Shipping giant plummets: "Red sea price hike" is only temporary, "surge in capacity" is the reality

The rise in freight rates in the Red Sea is only a short-term phenomenon. The shipping capacity is in excess of demand, and the shipping giant A.P. Møller - Mærsk A/S has seen a significant drop in performance, with a nearly 20% plunge in overnight trading.

According to the financial report released by A.P. Møller - Mærsk A/S overnight, its revenue dropped by over 30% last year, and it predicts that the profit decline in 2024 may reach as high as 90%. At the same time, the company announced the suspension of its stock buyback program.

Specifically, the company predicts that its pre-tax profit (Ebitda) in 2024 may range from $1 billion to $6 billion, far below last year's $9.8 billion. In 2022, the company achieved an astonishing profit of $36.8 billion.

Meanwhile, A.P. Møller - Mærsk A/S stated that due to increased uncertainty, the board of directors has decided to immediately suspend the stock buyback program. Once the conditions in the shipping market stabilize, the buyback will be reevaluated. This caused a significant drop in the stock price overnight.

The recent crisis in the Red Sea has caused a surge in shipping costs. The World Container Index has risen by 170% since early November, reaching $3,785.82 per 40-foot container on Thursday.

However, with global trade weakness, additional shipping capacity is about to enter the shipping market. At the same time, the factors driving up freight rates and stock prices in the Red Sea crisis are easily proven to be temporary.

A.P. Møller - Mærsk A/S explicitly stated that the Red Sea issue only affects one-third of the company's shipping volume. As newly ordered shipping capacity from the period of trade prosperity during the pandemic arrives, it will outweigh the headwinds caused by the Red Sea crisis. According to A.P. Møller - Mærsk A/S's estimate, even if the Red Sea issue persists for a year, freight rates will recover to pre-interruption levels with the delivery and use of record-breaking new ships.

Looking ahead, A.P. Møller - Mærsk A/S predicts that container shipping will face "significant supply surplus challenges" in 2024, and the impact may extend to 2026. The company forecasts that its global container trade will grow by 2.5% to 4.5% this year, equivalent to 11% of the existing fleet's capacity entering the market.

Vincent Clerc, CEO of A.P. Møller - Mærsk A/S, wrote in a statement:

Although the Red Sea crisis has caused immediate capacity constraints and temporary rate increases, the eventual oversupply of shipping capacity will lead to price pressure and impact our performance. Analysts say that the outlook for 2024 appears to be more challenging than 2023, as the oversupply of ships reaches its peak and A.P. Møller - Mærsk A/S's contracts expose limited benefits from the increase in spot freight rates after avoiding the Red Sea route.