Maersk’s misjudgement may indicate deeper issues for container shipping

Maersk’s misjudgement over the strength of demand for shipping may be understandable bearing in-mind the unusual conditions of the world trade. Soren Skou, the CEO of Maersk Line, discussed Maersk’s fleet expansion with the Wall Street Journal at Maersk’s ‘Capital Markets Day’ in London on the 26th September and commented that “it’s pretty clear that when we look back to early part of 2011 when these ships were ordered, ours and everybody else’s view on growth was somewhat different than what it turned out to be and therefore the market will not be as quite as big in 2015 as we thought it to be.”

In response to these new conditions, Maersk is recalibrating its business, using a remarkable phrase that “a deflationary mind-set is needed” in order to adapt to the present market conditions. The world’s largest container shipping line has decided to focus on incremental improvements in profitability and defending market share through its P3 alliance in order to grow “with the market” and increase margins. In a posture that might be described as defensive, Maersk is focusing on having a lower cost base through better capacity utilisation than its competitors in a market where the opportunity for differentiation is limited.

Maersk predict that underlying demand for container traffic will grow by 3-6% per annum between now and 2015, but could this be a continuing misjudgement?

It may not be just over-ordering and bigger ships that are behind the problems of the container shipping market. Although both the US and the UK, and to a lesser extent the German and Japanese economies, have shown strong signs of recovery over the past two quarters world trade has been becalmed.

Writing in the Financial Times, the respected economist Gavyn Davies observed in an article entitled “Has World Trade Lost its Mojo?” that “world trade volume has been virtually stagnant in the 12 months ended mid 2013”. Mr Davies points out that normally the pace of world trade growth is twice that of world GDP growth, however over the past five years world trade has grown more slowly than GDP. The reasons for this include the slowing of the export based growth model for emerging markets such as China and the emergence of ‘protectionism-by-stealth’.

The implication is that there has been a structural change in the nature of world trade which will lead to continued lower growth levels. If this is true, even Maersk’s new approach could be too optimistic.