AMKBY AP Moller Maersk AS (PK)

By Jon Sindreu 

Key global trade indicators are starting to flash red. This time, it may be for the right reasons.

A.P. Moller--Maersk Group, the world's largest containership operator, on Wednesday reported slower than expected unit growth in its core shipping division during the third quarter. Higher fuel prices are also squeezing the company's margins, though its acquisition of the Hamburg Süd container fleet helped boost overall profits.

The Danish conglomerate moves 18% of the world's containers and is often seen as a bellwether for world trade, which is currently under threat by the prospect of a global economic slowdown and the Trump administration's protectionist policies. Shipping and logistics companies like Maersk, Hapag-Lloyd and Deutsche Post -- owner of DHL Express -- have all been forced to issue profit warnings this year, and third-quarter results have confirmed a darker outlook.

It's still early, but this should nonetheless concern money managers. While the U.S. economy remains strong, weakening trade could signal further trouble in China, which would particularly endanger Europe and emerging markets.

For many years, analysts tried to take the pulse of the global economy by using the Baltic Dry Index, a figure issued daily by the London-based Baltic Exchange that tracks the cost of dry-bulk cargo ships. But after 2014 this index became unreliable, falling even as global growth powered ahead.

The index gave false readings mainly because of shipping companies' woes. In 2009 those firms launched something of an arms race, buying larger vessels in an attempt to lower unit costs and thereby profit from economies of scale. It was a trap: According to an analysis by research firm Drewry, megaships trimmed costs less than expected because ports had difficulty dealing with them. They were also harder to dispose of when no longer needed.

The excess capacity depressed freight rates for years. Now the index is trending down again -- but this time demand, not supply, is the driver.

Drewry's updated forecasts suggest growth in port throughput, a measure of demand, will fall below fleet growth by year end. This is happening even after consolidation in the shipping sector, as well as efforts by operators to cut the size of their fleets; new orders are now mostly made up of smaller vessels. A profitable 2017 led to high hopes for 2018, but the industry seems set to lose money again.

This time around, investors should pay attention to the warning flag being hoisted by the global shipping industry.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

November 14, 2018 12:12 ET (17:12 GMT)

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