Global container volumes may witness a sharp drop due to the COVID-19 pandemic with weaker retail sales and depressed car production dampening demand, warns Shipping group A.P. Moller-Maersk .

The crisis has disrupted the balance of the container shipping trade as supply chains have been turned upside down, and disruptions marred businesses and factory activity in China and later across the world.

Maersk, which also reported a 23% rise in first-quarter core profits on Wednesday, now expects global container demand to contract this year, after previously forecasting growth of between 1% and 3%.

“As global demand continues to be significantly affected, we expect volumes in the second quarter to decrease across all businesses, possibly by as much as 20%-25%,” Chief Executive Soren Skou said.

Maersk shares were 5.5% lower at 1020 GMT. They had risen by a third since March when they reached their lowest level in more 10 years.

Declining retail sales and automotive production in Europe and the United States were the main reasons for the decline in demand for container freight, Skou said.

E-COMMERCE DEMAND

While some retailers impacted by lockdown closures had asked Maersk to delay shipments, others like Amazon were growing volumes and asking for even quicker deliveries via rail or air freight, Skou informed.

To meet demand for e-commerce shipments, which have been impacted by the halt of commercial air traffic, Maersk had launched a new service where it loads small packages on a container vessel in China and ships them to Los Angeles for further distribution.

The company suspended its full-year guidance in March due to uncertainty caused by the coronavirus pandemic and did not give new guidance on Wednesday.

But Skou said in his main scenario, business would bottom out in the second quarter followed by a relatively weak third quarter and a partial recovery in the last three months of the year.

Maersk reported earnings before interest, tax, depreciation and amortisation (EBITDA) at $1.52 billion, slightly above company guidance provided in March.

The world’s biggest container shipping company reported revenue of $9.57 billion versus the $9.59 billion forecast by 16 analysts in a poll compiled by Maersk.

Financial review Q1 2020:

According to the Report, revenue was USD 9.6bn (USD 9.5bn) with an increase of USD 215m in Ocean, offset by a decline of USD 93m in Terminals & Towage and USD 79m in Logistics & Services, while revenue decreased by USD 88m in Manufacturing & Others.

“Looking into Q2 2020, visibility remains low as a result of the COVID-19 pandemic. We continue to support our customers in keeping their supply chains running, however as global demand continues to be significantly affected, we expect volumes in Q2 to decrease across all businesses, possibly by as much as 20-25%. 2020 is a challenging year, but as we proactively respond to lower demands and show progress in our transformation and financial performance, we are strongly positioned to weather the storm.”

~Søren Skou,CEO of A.P. Moller – Maersk

Increase in Freight Rates:

Freight rates, as measured by the China Composite Freight Index (CCFI), increased by 7.9% in Q1 compared to Q1 2019.

The IMO restrictions on sulphur emissions imposed in January 2020, which has led to vessels being taken out of service for scrubber retrofitting, as well as a large amount of blanked sailings were likely the main drivers behind the increase.

The switch into low-sulphur bunker fuels to comply with the new IMO 2020 sulphur cap caused an expected and dramatic reduction in consumption of high-sulphur bunker fuel in the shipping industry. As a consequence, high-sulphur prices fell considerably end of 2019 and continued to decline in the beginning of 2020.

In this highly volatile period of demand, deterioration on the back of the COVID-19-related lockdowns in place and the oil supply increase from Saudi Arabia and Russia, crude prices have fallen by 18% from Q4 2019 to Q1 2020.

While bunker fuel prices are declining with the decline in crude oil, the price of the high-sulphur fuel oil is more stable, supported by demand from the power industry.

Guidance for 2020:

Significant contraction in global demand is expected for Q2, with volumes expected to decrease by 20-25% across all businesses affecting both the profitability and cash flow in the quarter. The global market growth in demand for containers is expected to contract in 2020 due to COVID-19 (previously between 1-3% growth). Organic volume growth in Ocean is expected to be in line with or slightly lower than the average market growth.

The accumulated guidance on gross capital expenditures excl. acquisitions (CAPEX) for 2020-2021 is still expected to be USD 3.0-4.0bn, with steps being taken to reduce CAPEX in 2020. High cash conversion (cash flow from operations compared to EBITDA) is expected for both years.