Supply-Chain Costs Ease as Shipping Glut Persists

The world's biggest container line, A.P. Moller-Maersk, this morning booked a sharp decline in profit, indicating the recent spike in transport prices caused by the collapse of rival Hanjin shipping was more a blip than a boom.

Maersk’s third-quarter profit slumped by 43% to $429 million, missing market expectations and sending its shares down almost 10% in early trade. “The result is unsatisfactory, but driven by low prices,” Maersk CEO Søren Skou said.

The poor result is significant for CEOs, left questioning whether spiraling supply-chain costs caused by Hanjin’s woes would have to be passed onto customers. Maersk’s experience indicates the industry oversupply pressures that brought down the South Korean container carrier are continuing to dog the market.

“Freight rates in the three months through September were down 16% compared to the previous corresponding period, but had increased by 5.5% since the 2Q16.”

Skou said freight rates in the three months through September were down 16% compared to the previous corresponding period. Rates, however, had increased by 5.5% since the 2016 second quarter, the first time they had risen quarter-on-quarter since the third quarter of 2014.

Maersk’s result also comes a day after South Korea announced it would establish a state-backed ship financing company to help support local shipping companies. The news sent Hanjin shares soaring by 25%.

Hanjin, the world’s seventh-largest container carrier, filed for bankruptcy on August 31 after succumbing to weaker global trade and an oversupply of vessels in the industry. Its demise left 93 ships stranded at 51 ports in 26 countries, causing shipping costs to jump by as much as 50% as customers scrambled to find alternative vessels.

At the time, Gerry Wang, the CEO of leasing company Seaspan, said the fallout was a “huge nuclear bomb” shaking up the cornerstone of globalization. But Wang also acknowledged that the market pressures that brought Hanjin down could send prices lower again.

By that same measure, that means other companies could be pushed to the brink, creating more price volatility—though the South Korean government’ intervention could help smooth things out, at least to a degree.

Maersk isn’t predicting a turnaround in prices any time soon. In its outlook statement, the Danish company said it still expects to post a full-year result significantly down on last year. It also expects global demand for seaborne container transportation to have increased by around 2%, in line with previous expectations of 1-3%.


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