AP Moeller Maersk A/S share price up, to end unprofitable long-term agreements

Maersk Line, the largest operating unit of AP Moeller Maersk A/S, introduced a plan to cut unprofitable long-term contracts and increase its shipping rate.

“We need to be more disciplined in pushing the general rate increase to make sure it is sustainable” said Silvia Ding, head of South China operations. She also mentioned that the current shipments rate for the Asia-Europe route is unprofitable, therefore shipping rates will be increased again.

Ms. Ding also said that Maersk Line, largest container-shipping company in the world by capacity, would not renew some of its unbeneficial long-term shipping contracts. The yearly arrangements for the Asia-Europe route, the worlds busiest trade path, begin in April and Asia-U.S. contracts start in May.

Usually long-term shipping agreements provide lower margins for operators, but securing stable revenue and volume.“If we can’t get the rate up to a sustainable level, then in some cases it might mean we have to walk away from certain businesses” Ms. Ding said.

Last month the company introduced a plan to raise its Asia-north Europe shipping rate starting November 1.

The overall outlook for the industry is grim as overcapacity slow down cargo-delivery rates. A senior official at Maersk said those conditions may last at least two more years.

According to the Shanghai Containerized Freight Index, prices between ports in Asia and Europe dropped 21% week-to-week from $1 175 to $934 per 20-foot container.

Shipment volumes are known as a major indicator for the global economy. The industry reaches its highest number of deliveries in the August-October period, when European stores pile up stocks from Asia, preparing for the holiday season.

The shipping demand on the Asia-Europe path climbed 8.2% in the first nine months of 2014 said Ms Ding, up from the projected growth by low-single-digit number. However, after the peak period shipments dropped substantially. “It isn’t really driven by structural improvement on the demand side” she said.

Last week A.P. Moller-Maersk stated 33% gained in net profit for the recent quarter, boosted by the 24% net profit increase to $685 million of Maersk Line.

Maersk Line modified its projection of full-year shipping-demand growth to range between 3% and 5%, from its previous forecast of 4% to 5%. The Changes were made for a better reflection of the increased uncertainty in global trading and higher volatility of its freight rate.

AP Moeller Maersk A/S gained 2.43% on Tuesday and closed at DKK 12 640. On Wednesday the stock edged up 0.87% to trade at DKK 12 750 at 14:08 GMT, marking one-year increase of 14.31%. The company is valued at DKK 269.68 billion. Accroding to the Financial Time, the 24 analysts offering 12-month price targets for AP Moeller Maersk A/S have a median target of DKK 15 500, with a high estimate of DKK 20 400 and a low estimate of DKK 11 000. The median estimate represents a 22.63% increase from the last close price of DKK 12 640.