The comments from the Maersk Group CEO come amid a precipitous drop in container freight rates that could threaten carrier profitability in 2018.
Every now and then, an executive comes along and says exactly what analysts and even casual observers have been saying for years.
At a maritime shipping conference in Singapore Thursday, Soren Skou, chief executive officer of Danish shipping giant A.P. Moller-Maersk A/S, did just that when he called for an end to government subsidies for container carriers.
“I don’t think any government needs to throw money at container shipping, building ships that are not needed,” Skou said at Singapore Maritime Week’s 12th Maritime Lecture, according to multiple media reports.
The container industry has for years struggled with persistent overcapacity that has led to a race to the bottom on rates. In 2016, rates fell so far below operating expense that carriers lost a collective $5 billion and were forced to consolidate through mergers and acquisitions, as well as the high-profile bankruptcy of South Korea’s Hanjin Shipping.
The problem with all that, however, is that consolidation of company operations, branding and IT systems can only go so far in terms of increasing earnings via cost cutting measures. In order for carriers to truly reach stable profitability, the fundamental imbalance of supply and demand must be corrected.
And according to Skou, that likely won’t be possible as long as governments continue to subsidize loss-making operations.
“In my mind there is no longer anything strategic about governments investing in shipping,” he said, adding that certain state-backed lenders have allowed ships to be built that were “not needed, for companies who were not profitable and who do not have a profitable business model.”
Skou’s comments come amid a precipitous drop in container freight rates on major east-west trades like the transpacific and Asia-Europe that could threaten carrier profitability in 2018.
Although he did not call out any carriers or governments by name, for those that have been paying attention, he didn’t need to. Hyundai Merchant Marine of South Korea, Chinese state-run firm COSCO Shipping and Taiwan’s Yang Ming all have been the beneficiaries of government bailouts and low-cost financing for years.
HMM earlier this month confirmed an order for 20 new mega-containerships as part of its plan to grow its fleet’s carrying capacity to 1 million TEUs, a move that could jeopardize the slow, prodding progress carriers have made in managing capacity in order to help restore rates to a profitable level.
Lars Jensen, chief executive officer of SeaIntelligence Consulting, said at the time the more than 350,000-TEU order would not be disruptive in itself, but noted that the “problematic part is that this will double Hyundai’s size — and a carrier suddenly needed to double its size in a year, when you are the size of Hyundai, will be disruptive in the market.”
To be fair, Skou and A.P. Moller-Maersk, which is the parent of world’s-largest container carrier Maersk Line, have a vested interest in seeing the end to government subsidies in maritime shipping. The company has been stumping for consolidation in the industry for some time now as a means of reducing competition and growing its own market share.
So although that may ultimately be a good thing for the industry at large, one should always be careful to consider the motives of those doing the speaking, no matter how accurate their comments.
“This is a very competitive industry,” said Skou. “Even after we have consolidated, there are still more than 10 global carriers and we fight like only siblings can fight for market share, amongst other things.”
Skou: Subsidies distorting shipping markets
