If you had hoped global shipping markets were returning to health in the third quarter, numbers out on Thursday from Denmark’s AP Moller-Maersk should firmly shatter that illusion.
The world’s top container shipping company reported a deeper than expected net loss of DKr3.85bn for the nine months to September, saying it would now lose $1bn for the whole of 2009. To compare, the group reported a DKr17.89bn profit for the same period last year.
This is important because, as Reuters pointed out, the trillion-dollar shipping industry carries around 90 per cent of the world’s traded goods by volume, and many turn to the sector as an indicator of economic activity.
The commentary and outlook from CEO Nils Smedegaard Andersen, however, was hardly optimistic in the group’s statement (our emphasis):“As expected, the A.P. Moller – Maersk Group was still negatively affected by the challenging market conditions in the third quarter of 2009, particularly in the markets for the Group’s container vessels and tankers. The strong focus on reducing the level of costs continues to yield positive results, and with sales of treasury shares and issuance of bonds we have taken steps to strengthen the A.P. Moller – Maersk Group’s robust financial basis and long-term funding position,” says Nils Smedegaard Andersen, Group CEO.
For container trades, average rates including bunker surcharges for the fourth quarter are expected to be slightly above the third-quarter level, while volumes are expected to be somewhat below due to seasonal fluctuations. The Group’s share of oil and gas production for 2009 is expected to be at the same level as 2008. In the fourth quarter, the production is expected to be considerably below the third quarter due to lower share of production in Qatar. The outlook for the result for 2009 is unchanged compared to the statement in the Interim Report 2009, thus negative in the order of USD 1 billion.
In the fourth quarter, the Group’s cash flow from operating activities is expected, as in previous years, to be negatively affected by tax payments on the oil and gas activities. As a result of the declining investment level, the Group’s cash flow used for capital expenditure is expected to be lower than in 2008. The outlook for 2009 is still subject to uncertainty. Specific uncertainties relate to the development in container freight rates, transported volumes, the USD exchange rate and oil prices.
Looking deeper, it was the group’s tanker division that was among the most negatively affected in the period, with only gas and product tankers escaping sharply lower rates due to the energy market’s use of such vessels for storage:
During 2009, the economic crisis has had a severe negative impact on the activities of the A.P. Moller – Maersk Group. Freight rates and volumes for the Group’s container shipping activities were 30% and 5%, respectively, below the same period of 2008, and average rates for the tanker activities were considerably lower than in the first nine months of 2008. The average price of crude oil for the period was 48% lower than in the same period of 2008, while the Group’s share of oil and gas production was 9% higher.
Rates for the large oil and gas tankers (VLCC and VLGC) have halved since January, while rates for the smaller gas and product tankers have not been affected to the same extent. In the third quarter of 2009, rates fluctuated, particularly in the LR2 segment, driven by increased use of vessels as offshore storage facilities, but generally rates stabilised at the historically low level from the second quarter. The reduced global demand for oil has put tanker shipping companies under pressure, and there are no short-term prospects of higher demand for oil and gas transports, which could improve the situation.
In the third quarter, delivery was taken of one handy-size gas tanker. Maersk Tankers’ total fleet, including Broström, now comprises 100 owned vessels and 72 chartered vessels. The integration of Broström is progressing as planned, and the organisation is in place. The segment result after tax for the first nine months of 2009 was negative by USD 193 million, including impairment losses and provisions for onerous charter contracts as well as sales gains, compared to a positive result of USD 288 million in the same period of 2008. The segment result after tax for the third quarter of 2009 was negative and considerably below the result for the same period of 2008. The result was negatively affected by impairment losses of USD 53 million.It was also this division that suffered the greatest depreciation of its assets.
As FT Alphaville pointed out this week, depreciation of assets should be a key area of focus for shareholders. Many shipping companies are suffering due to the additional pressure of having to make margin calls on loans taken out to purchase ships at the peak of the market in 2008.
According to research from brokerage Icap, traditional bank financing is still hard to secure and actually more expensive relative to Libor than it was just post the Lehman crisis. This is driving many shipowners to the bond markets for the first time in a bid to maintain cash positions.
AP Moller Maersk itself turned to the bond markets in October so as to “diversify its sources of financing”. As the group stated on Thursday:
As part of the efforts to diversify the Group’s sources of financing, A.P. Møller – Mærsk A/S on 30 October 2009 successfully placed 5-year EUR bonds for a principal amount of EUR 750 million (USD 1.1 billion) with a coupon of 4.875%. The bonds will be dual listed on NASDAQ OMX Copenhagen and the Luxembourg Stock Exchange.
Many would definitely consider this a feat for a first-time issuer with no public credit rating.
Of course, while the fact that AP Moller-Maersk can tap the bond markets successfully is generally good news for the industry, any sign of further bond issues from the group would be indicative of further cash burn and financing pressure in shipping.
AP Moller Maersk shares opened over 4.8 per cent lower in Copenhagen on Thursday morning at DKr35,800.
Related links:
The bulk penetration myth – FT Alphaville
Prepare for shipping wars – FT Alphaville
Maersk hit by ‘crisis of historic dimensions’ – FT