Guaranteed Higher Grade!
Free Quote
Maersk Mauritius was set up in 1998. It represents the interests of Maersk Shipping Line and Safemarine in Mauritius, Seychelles and Comoros. It forms part of the Maersk Group which is the largest shipping conglomerate in the world. The company employs both local and internal specialist to help companies in the region to import or export standard container shipments, reefers or oversized cargo. It has developed over the years its core competency in the shipping business and has also diversified its activities.
The shipping industry worldwide has been facing some serious challenges in terms of stagnant global trade, decreasing freight rates and overcapacity in the industry. The other activities of the Maersk Group included an oil division which is suffering from constantly falling oil prices, shipping terminal operations , oil drilling operations and other marine and offshore shipping services which are all being impacted by the difficult market conditions globally .Profits for Maersk Group dropped significantly to USD 925m in 2015 compared to USD5.2bn a year earlier .
Eighty percent of globally traded goods by volume are moved through sea routes. The shipping industry, also referred to as the liner industry included movement of 1) merchandised goods by container shipping , 2) oil , gas and petroleum products by tanker shipping , and 3) dry bulk commodities ( grain , iron , ore , coal , etc.) by dry bulk shipping. Container shipping represented almost half of all these activities by value.
The freight rate that is the price charged by ship liners is an important indicator of the industry and differs depending on the routes employed, ports used and value of the goods transported. The higher the competition on a shipping route, the lower the freight rates. The market segment being served was the other factor influencing the freight rate; the container market was dependent on the volatility associated with merchandise exports and imports, the dry bulk market was susceptible to demand for commodities including metals and coal and the tanker market was more dependent on the changes in the price and demand of oil.
To run an efficient shipping business, a company needed to provide timely and reliable services with a fleet of vessels extensive enough to give its customers access to the desired geographical coverage at a standard frequency. One string of service from Asia to North America that stopped at several ports of call to load and unload cargo, for example, would require a few vessels to complete, depending on the size and speed of the vessel employed. Larger shipping companies typically owned hundreds of vessels and had enough capacity to provide services on all main trade routes, and with wide enough port coverage to provide services at strategic ports in each region. For the majority of smaller and regional shipping companies that only owned dozens of vessels, providing adequate service might mean joining alliances to operate combined services or to utilize other liners’ coverage through vessel-sharing agreements or slot-purchase agreements.
But for all companies, large or small, the ability to optimize a vessel’s carrying capacity was a key determining factor in sustaining a profitable operation. The fixed costs of operating a vessel included the crew’s expenses and costs to maintain the vessel. Variable costs were voyage- and cargo-related costs, which included fuel costs, port charges, charges for handling containers at terminals, and port charges for docking and towing the vessels. Fuel costs alone could account for up to 70% of a vessel’s operating costs. Many ship liners were incentivized to use larger ships because not only were bigger vessels more fuel efficient and could drive down the average costs of a voyage, but the unit cost per container was also lower on bigger ships.
Founded by Danish magnate AP Møller in 1904, Maersk Group started as a shipbuilding company. With a strong foundation in its core shipping businesses, it ventured to other related logistics support services, oil and gas services, including oil drilling, and oil tanker services. In the decades that followed, the Group diversified and became a conglomerate with a heterogeneous business portfolio, with investments in non-core businesses such as the airline and supermarket industries. While the company was active across a range of industries, its growth since the beginning had been closely intertwined with two industries—oil and shipping.
At the onset of the oil boom in the 1920s, its oil tanker business took off due to the growing demand for transporting oil and oil products. At around the same time, its container line unit, Maersk Line, began its first trans-Pacific operations. From then on, the Group went through the ups and downs of many economic cycles and downturns—from the slump of World War II to the rise of global trade in the 1960s, through the rapid surge in trade activities and shipping demand between 2000 and 2008. As of 2016, Maersk Group had 88,000 employees and operated in more than 130 countries. Over the course of four generations, it had become the world’s largest shipping conglomerate. Its two biggest subsidiaries were its container shipping division, Maersk Line, and its oil division, Maersk Oil.
