Seeing vessels half empty?

May 11th 2005
From The Economist Global Agenda

The advance of globalisation and booming world trade have provided bumper profits for the world’s container-ship companies. The biggest, Denmark’s AP Möller-Maersk, is using some of the gains to snap up Anglo-Dutch rival P&O Nedlloyd, thus extending its lead over rivals. But do rougher seas lie ahead?

“TIERS upon tiers of vessels, scores of masts, labyrinths of tackle, idle sails, splashing oars, gliding row-boats, lumbering barges…church steeples, warehouses, house-roofs, arches, bridges, men and women, children, casks, cranes, boxes, horses, coaches, idlers, and hard-labourers: there they were, all jumbled up together.” Containerisation has done much to destroy the seedy romance of ports as described in Dickens’s “Martin Chuzzlewit”. But the anonymous ship- and lorry-borne steel boxes that have replaced cargo nets, bales and barrels carry half the world’s traded goods. Prosaic they may be, but they have revolutionised marine transport and contributed enormously to the explosion in international commerce that has characterised globalisation.

Along with a decline in trade barriers, the precipitous drop in the price of getting exported goods to foreign markets around the world has had a huge impact on world trade. And leading the field in container shipping is AP Möller-Maersk, a Danish company that on Wednesday May 11th announced its intention to stay at the head of the fleet by paying €2.3 billion ($3 billion) for P&O Nedlloyd, an Anglo-Dutch rival and the world’s number three container firm. The deal boosts Maersk’s global market share from around 12% to nearly 18%, putting it well ahead of its nearest rival, Mediterranean Shipping.

Buoyant world trade has provided bumper returns for the world’s leading container-shipping firms. Between 1997 and 2006, global trade in goods will grow by an average of 6.9% a year, according to figures from the World Trade Organisation. In 2004, trade in goods was a blistering 10.7% higher than the year before, at $8.9 trillion.

This growth helped Maersk to make net profits of DKr18.4 billion ($3.1 billion) last year. Of that, the container business contributed DKr8.4 billion, more than double its profits in 2003 (the rest came from oil tankers, supermarkets, an airline and an oil and gas drilling business). These bumper results gave the company the financial clout it needed to stretch its lead through a big acquisition. However, they may also have tempted Maersk to overpay: it is offering a premium of some 40% over P&O Nedlloyd’s pre-announcement share price.

The demand for container transport has exceeded supply of late, despite an increase in the world’s container-fleet capacity by an average of 10.6% a year in 2000-04, largely as a result of China’s bumper economic-growth rates and burgeoning exports. This has pushed up the rates companies pay to ship their goods. To take advantage of the extra business and higher rates, shipping companies have ordered lots of new vessels—hence the 32.8% growth in the order books of the world’s shipyards in the year to January 2005. Of nearly 4,000 ships on order, almost one-third are container ships (and nearly 40% are tankers, as shipping firms also seek to take advantage of booming demand for oil).

With shipyards working flat out, Maersk may have decided that it was better to get extra capacity through a takeover, albeit a pricey one, than by ordering new ships of its own and having to wait for them—three years or more for orders placed now. Maersk’s acquisition of P&O Nedlloyd immediately adds 162 vessels to its existing fleet of 387, and raises its capacity by some 44% to around 1.5m twenty-foot equivalent units (TEUs—a standard measure of container capacity). The deal also gives the Danish firm access to P&O Nedlloyd’s order book of 42 ships. Maersk will, it would seem, soon leave its closest rivals wallowing in its wake, unless they too can forge mergers that propel them into the big league.

They may now try to do just that, for they have already shown that size is important to them. Many of the world’s container companies (including P&O Nedlloyd, though not Maersk) are members of capacity-pooling alliances that provide scale and help to improve efficiency. In fact, Grand Alliance, which includes P&O Nedlloyd (for now), currently outstrips Maersk in capacity, a factor that may have pushed Maersk to topple it.

The big question is whether an enlarged Maersk will be better able to withstand the choppy waters that would seem to lie ahead. According to Drewry, a shipping consultancy, demand is likely to outstrip fleet growth this year but could slip behind in 2006, when fleets are expected to grow by a heady 14%. And this assumes that world trade continues to increase at the current lively pace. China’s astonishing rate of growth cannot last forever—indeed, the authorities themselves are trying to cool the economy—and the slow-growing trade across the Atlantic is susceptible to any slackening of growth in Europe or America. If world economic growth and trade stumble while shipping lines are piling on extra capacity, shipping rates could fall rapidly, leaving the world’s container firms with plenty of empty vessels and a distinct sinking feeling.

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