The shipping rivals plotting divergent courses on global trade

Mediterranean Shipping Company and AP Møller-Maersk were always unlikely bedfellows. Yet in 2015, the world’s two biggest container shipping companies set aside their rivalry and shrugged off opposition from regulators to form a capacity-sharing alliance.

Maersk containers could be carried on MSC vessels and vice versa, cutting both groups’ operating costs without reducing the number of ports they could serve. The pact helped reshape container shipping, an industry whose profits had traditionally been tied to the ebbs and flows of the global economy. Within two years, other big players such as France’s CMA CGM, China’s Cosco and German liner Hapag-Lloyd had struck similar deals.

But now MSC, based in Switzerland but controlled by an Italian family, and Maersk, the venerable Danish conglomerate, are divorcing. This year they confirmed that the so-called 2M alliance will end in 2025. Eight years after the agreement began, the dynamics of the container shipping business are starting to change dramatically — in ways that have important implications for the future pattern of globalisation.

The context is the boom the two companies enjoyed during the Covid-19 pandemic. After years of highly cyclical and often weak earnings, shipping lines enjoyed record profits as ships queued up at ports to unload and customers raced to get goods on to a diminishing number of available vessels.

Bumper profits have given Maersk and MSC the freedom to sever ties and to invest heavily, but the two companies are taking strikingly different approaches to the future of their industry.

MSC has ordered a significant number of new ships and last year overtook Maersk in terms of tonnage — an apparent bet on the continued growth in global trade. Maersk, on the other hand, is investing in broader logistics facilities, such as new warehouses, trucks and planes, in an effort to appeal to customers worried about future supply chain disruptions.

As the two lines plot their very different courses, industry observers are uncertain which, if either, strategy will pay off. Large box carriers have more money “than they can use,” says Lars Jensen, chief executive of the shipping consultancy Vespucci Maritime. With trade now slowing after the dislocations of the pandemic, they have a rare opportunity to make that cash count.

But the years of abnormal profits have also drawn regulatory and public scrutiny, while owners of heavily polluting ships are under pressure to invest in curbing emissions. The industry that helped oil the wheels of globalisation must now weather its aftermath: reshoring and increased economic nationalism.

Setting new courses

This is not the first time that Maersk has attempted to tilt its business beyond sea freight. Jensen, a former Maersk researcher, points out that the group tried to break into logistics about two decades ago, before the financial crisis of 2008 scuppered investment plans across the industry.

Now, Maersk’s chief executive, Vincent Clerc, has set an ambitious target for logistics earnings to overtake those of the shipping operation within a decade. Its logistics and supply chain services unit generated a fifth of the group’s overall sales and less than 5 per cent of profits in 2022.

Since 2019, the group has used its bumper earnings to acquire at least 11 companies, among them the $3.6bn takeover of LF Logistics last year. The Hong Kong group’s 198 warehouses helped Maersk double the number of sheds it owned that year.

Clerc’s hope is that a premium, end-to-end supply chain service will appeal to the big retailers whom it has focused on building relationships with. “In the Covid years, [supply chain] vulnerability was really laid bare,” he says. “The idea was [that] you create solutions for these large customers that, today, have to contend with very, very volatile supply chains.”

Maersk had been allocating more shipping capacity to customers most likely to buy into these solutions, and Clerc argues that Maersk’s expansion into logistics will make it more resilient during economic downturns.

But he risks antagonising the freight forwarders who handle cargo for smaller retailers and group it together to help fill containers. Its move inland is turning these businesses from customers into competitors. Jensen says that “quite a few” have told him over the past year that they are reducing business with Maersk because of its new strategy and a perception that the carrier has not recently offered them sufficient capacity.

The challenge for Maersk is growing its logistics business at scale, he says, since freight forwarders control as much as half of the world’s container cargo.

If MSC can grow its fleet fast enough, it could offer a cheaper alternative to these disgruntled customers. But along with other shipping groups who have invested heavily in new vessels, MSC is running the age-old risk: overcapacity.

Prior to the pandemic, shipping lines suffered “10 years of piss-poor markets”, says Niels Rasmussen, chief shipping analyst at the industry group Bimco. “But that to a certain extent was self-inflicted. Because just like now, they had ordered a lot of ships” during an economic boom. That meant the supply of shipping capacity significantly outstripped demand when global trade took a turn for the worse.

The Swiss group is awaiting the delivery of 122 ships, while Maersk has ordered just 28, according to the data provider Alphaliner. Driven in large part by MSC’s bulging order book, Bimco expects the total supply of container space across the industry to increase 12 per cent in the two years to 2024 — up to double the anticipated growth in demand.

As MSC and its peers wait for more vessels to roll down the slipways, profits have already nosedived. During Covid lockdowns, a boom in spending on gadgets, home gyms and hot tubs helped drive up the cost of shipping. Now demand has moderated, freight rates have crashed back down. Maersk forecasts its underlying earnings will fall by as much as 94 per cent this year.

Rasmussen expects box carriers will scrap older vessels at a faster rate in the years ahead, partly offsetting the new supply. He adds that they are already taking steps to limit supply, including skipping port stops and reducing vessel speeds.

Challenges ahoy

The industry is bracing itself for new laws under which it will pay more for the greenhouse gas emissions from so-called “bunker fuel”, the heavy diesel oil used to power large ships.

The UN’s International Maritime Organisation previously mandated a target for shipping to halve annual greenhouse gas emissions between 2008 and 2050, short of the net zero ambitions set for other industries. But it has committed to strengthening that goal next month and, more recently, French officials have been rallying support for a global tax on the industry’s greenhouse gas emissions.

Maersk has ordered up to 19 green methanol-powered ships as it targets net zero emissions by 2040. But these are “dual-fuel” vessels, reflecting concerns that they may still rely on fossil fuels if the limited supplies of sustainable alternatives are not expanded in time.

For all these accumulating pressures, the industry’s closest watchers say that MSC and Maersk’s hold on the global supply chain is unlikely to loosen soon, even as they chart divergent courses.

Source: Financial Times

To read the original piece, please visit: https://www.ft.com/content/c29a373e-4c31-4f48-ac7c-221f1d0652a7

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