Maersk Line provided container shipping services operating under five brand names in different regions. As a market leader, it covered every major trade route and many feeder routes. It offered three types of shipping—cargo, container, and reefers [see Exhibit 3]. The company owned and operated a fleet of more than 600 container vessels, covered more than 300 ports, and offered 16% of the global container shipping market capacity [see Exhibit 4]
Maersk Oil was the Group’s other major business arm, providing upstream oil and gas production and exploration services. Upstream oil operation constituted a lengthy process that involved planning, assessing, and developing before the actual drilling. Together with Maersk Drilling, a subsidiary of the Group and a global drilling contractor specialized in deep-sea drilling; the companies were responsible for extracting more than 80% of oil and gas from the offshore fields in the Danish North Sea. With expertise operating in deep-water and high- pressure oil fields, they also operated some of the largest oil fields globally, such as those in Angola and Qatar. They usually collaborated with downstream oil companies and oil field owners, with each project taking years to develop and explore. Once started, the fields could operate for decades. Oilfields at their home base in the Danish North Sea, for example, had been in operation since the 1970s. Other projects might take only a few years. Revenue, which came from oil sales, depended on the oil price and its entitled production, which was determined by Maersk’s stakes in each project.
APM Terminals, which contributed about 8% to the Group’s revenue, was its third-largest business. It provided services at container terminals to ensure the smooth running of logistics at terminals, which included coordinating with logistics service providers and ship liners on inland transportation, managing container depots, and repairing containers. The Group also operated four other subsidiaries that were downstream-sector players in service to its two major business arms. Maersk Supply Service provided supporting marine services to the oil and gas industry with specialized vessels to be used in towing, inspection, and mooring. Maersk Tankers worked closely with oil and gas suppliers to ship crude oil, and oil and gas products. Damco was a logistics and freight-forwarding company that helped customers plan and arrange shipments. It also offered warehousing and distribution services. Svitzer provided towage and salvage services.
Low Oil Prices
Oil prices that began falling in late 2014 severely hampered profitability at Maersk Oil and Maersk Drilling. In the industry’s better days when oil prices were hovering above USD100 per barrel, Maersk Oil was able to deliver one-third of the Group’s profit, but since oil prices dropped by half in 2015, it had been reporting heavy losses [see Exhibit 5]. As exploration and drilling costs were fixed and incurred up front, lower returns from oil also extended the time needed to recover the costs in developing a project, which relied on cash flow from selling oil. Ensuring a steady volume in entitlement production and keeping costs low were thus crucial in times of low oil prices. Lower oil prices also added pressure to oil field owners, including many oil-producing countries, to cut back on production volume. They raised the uncertainty in securing future contracts, as owners tended to postpone or suspend projects. Other subsidiaries also suffered. Units that provided support to the oil business were affected by the lower demand and decreased spending on oil rigs, with some projects deferred or even cancelled. Units that provided shipping support were affected by lower shipping volume demand and throughput.
By 2014, the container shipping industry revenue was more than 16% below its peak in 2008.All ship liners adopted measures to raise fuel efficiency or minimize fuel use. One way to minimize fuel use was to operate vessels at slower speeds, a widely used method called slow steaming. Reducing the speed by 10% lowered the overall energy needed for a voyage by 19%. But slower speeds also meant longer transit times and additional vessels to keep up with the regular volume, which led to additional costs at port terminals, such as renting extra berths and paying for extra dock operator services. As oil prices fell further, savings from slow steaming were also eroded by lower bunker fuel costs.
Ship liners also tried to bring down per container unit cost by replacing smaller and older vessels with newer, bigger ones. Historical data showed that doubling the maximum container ship size could reduce the vessel costs per container by about a third.20 But since many of the heavily traded routes were highly competitive, when the largest players launched mega ships, other shipping companies hurried to order larger ships as well, further worsening oversupply and creating a vicious cycle within the industry. Such was the case in 2013, when Maersk launched the world’s biggest container ship, the Triple-E, which, at 400 meters long, could hold 18,000 20-foot containers and had lower fuel use.
Some liners chose to reduce capacity by leaving vessels idle, an industry practice called “laying up ships.” Shipping companies briefly practiced idling right after the financial crisis, when they laid up about 11% of the world’s fleet. Toward the end of 2015, more carriers returned to this method, and idle capacity again reached a record high. It was difficult to sell an operational vessel during times of overcapacity, and idling was a reversible tactic that temporarily withdrew capacity from the market in hopes of deploying those ships again when freight rates went up. Vessels more than 10 years old might be sold for scrap, while younger vessels would be idled.
When idling, ships were either anchored at sea or docked at less expensive ports to save docking expenses. Ships could be laid up “hot” or “cold.” “Hot” meant that the ship’s engine would run at minimum levels and a few crew members would maintain its operation, so that the ship could return to service within a few days. A “cold” layup meant a ship’s engines were turned off and no crew would maintain the ship; it could take weeks to warm up the ship for use again. So depending on the type of idling, both crew expenses and engine costs could be saved. Some shippers also chose to idle a ship while waiting for the costs of demolishing a ship to reduce or when scrapping prices went up to get better returns.
