All Aboard The Shipping Trade

The Red Sea conflicts are changing tides on the shipping industry. The timing couldn't be better.

There has been a significant shift in the shipping industry due to growing tensions in the Red Sea, which is a crucial passage for international trade. This shift has led to a compelling case for global shipping stocks.

Tankers and cargo vessels sailing through the Red Sea have been attacked by Iran-backed Houthis. This passage is used for about 12% of global trade. These attacks are related to the ongoing Israel-Hamas War, which has forced shippers to find alternative, albeit more expensive, routes such as around Africa's Cape of Good Hope.

Sources: LSEG; Planet Labs; Maps4News; Shoei Kisen Kaisha

The detour has resulted in an immediate impact on container freight rates, doubling them since tensions escalated last month. This is a clear indication of the increased costs incurred by carriers, which are passed on to exporters. According to Drewry data, a company that paid about $1,400 to ship a 40-foot container at the end of November 2023 can now expect to pay more than $2,600 to ship the same container.

Maersk (CPH: MAERSK-B) shares are up over 28% since the week commencing Dec. 11, rising from a three-year low. Rivals Hapag Lloyd (DE: HLAG) shares have jumped 46% over the same time frame. Frontline (NYSE: FRO) shares are up over 17.5% year-to-date, the STOXX 600's ninth biggest gainer. Our custom basket of shipping stocks is up 26.7% since Dec.11 (more on this selection of names later in the article).

The Implications

The March 2021 incident of the Ever Given container ship running aground in the Suez Canal has illustrated the significant financial impact of detours and delays in cargo shipments. It is estimated that an extended round trip between Asia and northern Europe costs an additional $1 million in fuel per vessel. The strategic importance of the Suez Canal makes rerouting ships a costly endeavour, further inflating prices and adding considerable delays to cargo shipments.

A current standoff in the Red Sea could have similarly profound economic impacts, albeit spread out over a longer period. This is particularly sensitive as China's Lunar New Year approaches, which is traditionally marked by an increase in shipping demand. Even before the Houthi attacks, Maersk had warned customers of “exorbitant” rates, “additional peak season surcharges,” and a “shortage of empty containers” related to the Chinese holiday.

The cost implications of these events are already visible, as rates for shipping goods from Asia to the Mediterranean and North America's East Coast have risen sharply. We believe this trend is likely to continue.

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Positioning

The Red Sea and Suez Canal are crucial routes that connect Europe to Asian suppliers (as shown in the earlier image) and facilitate a significant portion of the world's oil and oil products transportation. The redirection of tanker cargo increases the demand for shipping and consequently raises the ton-mile requirement, a key measure in the shipping industry.