Container ships and hurricanes don't mix, as all captains know. But AP Moeller-Maersk is weathering economic squalls well. Despite weak global trade and high fuel prices, shares in the world's largest shipping company are up 25% this year, buoyed by cuts to industry capacity. Now Maersk is merging some of its Asia to Europe services with rival CMA CGM, further reducing capacity. If that enables Maersk to raise freight prices this year, the shares could rise further.
Still, it won't be plain sailing. The industry's order book for new ships -- placed in healthier economic climes -- is around 30% of the current fleet. Capacity is currently outstripping demand for shipping of finished goods by around 4% annually, forcing shipping groups to cut prices last year. Even after a recovery this year, spot shipping rates from Asia to Europe -- the world's busiest route -- are around $710 per container box, below the cost of the fuel needed to transport them.
The wind is now changing. The main carriers are aiming to raise prices between Asia and Europe by $600-$900 per container in coming months, an unprecedented hike, notes data specialist Alphaliner. To regain pricing power, Maersk, CMA CGM and MSC are keeping ships in port or cutting routes. Around 7% of capacity is sitting idle, double the level of a few months ago, enabling the industry to push through the first rate rises in two years.
Even so, Maersk trades at around book value. That's in line with Asian rivals China Cosco Holdings and Evergreen Marine, which lack Maersk's oil-rig operating business and stake in oil producer DUC, which act as a partial hedge against rising fuel prices. Yet even a small freight-price increase could buoy its prospects. Each extra 1% rise would add approximately 5% to its 2012 earnings, notes Deutsche Bank. That's something investors might like to take on board.
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