The Business Of
Transportation | Maersk | What Are Their Margins?
Morning All!
So, yesterday we dug into how Maersk makes money. And we saw that the 2 main drivers of Maersk’ revenue are (i) containers transported and (ii) freight rates. We saw that whilst Maersk has consistently grown their containers transported, they were overtaken by MSC in 2022! And we saw that freight rates have been volatile since COVID - with these rates being the reason why Maersk’s revenues are so bumpy!
And in the chart below we can see that it’s not just Maersk’s revenues that are bumpy. The company’s EBIT margins have fluctuated quite a bit too. With margins being as low as 1% and as high as 38%... all just within the last decade!
So, to help us work out why Maersk’s margins have been so up and down, we’ll dive into their cost structure. And let’s start with a split of Maersk’s costs in 2022…
Now, from looking at the chart, we can see it’s very different from what we saw in our last series – The Business Of Banking. There isn’t one cost that really dominates the cost structure – there’s quite a few different cost lines! But have no fear, because over the course of today and tomorrow, we’ll really dive into most of these cost lines and uncover the bumpy margin question! So, without further ado, let’s get started!
Want To Save Fuel… Just Go Slower!
Okay, so the first cost we’ll talk about today is bunker fuel costs – which is the industry term for fuel costs. How much does it cost Maersk to power their ships for their voyages? Well, to work out how much they spend on fuel, it’s a little bit like working out how much you spend on fuel for your car! How many gallons of petrol you consume x the price of petrol per gallon. Well, for Maersk, it’s similar – it’s the tonnes of fuel they consume x the price of fuel per tonne.
And the chart below shows us how these 2 variables have trended over the last decade. As we can see, fuel consumption (yellow bars) has increased slightly over the years. But the main fluctuations have come in the pricing. Bunker fuel prices fell to extremely low levels back in 2016 – at just $223 per tonne. But this figure has since risen more than 3x (?!) – sitting at $763/tonne in 2022!
So, the question is – why’s the fuel price gone up so much? And what’re the real drivers of fuel prices? Well, the main driver for the bunker fuel price that Maersk pays is… the price of crude oil! Like the petrol and diesel that runs our cars, bunker fuel is derived from crude oil – so changes in crude oil prices have a very strong impact on bunker fuel prices.
And the chart below demonstrates this perfectly. It’s pretty clear to see that crude oil prices and bunker fuel prices are pretty strongly correlated!
So, in order to work out what’s happening with bunker fuel prices, all you really need to do is work out what’s happening with crude oil prices. We won’t dive into this now, but this article here gives a nice explanation of the various factors that drive crude oil prices (surprise, surprise, supply and demand feature again)!
Now, last bit on bunker fuel costs. As we can see from the chart below, Maersk have controlled things pretty well. There was a big increase in fuel costs as a % of revenue from 2016 to 2018 as bunker prices nearly doubled from $223 to ~$400. But question - why didn’t bunker fuel costs really rise as a % of revenue in 2022? We saw in the charts above that bunker fuel prices exploded – so what’s going on here?
Wellll, the answer comes from something we saw yesterday. And confession time, I purposely left out something from the newsletter yesterday! What did I leave out? Well, yesterday we said that freight rates were driven by 2 things - the demand for and the supply of containers. And that is true - the demand/supply relationship is the biggest driver. But another big driver of freight rates is bunker fuel costs!
And the reason is fairly simple to understand. If crude oil prices go up, and hence bunker fuel prices go up. It means shipping companies are going to have to pay more to power their ships. All shipping companies by the way, not just Maersk. And so what do shipping companies do to prevent them losing out on profits? They put up the freight rates! And this is what shipping companies did in 2022, meaning that whilst fuel costs went up - they didn’t really go up much in comparison to revenues!
Okay, very last thing on bunker fuel! I read something super interesting and wanted to share. There is one other main way ships try and save fuel costs. Yes, they can increase the prices they charge customers (higher freight rates). But there’s something they can do themselves. And that thing is to go slower!
What do I mean? Well, during the 2007-08 global financial crisis, shipping companies were facing a lack of demand for containers, and so were under pressure to save costs. And someone at Maersk came up with an idea - instead of sailing the ships at the standard speed of 22 knots, why not sail the ships at 14-18 knots? Because going slower might burn fuel slower and hence save costs. Well, would you believe it - this worked! And ever since then, when shipping companies are looking to save some cost, they just set their ship to sail a bit slower! This video explains this how this works in more detail.
The Philippines Is Popular In Shipping…
Okay, let’s move on. And like we did so often in The Business Of Banking, let’s talk about salaries and bonuses. What kind of compensation/employee ratio will we see in the shipping industry? Well, the chart below gives us the answer. Maersk’s average staff costs/employee came up to $68k in 2022. And this is pretty low! Especially when you consider that the average annual salary in the United States last year was $76k!
