By He Jun
As the global trade barometer, international shipping giant Maersk’s sudden announcement of major layoffs on November 3 has garnered market attention.
Maersk stated that it anticipates the full-year operating profit to be at the lower end of the range. Due to the adverse effects of declining freight rates and sluggish demand, the company is laying off 10,000 employees to reduce costs. It has already completed the layoff of 6,000 employees, and the remaining 2,500 employees will be laid off in the coming months. The plan to terminate the remaining 1,000 employees is scheduled for 2024. As a result of this announcement, Maersk’s stock price in the European stock market plunged by over 18% at one point on the evening of November 3, and as of the day’s close, it still registered a decline of over 16%, reaching its lowest point in three years.
According to the latest financial report, Maersk achieved third-quarter revenue of USD 12.13 billion, slightly lower than the market estimate of USD 12.54 billion, marking a significant year-on-year decline of 46.7%. Among this, Maersk’s shipping business contributed revenue of USD 7.897 billion, plunging by over 56% year-on-year. The company disclosed that, despite a 5% year-on-year increase in cargo volumes in the third quarter, reaching 3.166 million FFE (forty-foot equivalent units), the average freight rates saw a substantial drop of 58%, plummeting from USD 5046/FFE to USD 2095/FFE.
It is worth noting that as one of the world’s largest container shipping companies, Maersk transports goods for many retailers and consumer goods companies such as Walmart, Nike, and Unilever. It is typically seen as a global trade leader and often referred to as the “barometer of global trade”. Maersk’s recent announcement of significant layoffs undoubtedly sends a major negative signal to the market. Industry experts suggest that the global shipping market is currently facing a severe supply-demand imbalance. The global economy is still impacted by high inflation, high-interest rates, geopolitical conflicts, and the slow destocking process. As a result, the shipping market will continue to face significant challenges.
While demand in the market remains weak, the oversupply on the supply side has worsened the shipping industry’s downturn. As several large container vessels are being delivered and put into operation, this will further exacerbate oversupply in shipping, making it harder for shipping prices to rise. According to Alphaliner’s market supply and demand growth forecast, the capacity supply is expected to increase by 8.2% this year, which is higher than the demand growth of 1.4%.
It is worth noting that the third quarter is typically the peak season for the shipping industry, with both freight volume and rates rising during this period. However, this year, no such peak season has materialized. Vincent Clerc, the CEO of Maersk, analyzed the situation, saying, “Our industry is facing a new normal with subdued demand, prices back in line with historical levels and inflationary pressure on our cost base”. He added: “Given the challenging times ahead, we accelerated several cost and cash containment measures to safeguard our financial performance”. According to Maersk’s Q3 report, the average freight rates for Maersk fell by 58% to USD 2,095/FFE, marking a 14% decrease compared to the previous quarter.
It should be pointed out that the challenges faced by Maersk are not isolated incidents but a common trend in the global shipping industry. Currently, major shipping giants are all facing tough times. Data shows that the China Containerized Freight Index (CCFI) averaged a year-on-year decrease of 69.54% in the first three quarters of 2023, and a year-on-year decrease of 70.31% in the third quarter of 2023. China COSCO Shipping Corporation, the world’s fourth-largest shipping company, also faced similar pressures in the third quarter. During the reporting period, China COSCO Shipping’s revenue was RMB 42.714 billion, a year-on-year decrease of 59.61%, and the net profit attributable to shareholders of the listed company was RMB 5.51 billion, a year-on-year decrease of 83.07%. The performance of Ocean Network Express (ONE), the sixth-largest global shipping company, also saw a significant decline last quarter. In the second quarter of the 2023 fiscal year (July to September 2023), its revenue dropped by 62% year-on-year to USD 3.549 billion, and the pre-tax profit before interest, tax, depreciation, and amortization (EBITDA) plummeted by 92% year-on-year to USD 496 million. Mid-term reports of other shipping companies also showed quarterly losses. A container forecast report released by Drewry at the end of October also predicted that the global container shipping industry’s EBITDA is expected to reach USD 20 billion in 2023, but the entire industry is projected to incur a loss of USD 15 billion next year.
As a typical cyclical industry, the shipping industry can be considered the best window to observe changes in the global economic landscape. In the era of globalization, the prosperity of the shipping industry directly reflects the global demand for tangible goods, which is the truest reflection of the global economy. Historically, changes in the shipping industry’s prosperity have been a good indicator of shifts in the global macroeconomic cycle. Dr. Martin Stopford, the founder of the internationally renowned shipping brokerage firm Clarkson, stated that after analyzing nearly 300 years of shipping cycle changes, the length of shipping cycles typically ranges from 5 to 15 years and passes through four stages: trough, recovery, peak, and collapse. Generally, participants in the shipping industry take certain cyclical measures in advance to respond to the changes in the shipping industry cycle as it fluctuates.
However, researchers at ANBOUND believe that the shipping industry’s downturn reflected by Maersk’s significant layoffs may be different from the typical industry cycle changes. In addition to the general cyclical variations, it faces another, more macroeconomic risk – the collapse of globalization. The shipping industry is closely related to the process of globalization, and, in fact, the first historical wave of globalization was directly connected to maritime shipping. After the Age of Discovery, the first wave of globalization began with maritime shipping as its foundation. Since then, the shipping industry has been intertwined with globalization, experiencing periods of growth and reaching its peak in the first two decades of the 21st century.
However, in recent years, globalization has encountered increasingly strong constraints, and there is a rising tide of deglobalization. ANBOUND’s founder Kung Chan pointed out that deglobalization and the resulting fragmentation of the global market space have greatly changed, or even disrupted, the process of globalization (Kung Chan, 2019). During the era of globalization, multinational corporations could seek “cost advantages” all over the world by relying on free trade, free investment, and the smooth operation of global supply chains. They could then efficiently connect markets on both the supply and demand sides worldwide through a global supply chain system. However, in the era of “deglobalization + geopolitical frictions”, the situation has undergone considerable changes. The global supply chain is fragmented and forced to be restructured. Investments are no longer free but are greatly influenced by geopolitical factors. Trade is no longer smooth, as artificially imposed tariffs and non-tariff barriers have become significant obstacles to free trade.
Under the influence of various factors, global trade and investment are presenting a new, relatively fragmented pattern. Many multinational corporations have begun to restructure their supply chains, with mainland China being the primary region they are relocating from. This is because many multinational corporations believe that in the current geopolitical landscape, China has become a market with rapidly increasing risks. Particularly, the potential future crisis in the Taiwan Strait is a long-term concern for many multinational corporations. Based on this consideration, many multinational corporations are adjusting their previous “China +1” investment layout strategy to separate the Chinese market from the global market. In this new global layout, the Chinese market is considered as a distinct market.
Due to risk considerations, multinational corporations are no longer pursuing a global investment layout but are turning to a “close produce” model that involves configuring industrial chain systems on a smaller scale (Kung Chan, 2022). This production model requires a different production layout compared to the past. It shifts from “offshore manufacturing” under globalization to “nearshore manufacturing”, “friendly-shore manufacturing”, and “onshore manufacturing” under deglobalization and geopolitical impacts. If globalization further fragments, even the transfer of manufacturing capacity between regions, such as relocating it from China to India or Vietnam, will become increasingly improbable.
Final analysis conclusion:
The global shipping industry is undergoing an epic-scale adjustment, which not only reflects the cyclical changes in the general shipping industry but also illustrates the consequences of the collapse of traditional globalization. In this context, economies that are more dependent on globalization will face greater impacts. The future operation of the world economy will be significantly influenced by the fragmentation of globalization.
He Jun is a researcher at ANBOUND