Maersk: Impact From US-China Trade Spat "Quite Manageable"

A.P. Moller–Maersk AMKBY reported a sharp improvement in second quarter earnings when compared to the same period last year despite a relatively small increase in revenue, and said trade tensions between the U.S. and China have had a limited impact on its business.

Søren Skou, the company's chief executive officer, characterized the second quarter as one of "solid progress" noting that earnings before interest, tax, depreciation and amortization (EBITDA) was about $1.36 billion in the second quarter of 2019, 17 percent more than in the second quarter of 2018.

Speaking to securities analysts about the company's results during a teleconference, Skou spent the first several minutes discussing U.S.-China trade tensions.

"We don't believe that tariffs are good for the global economy and we do not welcome them," said Skou. "That being said, the impact from the U.S.-China tariffs and trade tensions on global trade has been quite manageable for us, so far."

He said that global container trade was up about 2 percent in the first half of 2019. U.S. imports have slowed, but he said "the drag from tariffs has been less than expected."

He said U.S. imports from China have fallen about 7 percent in the first half of the year, but that Pacific trade grew 1 percent and total imports to the U.S. grew 2.5 percent in the first half of the year. He noted that sourcing patterns are changing, with imports of goods to the U.S. from outside of China grew at "close to double digits in the first half."

He noted that new sourcing locations can actually benefit Maersk because "they entail higher freight rates and new opportunities for us to sell logistics services."

Skou also said there is "quite some anecdotal evidence that tariffs are being circumvented to some extent by shipping stuff out of China to other destinations in Asia and then sending it on to the U.S."   

"European-related trade, where we are most exposed, had strong volume growth in the first half, around 5 percent, in part because of trade diversion resulting from the U.S.-China trade tensions."

He said the impact from tariffs is being moderated by several factors. He said consumer spending remains fairly robust, supported by good labor markets and consumer confidence. He also said the goods affected by tariffs represent only about 4 percent of U.S. consumer spending. He also said the strong dollar relative to the Chinese yuan has helped to blunt the impact of the tariffs. And he said Chinese exporters and U.S. importers have absorbed some of the increased costs through lower margins.

Looking forward, he said the 25 percent tariff hike in April 2018 on $250 billion of U.S. imports from China and the latest 10 percent tariff announced on $300 billion of U.S. imports from China, if implemented in full, could reduce global trade by up to 1 percent in the next year and further escalation could cause further slowing of the U.S. economy and be negative for Maersk.

But Skou said "we should not lose sight of trade liberalization efforts being made elsewhere." He said World Trade Organization (WTO) data indicates trade flows that are subject to liberalization are outpacing restrictive measures in the U.S.-China trade tensions. He pointed to efforts led by the WTO to reduce non-tariff trade barriers, European Union trade agreements with Vietnam, Japan and Canada (as well as the EU-Mercosur agreement reached in June), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the trade agreement  between 11 countries created after the U.S. withdrew from the proposed Trans-Pacific Partnership.

Maersk's ocean segment accounted for the lion's share of the company's second quarter revenue, $7.15 billion, up from $6.95 billion in the second quarter of 2018. EBITDA in the ocean segment was $1.07 billion in the second quarter of 2019, a 25 percent increase over the same period last year.

Ocean volumes were up 1.4 percent year-over-year to 6.9 million twenty-foot equivalents (TEU) in the second quarter, driven mainly by backhaul volumes. Average freight rates increased 1.5 percent to $1,868 per 40-foot container.

Maersk said it saw the fastest growth in cargo volumes on intra-regional trades, where volumes increased 5.4 percent year-over-year, but freight rates in the second quarter of 2019 on those trade lanes were 1.6 percent lower than they were a year earlier.

East-West volumes were 0.5 percent higher in the second quarter of 2019 compared to the same period last year and rates were up 3.5 percent in the same period.

Maersk said the volume increase was "driven by Europe, impacted by higher demand for refrigerated goods in China, while North America trades were impacted negatively by the trade restrictions with China and modest growth in the U.S."

Overall North-South volume growth was flat, "driven by growth in Africa and West Central Asia, which was offset by declines in Latin America and Oceania trades, mainly due to weak market demand."

The company said revenue in its logistics and services segment was relatively flat, with increasing revenue in supply chain management offset by declining revenue in sea and air freight forwarding."

The company's terminal and towage segment had revenue of $957 million in the second quarter which was 13 percent higher than in the same period last year.

Revenue in the company's manufacturing segment was $459 million in the second quarter of 2019, down 34 percent from the same period last year. This reflected the company's exit from the business of manufacturing dry containers and lower revenue from the manufacture of refrigerated containers.

As for capital expenditures, Maersk said "No new large vessels are expected to be ordered and no new large greenfield terminal projects are expected to be pursued until earliest 2020."

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