So, what’s going on here? Why are Maersk’s employees paid below the average? Well, the first thing to say is that a lot of the job roles at Maersk are in what’s defined as ‘low-skilled’ positions. Being on the ship, moving containers at ports, and a lot of other manual work. But the second thing to say is that Maersk’s employees aren’t ACTUALLY getting paid less than their average national wage.
But hold on – I just said that Maersk’s staff costs/employee was $68k. And the US average was $76k – so what am I on about?! Well, the key here is that the majority of Maersk’s employees aren’t US citizens!
Maersk is a global company. I know most of the companies we’ve covered on TBO are also global companies. But Maersk really is a global company because they’re travelling all around the globe. And because of this global presence, and the fact that their employees don’t need to be the most skilled, Maersk can hire people from countries where the average national wage is very low!
During my research (check out ~05:00 in this video), I came across this quite extraordinary stat. A whopping 77% of junior crew members of ships are from just one country. And that country is the Philippines! And why the Philippines you may be wondering? Well, take a look at the chart below! Whilst the average annual salary for a US citizen is ~$76k, the average annual salary for a Philippines citizen is just ~$4k!
So, this explains why it looks like Maersk are paying below average wages. But in reality, they’re really not!
Now, over the years, we’ve seen Maersk have great control over their staff costs. The chart below shows us that staff costs as a % of revenue (brown line) has stayed very consistent over the last decade. With the % actually dropping to its lowest level in 2022. Alrighty, let’s move on!
The Port Of Shanghai Is Killing It!
Okay, so we’ve talked about 2 major costs for Maersk. The bunker fuel their ships need to travel. And the employees the company needs on the ships, in their offices, etc. But there’s one other major cost that we’re going to go through today. And that’s Maersk’s terminal costs - the costs that Maersk pay when their ships arrive at a port/terminal.
But what costs am I talking about exactly? Well let’s use an example to help us understand! Let’s say a Maersk ship leaves a port in the US and arrives at the Port of Shanghai. The Port of Shanghai has ~200 terminals (areas where ships ‘park’ and unload their containers). And the Port of Shanghai will charge Maersk a fee for just occupying space at one of their terminals. Below you can see an image of a Maersk ship pulling up at the Port of Shanghai.
But that’s not all! The Port of Shanghai will also charge Maersk a fee for using their equipment - like cranes and forklifts - to unload their containers. And remember, the unloading process is far from easy! These cranes can unload ~30-40 containers an hour. And considering a Maersk ship has thousands on containers that need unloading – these unloading processes can take days!
Okay, so we’ve had fees for just pulling up at the terminal. Fees for using the equipment. Anything else? And the answer is yes! Ports like Shanghai also charge fees for storage. Usually, when a ship arrives at a terminal, they have a time period in which it’s free to store containers at the terminal. However, after that time period, the port will start charging Maersk storage fees. Now, I know what you’re thinking – these Ports must really make some money if they’re charging Maersk, MSC and all these shipping companies for so many things, right? And yes, you’re absolutely right! In 2022, the Port of Shanghai made an astonishing $4.7 billion in revenue!
I know, crazy!
Ah Yes, We Can’t Forget The Cost Of Building The Actual Ships…
Alrighty, let’s wrap up. Because this newsletter’s getting a little on the long side, I’m just going to very briefly touch on Maersk’s remaining cost lines. First up is port costs. These are costs that Maersk undergoes for operating their own terminals – APM Terminals. We’ll talk more about this on Friday!
Another cost is intermodal costs. These are transportation costs that Maersk pays to transport containers to their final destination, after they’ve been unloaded from the ships. And this is a part of Maersk’s Logistics segment – again something we’ll come to on Friday. Sorry for the wait…
Another cost for Maersk are the costs the company pays for renting and leasing out ships. We saw yesterday that whilst Maersk owned 389 ships in 2022. They also hired out 318 ships for their operations. This article here tells us that the cost of renting out one ship in 2021 was a whopping $63 million!
And the final notable cost for Maersk is depreciation. Which is all about the cost of building their ships. And as you can imagine, these ships aren’t cheap?! Well, we’ll be talking a lot about depreciation and the cost of shipbuilding tomorrow! By the way, I know we haven’t uncovered why Maersk’s margins have been so up and down over the last decade – but we’ll uncover that mystery tomorrow as well!
6th Dec 2023
And that’s a wrap for today! I hope you enjoyed diving into Maersk’s cost structure. Tomorrow we’ll look at the depreciation costs that Maersk has because of their ship building. And we’ll look at where the company spends all their profits!
Have a fabulous day!
The Business Of Team