The Business Of

Transportation | Maersk | Outlook

Morning All!

TGIF! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of Maersk. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about the shipping industry this week…

• Love Big Ships - the biggest ship in the world - actually owned by Maersk’s rival, MSC - can hold a ridiculous 12,173 40-foot containers!

• Love The Philippines - ~30% of employees in the shipping industry are from the Philippines. And this goes up to a crazy ~77% for the most junior roles!

• Love Capex - from the companies we’ve covered on TBO, only TSMC has spent more of their cash on capex than Maersk!

Okay so for today, we’re going to keep it fairly brief! We’re going to touch on why - for such an important company in the global economy - Maersk’s stock price doesn’t seem to reflect that. We’ll look at why the issues that affect Maersk don’t seem to impact TSMC. And finally we’ll touch on how the Danish shipping giant may be changing in the future. Alrighty, without further ado, let’s get stuck in!

PROOF That Maersk’s Share Price Is Very Exposed To The Freight Rate!

So, as we said - let’s kick off with Maersk’s stock price. On Monday, we saw the chart below which shows us that Maersk’s shareholders haven’t exactly had the smoothest ride over the years! It’s actually been a pretty bumpy ride.

Now, I’ve used this word ‘bumpy’ a few times already this week. The first time was to describe Maersk’s revenues - and how impacted the company’s revenues are by freight rates. And the second time was to describe Maersk’s margins - and again, how impacted margins are by freight rates!

But I want to just conclude on this. And actually PROVE how exposed and correlated Maersk’s financials and their stock price is to the freight rate! With a bit of help from Mr Altman’s friend, ChatGPT! Below, is a screenshot of me asking ChatGPT what is considered ‘high or strong correlation’. And we can see the answer is 0.7 - 1.

Now, in the chart below, I’ve plotted Maersk’s share price vs the Drewry World Container Index - which is basically an indicator for global container rates - from 2011-2023. And the correlation is absolutely stunning. It’s 0.82!! Which just shows us how correlated and exposed Maersk is to movements in container freight rates!

Now, of course, when freight rates are high, it’s great for Maersk. They can charge customers like Nike, Tesco, etc. more for transporting their goods. And the stock price performs strongly. But when freight rates fall - it’s the reverse! And this really isn’t ideal.

Warren Buffett once said that pricing power is one of the most important things to look for in a business. However, in the case of Maersk - because the company is basically hostage to the freight rate - Maersk really lacks any sort of pricing power!

However… this may not be the case for much longer! At the end of today’s newsletter we’ll look at how Maersk are changing their strategy to become less exposed to the freight rate.

Commodities = Low Pricing Power!

But just before we get to that, I want to chat briefly about everyone’s favourite Taiwanese company – TSMC. Yesterday, we compared Maersk’s capex spending to TSMC’s. Whilst TSMC build factories (below left) to increase their capacity to make chips. Maersk build ships to increase their capacity to transport containers.

But I have a question - why is TSMC and the semiconductor industry not impacted by oversupply issues like the shipping industry is? I mean, what if Samsung and Intel - TSMC’s main competitors - decide to build loads of factories and start making loads of chips. Won’t TSMC have to lower their prices? Like how Maersk have to cut their prices (freight rate) when MSC, and their competitors all build loads of ships and bring an oversupply of ships to the market.

Well, the answer is no - TSMC won’t have to lower their prices. And the reason is because the chips manufactured by TSMC are hugely different to the chips manufactured by the others! Over the last decade, TSMC has always been the first chip manufacturer to begin making the most advanced chips - the screenshot below shows that they’re leading in the race to 2-nm chips too! And so, even if Samsung and Intel increased their capacities massively, TSMC wouldn’t be that tied to these capacity movements - because they’re selling something very different to customers!

This idea of customers (like Nvidia, Apple) receiving more value using TSMC vs Intel is an important one. Because it’s NOT something we really see in the container shipping industry. To illustrate this, let’s look at the image below of (i) containers on a MSC ship and (ii) containers on a Maersk ship. Let’s say you’re Apple and you’re deciding which company to use for your iPhone shipping needs.

Now, let’s be honest - would you really care?! There’s very little difference in the value Apple would get if they picked MSC or Maersk to ship their iPhones. Both companies use containers that are the same size. The ships they use are roughly the same size. They even share each other’s ships! And so, what does this mean? Well, it means that for Apple, the biggest consideration becomes price! Who can ship my goods for me at the best price?

And what do we call products that are pretty much identical across the industry? And that compete vs each other mainly on price? Commodities! Whisper this, because shipping enthusiasts may take offence… but Maersk is basically in a commodity industry!

And in commodity industries, pricing power is a real struggle! Now, the week after next, we’ll be diving into the railroad industry and seeing whether the train market is also a commodity industry. And I’m excited for the new year where we’ll be looking at The Business Of Airlines – and we can see if planes also suffer from this!

More Logistics, More Pricing Power!

Alright, last thing for the week! Yesterday, we saw that Maersk had written in their annual report that they were looking to diversify their operations so that they wouldn’t be so exposed to freight rates. See the screenshot below…

Now, the way Maersk are doing this is by going into Logistics. But what on Earth does that mean? Well, we really don’t have time to get into a whole new business segment now. But let’s make a start and I’ll leave a few good articles/videos for those of us who are interested to learn more!

Okay, let’s say Nike are shipping Jordans from the Port of Shanghai (where the shoes are manufactured) to the Port of LA (where the shoes will be distributed). Now, Nike don’t want their Jordans to just be transported in a container from one port to the other. What good is it if the shoes just stay at the port?! Once the shoes get to the Port of LA, they need to then be transported to Nike’s warehouses. From which they’ll be sent off to customers!

And this is where Maersk see their opportunity. Instead of just helping Nike ship their products from one port to another. What if Maersk also helped them transport their products to their warehouses… and then on to customers too!

Currently, Maersk only do this kind of land-based logistics, for ~20% of their shipping customers. And shipping revenues still make up ~80% of the company’s revenues. But the plan is for this to change! In 2019, Maersk’s CEO said that he wanted the split between shipping and logistics revenues to be 50:50. And recent acquisitions and partnerships struck up with the likes of Unilever suggest that the company is going in the right direction!

Now, last thing I want us to leave the week with. If Maersk start doing logistics for more of their shipping customers - of course, they’ll be able to charge their customers more and make more revenues. But the CRITICAL part to this, is that this logistics business isn’t exposed to the freight rate! And so, Maersk can have more control of their pricing… which would make Mr Buffett very happy!

For those of us interested in learning more about Maersk’s Logistics business, check this YouTube video out!

8th Dec 2023

Nigel Jacob CFA