Correlation Analysis

Figure 34 - Correlation Output

Source: Own creation based on applied variables

The correlation analysis provides both expected and unexpected insights into the data. In the following paragraphs the most relevant findings, in the perspective of the thesis, will be highlighted and analyzed.

7.2.3.1.1 Oil price vs. profitability

The first thing that stands out is the relationship between oil price and the profitability variables of MOG and ML. The figures are interesting, as they indicate the existence of a natural hedge, which Maersk strongly advocates for. When looking at oil price and profitability separately, it seems that a hedge against the volatility of oil indeed does exist. When the price of oil increases, the profitability of MOG increases in line with it, while the opposite is true for ML. The shipping liner’s profit has an inverse relationship with oil price, as profits decline as oil price increases. Conversely, when evaluating the profitability measures among the two BUs a fairly consistent tendency of zero correlation between the two can be observed. This

Troels Hedegaard & Morten N. Nielsen illustrates, that other factors not related to the price of oil is determining the overall return of the individual BUs.

7.2.3.1.2 Oil price vs. stock price

Combining the findings of oil price vs. profitability with the significant correlation between stock price and the price of oil, one would conclude that the market considers the attractiveness of the stock more dependent on the price of oil than it actually is. This propensity could be caused by a general lack of confidence in the hedge that the two BUs seemingly provide. Conclusively, a trend can be observed that the market considers Maersk primarily an oil stock. Thereby, causing the stock price to fluctuate with the development in the price of oil, which is confirmed by Graham Slack who attributes it to market psychology. It is important to note, however, that the positive effect of increasing oil prices on the profitability of MOG is relatively more significant than the negative effects on ML. Consequently, increases in the price of oil would have an overall better relative effect on the group as a whole than decreases.

7.2.3.1.3 Freight rates vs. unit costs and oil price

The freight rates for ML are expectedly highly correlated with both unit costs and oil price. This is explained by the obvious need to increase prices to mitigate increases in costs. Conversely, the significant negative correlation between unit costs and transported volume indicates the noteworthy decreases in unit costs that are achievable by increasing capacity. However, at the same time a high correlation between freight rates and transportation volume is observed. This indicates a tendency for the gains from increased capacity and lower unit costs to be captured by the customers, as the company is not able to maintain the price level due to pressure from customers and competitors. The perceived intensity of competition in the shipping market is further depicted by the highly negative correlation between freight rates and stock price.

7.2.3.1.4 Transported volume vs. profitability

The market seems to value acquisitions of bigger vessels to a larger extent, than the correlation with profitability measures indicates it should. In fact, a zero correlation can be seen between the profitability of ML and increases in transported volume, indicating that it should in fact matter very little when valuing the stock. The lack of correlation could possibly be explained by the fact that high capacity has become the industry standard, and a necessity in order to provide the same prices as your competitors. The customers are thereby capturing the cost reductions, because competition drives prices down to the new equilibrium.

Troels Hedegaard & Morten N. Nielsen

7.2.3.1.5 World growth vs. transported volume

The two variables that are used as proxies for world economic growth display negative correlations with transported volume. This is surprising, as it would be expected that increases in trade translate into more goods being transported. The relationship might be due to the fact that both world economic growth and the BDI are leading indicators of future growth, and therefore by definition should react before the market.

Consequently, the cyclical nature of the variable might cause a delay in the data.

7.2.3.1.6 Oil price vs. oil production

The observed correlation between oil price and oil production, seems to indicate a rather significant negative relationship between the two variables. One would expect it to be in the best interest of the company to increase production of oil, when the price is at its highest. However, it appears that production levels actually decreased when oil prices increased.

Figure 35 - Oil Production vs. Oil Price

Source: Own creation based on data from Maersk Annual Report (2010-2015)

This unfortunate relationship is likely a product of the inability of MOG to foresee the direction of change in the oil prices ahead of time. Furthermore, it is strengthening the argument that MOG has functioned as a cash cow for ML. It can be argued, that sufficient capital has not been allocation to MOG to sustain attractive output levels, plan production accordingly and reap profits when oil prices were high. On the contrary, you might argue that MOG has increased production volumes in times of low commodity prices in order to mitigate the lower profit margins, by simply selling more oil.

Troels Hedegaard & Morten N. Nielsen

7.2.3.1.7 Oil price vs. world growth

As expected, although somewhat weak, a negative correlation between world growth and oil price is identified. Historically, a low level of oil prices has ‘fueled’ the economy, increasing world economic growth (Bowler, 2015 January 19).