Ship liners also opted to return chartered ships to reduce capacity. Maersk in 2014 returned 14 chartered container ships to the ship owners two years ahead of their stated contracts. At that time, chartered ships accounted for about 42% of Maersk’s fleet.
Faced with overcapacity in the industry, shipping companies cooperated to share vessels and routes. The most common partnerships were alliances in which members jointly operated vessels and provided services for each other’s customers. Alliances also allowed shipping companies to extend their geographical coverage to regions already covered by other members. Members also created vessel-sharing arrangements in which each liner contributed a certain number of vessels to run joint services, and each company was allotted capacity reserved for its customers. Others signed slot-purchase agreements in which one liner purchased or exchanged shipping services provided by another liner on routes that it was not covering.
Between 2014 and 2016, three major alliances were created, which included many of the top 20 shipping companies. The biggest was 2M, formed between Maersk Line and Mediterranean Shipping Company (MSC), the two largest shipping companies that together shared a third of overall market capacity. Other alliances were Ocean Three and CKYHE [see Exhibit 6] Alliances also reshuffled as companies went bankrupt or merged. New alliances formed and old alliances added new members. It was a changing landscape, and companies needed to utilize each other’s route coverage to stay afloat in the industry.
Despite the alliances, many shipping companies could not survive the tough operating environment and sought to merge with or acquire other players. The first large-scale merger was between two Chinese shippers, COSCO Container Line and China Shipping Group, as part of a government-led effort to consolidate unprofitable state-owned enterprises. The two companies had lost more than USD900m combined in the five years before the 2015 merger. Then, shortly after, the third-largest shipper, CMA CGM, took over Singapore-based Neptune Orient Lines for USD2.4bn. More followed, as German-based Hapag-Lloyd, the fifth largest, agreed to merge with Gulf-based ship liner United Arab Shipping Company. This was Hapag Llyod’s second merger in two years; it had previously merged with Chilean company CSAV. Both mergers aimed at expanding the existing liner’s geographical and route coverage. Three Japanese shipping companies, Nippon Yusen KK, Mitsui O.S.K. Lines, and Kawasaki Kisen but still reported loses. In 2016, they decided to merge to remain competitive. The new resulting entity was expected to become the world’s sixth largest, which had 7% of the container shipping market.
While market consolidation continued [see Exhibit 6], the tough market environment had started to erode the financial strength of some players, and what followed was one of the biggest bankruptcies in the industry in decades. Hanjin Shipping, once part of the CKYHE alliance, filed for bankruptcy after suffering years of huge losses amid historically low freight rates on some of its major Asian routes. At the time of filing, the company was South Korea’s biggest and the world’s seventh-largest shipping company. Hanjin’s bankruptcy only sped up the number of mergers and acquisitions swiftly taking place as shipping companies tried to mitigate losses.
The industry’s competitive landscape was changing rapidly as mergers, alliances, and even bankruptcy took place. Before 2001, the industry was relatively fragmented, with the top 10 companies together holding 37% of overall market share. By 2016, a series of industry consolidations had resulted in the three biggest liners taking 41% of all the industry’s seaborne capacity, and the 10 biggest shipping companies holding 69% of all capacity.
Consolidation was also occurring in the upstream and downstream sectors. Some cash-strapped shipping carriers disposed their assets and stakes in terminals in exchange for liquidity. Others, such as the Chinese carriers, took the opportunity to buy terminal assets. In the shipbuilding sector, major players in China and Japan were considering mergers.
In the last few years, Maersk had relied on leveraging cost and scale to maintain its competitive position when top-line growth slowed. However, going forward, a strategy that would induce growth in such adverse conditions is needed. Operation-wise, the company could continue with the company’s cost leadership approach and intensify current efforts on optimizing resources. However, going forward, what would be the best strategy for Maersk Group? Can the company expand the possibilities of growth instead of just focusing on cost?
NTU Grading System in Singapore: A Complete Guide for Students
NTU in Singapore is considered to be one of the most popular educational institutions across the gl
Top 9 Private Universities in Singapore: Your Guide to Higher Education
If there is one thing Asian countries never compromise on, it is education. Particularly, Singapore
How to Format an Essay: MLA, APA, Chicago Styles
Many of you know how to write an essay. However, you guys struggle when it comes to formatting the
Extemporaneous Speech – Examples & Writing Guide
“According to most studies, people’s number one fear is public speaking. Number two is death. D
