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The Shanghai Container Freight Index measuring spot rates on the Asia-North Europe trade fell once again last week, almost completely wiping out the gains made since the 1 November general rate increases.

Last week, the rate declined 12% from the week ending 16 November, settling on $1,079 per teu, down $146 from $1,225. The fall is especially precipitous given that for the week ending 9 November, following the application of the November GRIs, the SCFI stood at $1,491 per teu – meaning that rates have declined by 27.5% in the space of just three weeks.

According to new research from Credit Suisse, freight rate movements of this degree will have a serious impact on the world’s largest container shipping line, Maersk, as it strives to return a profit for the 2012 full year.

In a long and thorough research note seen by The Loadstar, Credit Suisse analysts claimed that a $200 per 40ft movement in freight rates has a $1.8bn impact on the line’s annual revenues, before it has been able to take any “reactive measures”.

“Maersk Line surprised positively in 3Q given aggressive capacity management as it returned vessels to charterers. However, headwinds globally, and on Asia-Europe in particular (where oversupply may run to 17%), are likely to constrain Maersk Line’s recovery attempts in 2013. Recent rate hike attempts do not appear to be working, per latest Shanghai data, and we anticipate market sentiment will turn negative towards the container business again as visibility firms up on a challenging 2013,” it said.

One of the company’s problems is that it has let itself become too focused on the Asia-Europe trade, which is clearly suffering badly. While Maersk has a global share of the container shipping market of 16%, its market share on Asia-Europe is almost double that, at 29%, meaning that its financial performance is more closely linked to the performance of the most volatile trade in liner shipping – the trade has accounted for 37% of the line’s volumes this year.

Credit Suisse is forecasting the line to make a net operating profit after tax (Nopat) of $295m, and said that if it can continue to show the strict discipline regarding capacity and pricing that is has shown in the past few months – the wild swings of the SCFI notwithstanding – it has forecast a Nopat of $329m in 2013.

And yet the prospects for next year look, if anything, worse. Around 1.3m teu of capacity is due to be delivered over the course of the year, representing about 10% of the current global fleet – and 17% growth of capacity on the Asia-Europe trade – while Credit Suisse estimates that demand will grow 5% globally. It further suggests that delivery slippage – by which lines delay delivery of vessels from shipyards – and scrapping will mean that the actual fleet growth may be more around the 8% mark, meaning a net growth in supply of 3%.

“These capacity headwinds mean it looks challenging to protect rates into 2013 and we model a slight decline of 1% following an average of 2% growth in 2012. We expect year-on-year weakness to manifest in 2Q13 as the most challenging quarter in terms of tonnage delivery, beyond easy year-on-year rate comparisons in 1Q13,” it said.

Maersk itself is due to take delivery of 10 vessels next year, including the first four of its Triple-E class.

In fact, the introduction of the 18,000teu vessels will be crucial to the line’s future profitability because of their potential to significantly reduce Maersk’s operating costs. The line says that the vessels – which by 2016 will represent 10-15% of its total fleet capacity – are 19% more fuel efficient than the Emma Maersk class; 35% more fuel efficient than a 13,100 teu vessel and 50% more fuel efficient than the average-sized vessel deployed on the Asia-Europe trade.

“This suggests the potential for a 3% unit cost saving over a three-to-four year period, assuming fuel is broadly 30% of operating expenses. Were Maersk Line to prove successful in keeping a potential $800m saving in costs, by limiting rate discounting on a larger gauge fleet, this alone could contribute to around 30% of the total structural cost base reduction requirement suggested by 2012E earnings,” the research note said.

Attacking its cost base is its one recourse to profitability, given how weak trading conditions are. But as the slew of articles about the company noted last week, predicting a diversification away from liner shipping, Maersk Line continues to represent the bulk of the group’s revenues and investment in 2012, according to Credit Suisse estimates, but not its pre-tax earnings – the line accounted for 46% of revenues, 39% of invested capital and 17% of ebitda.

“As such, in the short term, Maersk Line’s fortunes will likely be dictated by management’s ability to insulate the company from rate downswings and capitalise on opportunities as rates rebound with the push and pull of global capacity management—we model Maersk Line rates down 1% in 2013 reflecting declines from 2Q13 [onwards],” it concluded.

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