expects to see income rise in Q2.
Søren Skou, CEO of AP Møller - Maersk said that even in the face of declining demand, “I am pleased that we expect to deliver operating earnings slightly above our operating earnings in the first quarter. This also means we expect operating earnings to be higher than they were in the same quarter last year.”
Freightos CMO Ethan Buchman said that China-US West Coast rates rose 14% since last week to US$2,464/FEU. “Rates are a remarkable 76% higher than rates in 2019 at this time”. China-US East Coast rates also climbed 10% over the last week, reaching US$3054/FEU, and are 22% above rates for this week last year, he added.
Rates on the European trades had also cranked up a little, 4% to US$1,650/FEU, and on the backhaul trades out of North Europe rates had almost reached parity, at US$1.492/FEU, from US$783 in June 2019.
However, Buchman pointed out that, “Even with the now weeks-long climbing demand, many industry observers hesitate to call this the start of a sustained rebound, with indications that consumer spending will not come roaring back any time soon.”
That is a sentiment expressed by consultant Jon Monroe, who questions whether the increase is sustainable and whether the cargo is arriving in the US, with cargo levels still well below last year’s throughput and ports still reporting volumes down.
“Container traffic is up but containers for the most part are not getting loaded on the vessel for which they are booked,” concedes Monroe, adding, “Carriers just announced their third general rate increase (GRI) in four weeks effective 1 July, said Monroe.
The GRI’s are coming thick and fast as Buchman also commented, “Under normal circumstances carriers introduce a GRI once a month, on the 1st or 15th,” of the month, he said.
“Only in rare, usually peak demand, circumstances do they manage to increase rates twice in a month – the last double GRIs for China-US West Coast were in October 2018 (during peak season and the trade war) and in January 2019 ahead of Chinese New Year,” argued Buchman.
Monroe said that “If it [the GRI] sticks, it becomes a 38% increase after having doubled on 15 June.”
He went on to point out that “Demand is still weak at best while carrier blank sailings are choking space at origin and rates will be up 150+% in four weeks with 1 July GRI.”
European Shippers' Council’s maritime policy manager Jordi Espin told Container News, “It is clear that shipping lines are price setters and use any tool to keep freight rates high, despite the very low fuel indexes, state aid and longer transit times (now avoiding the Suez Canal).”
According to Monroe, the carrier’s programme of cancelled sailings is “like a chokehold” on ports of origin and that freight forwarders, in particular “are finding it difficult to obtain space without having containers roll sometimes multiple times”.
In effect Monroe believes, though he does not explicitly say, that rates are being artificially pushed up through the control of capacity, with the belief that volumes are increasing.
Espin, agrees with the sentiment, “We do not see it as a breach of the competition rules, we see it as an unfair practice and an example of another abuse which the current legislation allows to take place. Current CBER (Container Shipping Block Exemption Rules) allow this non ethical practice where contracts with shippers are not respected and services are only managed from the supplier perspective.”
For European shippers the problem is that the lines are abusing their dominant position. However, Monroe commenting on the US trades rather than the ESC’s focus on Europe, argues that the market is being misread. “Container volumes by themselves do not always signify demand,” he argued.
According to the consultant the only real indicator of demand is consumer spending. And he says, “The Department of Commerce announced that May’s retail spending numbers were up 17.7% over April 2020. While this is an indicator of real demand, what is behind the demand?” He asks.
Monroe makes a distinction between “replenishment demand” and Covid driven demand, saying, “while both are a sign of demand, it may not be sustainable demand.”
Clothing appears to be the key driver for increased demand with apparel purchases up 188% over April sales, a significant increase, but still 63% lower than May last year. Even so clothing retailers have been closed for months so any increase will be large, Monroe pointed out.
Furthermore, with 10% of the workforce employed in bars and restaurants, which have shown only a 29% increase in demand, the probability is that people remain unemployed.
Monroe went on to cite a recent Harvard study which estimated that the top 25% of US earners were responsible for 50% of the reduction in US consumption. “Yes, the wealthy and business types are not spending their money. This contrasts with the low-end earners whose consumption is down only 5%, largely due to the cushion felt by the recent stimulus checks.”
Always ready with another question, Monroe asks, “What will happen when the stimulus is finished?”
According to Monroe, the answer is “anyone’s guess”. His guess, however, “Is that this will be the turning point in demand for this year. Think mid-September to October.”
That fact is acknowledged by Maersk and Skou. “Given the uncertainty on demand recovery in the second half of 2020 as economies are still impacted by Covid-19, the full-year guidance on earnings remains suspended,” he said.
Skou added, “We have been able to navigate well in a very difficult second quarter, adjusting capacity to demand to maintain high utilisation of our network and managing our costs across the company. This quarter follows a first quarter where we also delivered year-on-year earnings growth despite 5% lower demand and sharply increasing fuel costs as a result of the switch to low Sulphur fuel on 1 January.
“While uncertainty persists because of the pandemic and low visibility on the recovery path, we benefit from a more resilient ocean-business.”
One thing is certain that while it is Maersk that has made a statement, it is likely that all the major lines are benefitting from the management of capacity.
Second-quarter results from the lines will be scrutinised by shippers carefully, and they may further regret the decision by the European Commission earlier this year to renew the carriers anti-trust exemption.
In Espin’s opinion the solution is straight forward. “Shipping lines should take customer demands as the centre of their commitment and should abandon their selfish view to only cover their needs. Customers do exist although being neglected. This is a unique industry where the voice of the customer is not taken into account, therefore suppliers organise the market only and according to their needs.”