Shipping giant AP Moller-Maersk will receive a $3bn boost to its earnings this year after inking longer freight contracts at higher rates.
The Danish container shipping giant said its contractual business is set to rise 20% this year and will account for more than half of its long-haul bookings.
Around 6m 40-foot equivalent units (feu) have been booked at higher contracted rates that will add approximately $550 per feu for the full financial year, chief executive Soren Skou told a conference call on Wednesday.
The contracts underpin Maersk's earnings for the next two years and make its management confident of hitting its upgraded earnings forecast of $13bn to $15bn this year.
“The upgrade is strongly supported by us having signed long-time contracts that will impact positively compared to last year by more than $3bn in 2021,” Skou said.
80% locked-in
Copenhagen-listed Maersk has this month closed 80% of long-term contracts for the current contract season.
Most of the deals were for the Asia-Europe trade, with the remaining deals expected to be tied up for the transpacific trade by the end of May.
The shift from spot to longer contracts reflected “a fundamentally different approach to servicing customers”, said Maersk chief financial officer Patrick Jany.
“On top of the higher contract volumes, we have also signed up more than 1m feu on multi-year contracts, ensuring predictability and stability of our earning,” he said.
Shippers have shifted to long-term contracts as freight rates soared and port congestion left them uncertain of obtaining space on scheduled sailings.
Skou said that shippers were committing both to fixed long-term contracts, as well as for index-linked contracts.
500 largest shippers
Maersk’s contract portfolio is made up mainly of its 500 largest customers.
“Our focus has not been to maximise short-term income – in which case we’d have just gone for the spot market," Skou said.
"We see this as an opportunity to build a longer-term business partnership with our customers.”
Skou said that bookings remained strong in the second quarter and he was confident that customers would fulfil their shipping contracts.
The contracts have been booked as Maersk logged its highest quarterly profits ever.
Net profits hit $2.7m for the first three months of the year, beating the previous record dating back to the second quarter of 2010 and almost equalling the $2.9bn in profit for all of 2020.
The period was the eleventh profitable quarter in a row for Maersk, which is due to hold its capital markets day on 11 May.
“We are building on a strong track record, and we didn’t just get lucky,” said Skou. “We faced plenty of headwinds in the last three years,” he said.
But the growth of higher contract rates for longer durations would underpin earnings this year and next, he said.
Maersk is using some of the cash it is earning to complete a share buy-back programme ahead of time in September.
It will subsequently launch a new, additional share buy-back programme of approximately $5bn over two years.
