Analysts estimate massive losses of US$ 1.4 billion from Maersk's container operations.
Analysts Rikard Vabo and Lars Erich Nilsen say recent developments in the container and oil and gas markets have increased the likelihood of the Danish giant slumping to a loss in 2009 from ?possible to probable?. They estimate massive losses of US$ 1.4 billion from their container operations. This will put heavy pressure on the group to redeliver vessels and proceed to renegotiate charters. Likewise they will have little incentive to take on new tonnage from third party owners.
Maersk is estimated to have a group loss of US$ 858 mio in 2009 mainly driven by a loss of US $1.9 bn from containers (2008: US$ 104 mio). These losses may well continue for the next two or even years. Whether they like it or not, Maersk management will be under intense pressure to contain and reduce their operating losses.
Companies base their business on long-term charters
Container shipping companies like Seaspan Corporation(NYSE:SSW) with large orderbooks and fleet of containerships base their business model on long-term, fixed-rate charters to major shipping lines. Maersk is one of their major customers. Jerry Wang, Seaspan CEO, often claims that his business model a sure bet. Many major US institutional and German KG investors continue to believe this, too. Whilst the Germans are getting worried by increasing idle tonnage, some on Wall Street are looking to average down and increase their bets in this beloved sector.
The issue is how customers like Maersk will be able to service the current charters much less absorb the new vessels from their large orderbook. The conventional wisdom is that liner companies have such strong balance sheets that there is only minute default risk.
Seaspan reported net loss of $241.9 million and $199.3 million for the quarter and year ended December 31, 2008 but maintained their cash dividends and paid a fourth quarter dividend of $0.475 per share, expressing optimism about renewed Chinese growth and exports. This operation was financed by a bailout infusion of fresh cash capital from their parent company. They also had to revise their intercompany management agreement to shore up eroding operating margins from low paying charters and escalating operating expenses.
If a major company like Maersk eventually is forced to renegotiate contracts and unable to take delivery of new chartered-in vessels, this would affect severely companies like Seaspan. No one seems to have factored in default risk in their business models. Moreover, they are counting on liner companies to employ their substantial orderbook.
The outcome is highly dependent on renewed growth rates in the Far East and a big comeback in exports to the US and EU. Especially if the anticipated recovery is the US is less than anticipated and there is a period of slower growth than recent past levels with overspent US consumers and burgeoning public debt levels, this could lead to trouble. There is so much money chasing this sector and endemic overcapacity.