Maersk Line CEO: We Misjudged Container-Shipping Demand when we ordered billions of dollars’ worth of new vessels two years ago

September 26, 2013, 7:04 a.m. ET

Maersk Line CEO: We Misjudged Container-Shipping Demand

Shipper Now Counting on Cargo-Sharing Alliance to Cut Costs

COSTAS PARIS And CLEMENS BOMSDORF

Søren Skou, the chief executive of Maersk Line, said the Danish group misjudged the strength in demand for container shipping, which has proved far more sluggish than it expected when it ordered billions of dollars’ worth of new vessels two years ago. Photo: Bloomberg

COPENHAGEN—The chief executive of Danish shipping group Maersk Line said Thursday the company misjudged the strength in demand for container shipping, which has proved far more sluggish than it expected when it ordered billions of dollars’ worth of new vessels two years ago. The world’s biggest container shipper is now counting on the planned P3 cargo-sharing alliance with European rivals CMA CGM and Mediterranean Shipping Co. to cut costs and reduce the number of their ships plying major routes between Europe and Asia to 250 from 300, Soren Skou said in an interview with The Wall Street Journal.Maersk Line spent $3.7 billion on an order for 20 of the world’s biggest container ships. The so-called Triple-Es, all of which will be deployed on the Asia-to-Europe trade route, can carry 18,000 containers, some 11% more than the second-largest vessels. Maersk says they also consume 35% less fuel on average than other ships in the company’s lineup.

“It’s pretty clear that when we look back to early part of 2011 when these ships were ordered, ours and everybody else’s view on growth was somewhat different than what it turned out to be and therefore the market will not be as quite as big in 2015 as we thought it to be,” Mr. Skou said.

Some 17% of global container capacity is deployed to the Asia-to-Europe route, the world’s busiest. Maersk Line’s head of Asia-Europe operation, Lars Jensen, told The Wall Street Journal earlier this year that capacity on Asia-to-Europe routes is around 10% above demand.

In the past two years, with shipping capacity expanding fast and global trade growing more sluggishly than expected, smaller shipowners in particular have fought hard for market share by reducing prices. Freight rates on the Asia-to-Europe routes have tumbled around 30% this year to well below $1,000 per container.

Maersk Line, a unit of Danish conglomerate A.P. Moller-Maersk A/S,MAERSK-B.KO -0.68% and other big players couldn’t make a $500-per-container increase in average freight rates stick this summer.

Maersk hopes the cargo-sharing alliance with CMA CGM of France, which earlier this year began sailing new vessels that can carry 16,000 containers, and Switzerland-based MSC will change the industry’s dynamics. The venture needs to be cleared by European Union regulators before going into effect in the second quarter of next year.

“We expect to reduce annual costs 8% [with P3] and increase capacity by 6% by deploying fewer but bigger ships,” Mr. Skou said. “P3 partners now deploy 300 ships in Asia-Europe, but once the agreement is ratified the number will be cut to 250 in one go, resulting in significant savings, which we’ll benefit immediately.”

The P3 will command more than 40% of total capacity on the Asia-to-Europe trade line.

Maersk, CMA CGM and MSC have timed the arrival of the P3 network perfectly, said Jonathan Roach, senior container analyst at London-based Braemar Securities Ltd.

“The big issue for container carriers is the damaging overcapacity in the Asia-Europe trades coupled with historically low global container demand,” he said.

CMA CGM and MSC didn’t respond to requests for comment.