The company said this investment will allow it to ‘grow with the market.’
Maersk Line plans to add 425,000 TEU of new capacity in 2017-2019, the equivalent of about 30 14,000 TEU ships.
Soren Skou, the chief executive of Maersk Line, told a group of
investors and analysts who gathered for the company’s Capital Markets
Day earlier this week that the company needs that much capacity in order to grow in line with the market. The capacity will also help support its strategy of having the largest ships in each trade.
While he said most of that money will be used for large ships, some of the money may be used for smaller ships for Seago, its feeder operation in Europe, which faces increased costs because of the stricter sulfur emission regulations that kick in Jan. 1. The company said low sulfur fuel is expected to raise Maersk’s costs by $200 million per year, which it intends to recoup with a new tariff. He said the company may also look to invest in advanced technology such as scrubbers or ships that use LNG as fuel.
Skou said the company plans to invest about $3 billion annually between 2015 and 2019.
He said there is little evidence that shipping rates will increase over the next several years.
“Hope is not a strategy,” he said. “Therefore, we have to continue to have a deflationary mindset when it comes to cost.”
Maersk said that in the past decade, the average vessel capacity ordered has been 11 percent of the existing fleet; nominal capacity (after reductions due to factors such as slow steaming, scrapping, idling and blank voyages) has grown 10 percent, compared to demand growth of 6 percent. That has led to what Skou calls a “vicious circle” in container shipping — overcapacity has led to about a 2-percent reduction in freight rates each year (at fixed bunker costs), which has led companies to order larger ships. The thinking behind this is when ships double in size, they have a 25-percent lower operating cost.
He said there is only one strategy that work in such an environment — “that is lowest cost will win, and we are going to continue to drive out cost.”
Jakob Stausholm, chief strategy, finance and transformation officer at Maersk Line, said at the same conference that “cost leadership is a lifestyle” at the company. Eliminating the effect of bunker costs, Maersk said it has reduced cost per 40-foot equivalent unit by 5.9 percent since the beginning of 2012.
Maersk said the company has several tools it can use to drive down cost. One of these is network optimization.This involves creating a more integrated network, making more effective use of hubs, reducing port calls, and cutting canal transits. As an example of optimization, Skou pointed to the company’s decision to combine overlapping strings between Asia and South Africa, and Asia and South America. By having just one long string instead of two shorter ones, the combined services could use one less ship, have fewer port calls and reduce bunker usage. Annual savings amounted to $20 million.
Skou said that Maersk will continue to use “slow steaming” and perfect it. By slowing ships and adding a ship to a string, carriers can dramatically reduce bunker consumption, but still maintain schedules with fixed-day weekly port calls.
He said the transatlantic TA2 service went from five vessels to six vessels, reaping a savings of $10 million per year. The U.S. East Coast-Middle East service went from eight to nine ships and will save $20 million per year, and the ME1 service between the Middle East and North Europe went from seven to eight ships and will save $15 million per year.
Skou said the company also is improving slow steaming through what the company calls “speed equalization.” Ships that are slow steaming commonly have a faster speed on the headhaul (Asia to the U.S. or Asia to Europe, for example) than on the backhaul. But he said the company now calculates that it can save even more if the speed of the backhaul is increased slightly and the headhaul speed is slightly decreased.
Maersk is also seeking to improve utilization of its ships, having ships carry more boxes on each sailing. Since the beginning of 2012, Maersk has increased volume by 10 percent at a time during which it has increased nominal capacity by just 3 percent and actually reduced capacity offered the market (because of slow steaming, idling and banked sailings) by two percent.
Even though the company added 31 ships so that it could do more slow steaming, the size of the company’s fleet fell from 640 ships in the second quarter of 2012 to 577 ships in the second quarter of this year.
The company has also reduced its reliance on chartered tonnage — they make up 53 percent of its fleet today compared to 58 percent two years ago. Skou said the company can also retrofit ships to increase their capacity. For example, by slicing and raising the accommodation house on some containerships so that the bridge is higher, Maersk has been able to add another layer of containers, increasing capacity at a relatively low price and getting a quick payback on its investment.
Maersk operates in 120 countries, some of which are small markets. By bringing better procurement practices to all of its offices, it is able to reduce costs.
Vesssel-sharing agreements are an important took for reducing costs, while improving service, Skou said. Maersk expects to realize annual savings of $350 million per year through the 2M agreement with MSC, he said. (Savings next year will amount to $250 million because of start-up costs.)
With 2M, Maersk will see the average size of its ships in the East-West trades grow from 9,500 TEU to 11,500 TEU, and will realize better utilization of its Triple E ships than if it had to operate them on its own.
At the same time, he said it will be able to offer five strings instead of three strings in the transatlantic, and 10 strings instead of nine strings in the trade between Europe and Asia.
Despite fears expressed by the European Shippers Council, Maersk and MSC said the 2M offers shippers more choices. Maersk said it will call more ports each week — 291 versus 212 — and offer more direct port-to-port pairs — 1,036 versus 788.
Skou said Maersk would like to improve container and inland efficiency. The company has improved the usage of containers somewhat, but has been stuck at the same level for several years, and Skou said the company has not yet cracked the problem and intends to work on it in 2015. Similarly, Skou said the company feels it can learn a lot from companies such as Kuehne + Nagel and DSV on how to improve its inland network.
Maersk expects demand for container shipping to increase 4 percent to 5 percent this year, while capacity will increase 6 percent. In 2015, it forecasts a demand increase of 4 percent to 6 percent, which will be outstripped by an increase in capacity of 7 percent. In 2016, it forecasts both supply and demand to increase by 4 percent to 6 percent.
Skou said Maersk will “stay the course” by employing a strategy to grow at the same rate as the market and continuing to reduce costs.
The North-South trades, Skou said, are a stronghold for Maersk. He said it is the number one carrier in Africa, with a 28-percent market share; in West and Central Asia (Saudi Arabia and India), with an 18-percent market share; and in Oceania, with a 14-percent market share. It is the second largest carrier in Latin America.
He said there are a number of competitors that want to enter those trades because there are better margins and better growth. He also noted the trades are under increased pressure because a lot of ships are cascading into those trade, including ships of between 7,000 TEU and 9,000 TEU that used to be the workhorse of the Asia-Europe trade.
To preserve its leading position, he said the company wants to have the largest ships and lowest unit costs, but also needs to have the best product, calling at more ports and having a better feeder network.
He also said it is particularly important in markets such as Africa to have “boots on the ground” to deal with problems that arise.
He said the company is looking to growth opportunities, for example, in the intraAmerica trades by reviving the SeaLand brand, which he said will leverage the company’s experience operating the feeder services Seago in Europe and MCC in Asia. SeaLand, which will be headquartered in South Florida will begin operating early next year with 250 employees.
Maersk plans to boost capacity by 425,000 TEU
