Maersk Line Chief Executive Officer Soren Skou said Tuesday at a refrigerated logistics conference in Antwerp that his company plans to hike reefer rates by roughly 30 percent on a global basis from Jan 1, 2013.
The increase, which translates to $1,500 per FEU on average globally, is necessary to account for stagnating rates on reefer trades despite growing costs to manufacture reefer boxes and operate reefer services, Skou said.
The announcement comes after a period in which Maersk has withdrawn reefer-intensive services from South America to North America (the Spondylus
) and Europe (the Andean
) due to a lack of profitability.
Skou said in the last seven years reefer rates failed to keep pace with inflation, much less bunker costs. He said reefer rates have risen 2 percent annually, while inflation has grown at 4 percent and bunker costs 18 percent.
That also doesn’t factor in the cost of investment in new reefer containers, an issue that particularly impacts Maersk as the market leader in the reefer segment. The Danish line’s reefer fleet of 230,000 FEUs represents roughly 23 percent of the global fleet of 1 million FEUs.
Skou said Maersk will suspend investment in new reefer equipment in 2013 along with the rate increase. Earlier, he said Maersk will also scrap 25,000 TEUs worth of reefers this year, more than 10 percent of its existing fleet.
“This is not a decision we have taken lightly,” Skou said at the Cool Logistics conference, adding the move will have a “significant short-term impact on the markets and our customers, which is also why we provide an extensive notice period. We’re telling you now so there’s time to prepare.”
Maersk’s moves could tilt the supply-demand balance in a market that requires heavier investment than the dry container segment does.
The cost of producing a dry 40-foot box is roughly $4,000, compared to $14,000 for a 40-foot reefer box. Skou, in his presentation, estimated the liner industry needs to invest a collective $3.5 billion in new reefer equipment from 2012-2015.
The cost to replace the total industry equipment capacity to be scrapped is $1.7 billion, and replacing that would only keep the reefer equipment fleet at present levels, not accounting for the average 5 percent growth in reefer demand.
By withdrawing its own investment next year, Maersk could create a gap in capacity that would be exacerbated by a decline in conventional vessel reefer capacity, where scrapping rates have doubled from 2008 through 2012. The number of conventional reefer vessels stood at 847 in 2008, but is projected to fall to 691 by the end of 2012 and to 362 by 2018, which would be a more than 50 percent decline in a decade. Coupled with forecast annual demand growth of 5 percent, that could create a shortfall in capacity of as high as 9 percent by 2015, Maersk estimates.
At the heart of Maersk’s argument for drawing down its reefer investment and increasing rates is the reality that reefer rates have hardly budged in the last seven years despite the line’s significant investment in the market. Skou took command of the world’s biggest carrier in March and immediately set about returning it to profitability.
In his presentation, he noted that average operating margins for publicly traded liner carriers were in the 1 to 2 percent range, far below typical investor expectations of 10 percent. In 2011, industry margins were at around - 5 percent, meaning a 15 percent gap existed between the industry’s performance and an expected rate of return for shareholders.
The industry is unable to fund its investment through its earnings, Skou said, with accumulated operating cash flow net of investments at - $22 billion since 2005.
The decision to significantly raise rates while also curtailing investment resembles a similarly tough decision Maersk made in spring 2007 to retrench the number of inland intermodal points it served in North America (see page 60 of the March 2007 issue of American Shipper
Maersk said its near-term reefer strategy has no impact on its decision to buy a reefer equipment production plant in Chile in the last year. That plant is only due to begin production in 2014, by which time the line is hopeful that rates will have improved enough to merit more production.
“The decision to cease investment in equipment is only applicable to 2013,” Skou said. “As a company with such a proud history in reefers, we do not desire to exit the reefer business. This is exactly why we are working now to provide a sustainable future in the reefer industry. The decision to build in Chile was made with the long term future in mind. If this initiative works and we get paid what we believe our products to be worth, then we will continue to use the Chilean factory for future equipment production.” - Eric Johnson