US Markets
Wednesday, August 7th, 2024 2:08 pm EDT
Key Points
- Robust Freight Demand and Economic Resilience: Maersk’s CEO, Vincent Clerc, stated that freight demand remains strong, indicating no signs of a U.S. recession. He noted the surprising resilience of the shipping container market over the past few years, which suggests underlying macroeconomic strength.
- Impact of Geopolitical Tensions and Cost Implications: Geopolitical tensions in the Red Sea have led to the diversion of shipping routes, increasing journey times and capacity constraints. This situation has raised operational costs for Maersk, potentially leading to significant inflation in their cost base, with costs on certain routes increasing by 20% to 30%.
- Financial Performance and Market Conditions: Maersk reported a year-on-year decline in underlying profit and revenue for the second quarter. However, ocean freight margins have improved compared to previous quarters, positively impacting the company’s margins despite overall weaker annual results. The company has experienced three profit upgrades recently due to these short-term capacity constraints.
Maersk, a leading indicator of global trade, reports no signs of a U.S. recession as freight demand remains strong, according to CEO Vincent Clerc. Despite fears of a recession over the past few years, the shipping container market has shown surprising resilience, indicating robust underlying macroeconomic conditions. U.S. inventories have risen since the start of the year but are not at concerning levels, suggesting no imminent significant slowdown. Clerc noted that purchase orders from retailers and consumer brands importing into the U.S. remain strong, reflecting continued confidence in current consumption levels.
Recent concerns about a potential U.S. recession have been fueled by weaker-than-expected jobs data, sparking debate among economists and market participants. U.S. retail trade inventories in May increased by 5.33% year-on-year to $793.86 billion, as per the U.S. Census Bureau. A report by Container xChange highlighted that inventories are outpacing demand, predicting tougher times for container traders and retailers who overstocked.
Clerc emphasized Maersk’s unexpected success in maintaining container volumes over recent years, anticipating this trend to persist without signs of a global economic downturn. The rise in container volumes has been largely driven by Chinese exports, with an increasing share of global containers either originating from or destined for China.
In 2022, Maersk had a more pessimistic outlook, citing inflation, potential global recession, the European energy crisis, and the Ukraine war as factors dampening demand. These issues led to a decline in freight rates and a subsequent drop in Maersk’s profits in 2023. However, geopolitical tensions in the Red Sea have recently caused shipping firms to reroute around Africa, increasing journey times and reducing global shipping capacity. This diversion is expected to continue through the end of the year, requiring more ships and containers, thereby driving up costs.
Clerc noted that this situation has led to higher operational costs for Maersk, which may result in significant inflation in its cost base, necessitating cost pass-throughs to customers. Routes from Asia to Europe or the U.S. East Coast have seen cost increases of 20% to 30%. Despite these challenges, capacity constraints have temporarily boosted Maersk’s margins, resulting in three profit upgrades in recent months.
For the second quarter, Maersk reported a decline in underlying profit to $623 million from $1.346 billion year-on-year, with revenue slightly decreasing to $12.77 billion from $12.99 billion. While annual figures were weaker, ocean freight margins improved significantly compared to the first quarter of 2024 and the fourth quarter of 2023, with an EBIT margin of 5.6% versus -2% and -12.8% in the previous periods. Nevertheless, Maersk’s shares were down 1.6% in London trading by midday Wednesday.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/08/07/no-sign-of-us-recession-in-freight-demand-maersk-ceo-says.html
