Maersk says Q3 will be the peak of the year as it adjusts contract rates

The container shipping market is currently grappling with high levels of uncertainty, leading to significant volatility in container rates. Maersk expects Q3 to be the peak of the year, building on the momentum from Q2, driven by increased contract rates and revenue recognition due to longer transit times.  However, this period of uncertainty makes it challenging to predict the rate trends for Q4.

Patrick Jany, Maersk’s Chief Financial Officer (CFO) said during an earnings call last week that the company is not fully exposed to spot rates, due to its contracted rates prenegotiated with shippers, which has resulted in a delay in profitability.

“Overall, right now, we do not see that rates would come back to pre-Red Sea in Q4. But we see them coming down sequentially, and then we can debate the rate of the decrease, depending on the volume situation in Q4,” he said.

Commenting on the higher rates in new contracts, Jany explained that contract rate adjustments lag behind rising spot rates, noting that recent renegotiations have aligned contracts, which will drive Q3 profitability. This delay in profitability has shifted more earnings into Q3, making it the strongest quarter of the year, although uncertainty remains for Q4, with expectations of a decline in profitability.

Looking ahead, Jany expects spot rates to continue falling into Q4, with contract rates adjusting more slowly.

Maersk reported an underlying profit of US$ 623 million in the second quarter of 2024, down by around 52% from last year’s US$ 1.3b. However, the company saw a sequential ramp-up in earnings in the second quarter of 2024 with EBIT margin reaching 7.5% vs. 1.4% in the first quarter amid strong container demand in a market of supply chain disruptions.

Read more: Maersk reports lower Q2 & H1 profit

Growth Drivers and Market Dynamics

Maersk CEO Vincent Clerc explained that Europe and emerging markets, including Latin America, Africa, and India, are currently the key regions driving growth. Clerc attributed this to a combination of factors, including a rebound in consumer demand and cyclical replenishment of inventory in Europe, where earlier concerns about a significant recession have not fully materialised.

“I think in Europe it is going to slow down a little bit as the higher demand stays with us, the replenishment of inventories will eventually go away,” Clerc said.

“We’re seeing that inventory levels in the US are a bit higher today than they were at the beginning of the year, but they are not abnormally high. So whereas that could bring forward orders out of fear of possible tariffs into next year or fear of delay from a strike or labour action on the East Coast, it does not seem to be the case to an extent that is very significant or would cause significant concern for the lull that would follow this. So at least at this stage, our bet is, based on what we’re seeing from the purchase orders from customers, there will be continuous strong volumes in the third quarter and a normal seasonal taper-off in the fourth quarter, but not much more than that.”

In addition, Clerc highlighted the dual approach the company might take in response to fluctuating demand and rates. He noted that Maersk has been operating its fleet at full speed to meet the current high demand, which has led to a significant increase in the fuel bill. However, Clerc suggested that if demand tapers off in Q4, Maersk could lower sailing speeds to reduce fuel consumption and manage costs, thereby offsetting potential rate erosion.

“That’s certainly something that we will look at balancing now between what is more earnings accretive. Is it to deploy more capacity or is it to lower the unit cost? (…) If there is a taper of demand in the fourth quarter, then it is economically very interesting for us to plug some of the tonnage into slow steaming. If demand continues strong, then we may have to accept a higher freight bill,”  Clerc added.