Shipping giant Maersk issues profit warning, slashes capital return plan in response to Red Sea disruptions

Maersk (AMKBY), the Danish shipping giant, has issued a warning that container shipping overcapacity will have a greater impact on profits than previously anticipated. The company revealed that it does not expect a significant boost from the surge in freight rates caused by disruptions in the Red Sea. As a result, Maersk's shares fell by 17% in morning trade. 

The ongoing disruptions in the Red Sea have caused high uncertainty for Maersk's 2024 earnings outlook. The company is facing challenges due to the diversions of shipping routes away from the Red Sea following a series of attacks by Yemen's Houthi rebels. These attacks, which targeted commercial vessels, have led to increased delivery times and costs. 

The redirection of shipping has resulted in higher freight rates, but Maersk does not expect these increases to impact profits significantly. 

Maersk reported fourth-quarter profit figures below expectations, with EBITDA for the period dropping to $839 million compared to the anticipated $1.13 billion. 

The company has suspended its share buyback program due to the uncertainty surrounding market conditions in the Ocean division. CEO Vincent Clerc expressed concern about the lack of visibility regarding how the situation will unfold and its potential impact on earnings. 

The disruptions in the Red Sea are causing Maersk to absorb significant costs to keep the global supply chain operational. The company is unsure whether the situation will persist for weeks, months, or the entire year. 

The OECD has warned that the diversions in the Red Sea could lead to an increase in inflation, with a potential 5 percentage points rise in import price inflation across its member countries. However, Maersk does not believe that these increased freight rates will result in significant profits for the industry overall. 

While container shipping companies have performed well in Europe this year, Maersk's warning highlights the challenges it faces. The company has been diverting vessels around Africa, which has impacted journey times and increased costs. In addition, Maersk expects overcapacity in the shipping market to materialize fully in 2024 and have a lasting impact on prices into 2025 and possibly 2026. 

Maersk attempted to resume sailing through the Red Sea but received a message from the U.S. Navy stating that it cannot guarantee safe passage. The company will only return to the Red Sea when it is confident of permanent safety. 

In light of these challenges, Maersk is adjusting its earnings expectations for this year. It now predicts underlying EBITDA between $1 billion and $6 billion, significantly lower than the $9.6 billion achieved in 2023. This adjustment reflects the unpredictable impact of the Red Sea disruptions and the overcapacity in the shipping industry. 

The suspension of Maersk's share buyback program and the significant reduction in its dividend are measures taken to preserve cash. These actions aim to address the challenges the company is currently facing, including the disruption in the Red Sea and the impact of overcapacity on freight rates. 

Ultimately, Maersk's warning demonstrates the vulnerability of the container shipping industry to external factors. The disruptions caused by the Red Sea incidents, combined with the existing overcapacity, are posing significant challenges to the company's profitability. As the situation continues to unfold, Maersk will need to carefully navigate these uncertain waters and implement effective strategies to mitigate its impact on earnings.