The shipping industry is feeling the impact of increased risk factors in the Middle East and a drought in the Panama Canal, resulting in higher rates and potential long-term effects on shipping stocks.
Middle East Conflict Leads to Rising Shipping Rates
Over the past month, there has been a surge in shipping stocks due to attacks by Yemen’s Houthi faction on ships in the Red Sea. These attacks have compelled companies to avoid using the Suez Canal, forcing them to take longer routes and causing shipping rates to soar. The average rate for shipping containers between Asia and Europe has more than doubled during this period. As a ripple effect, other routes have also been affected, with container ships having to make extended journeys, ultimately reducing ship availability. Jefferies reports a 40% increase in shipping rates between Asia and the U.S. East Coast since mid-December.
The Duration of Disruptions Remains Uncertain
The primary question is how long these disruptions will last. The U.S. is currently working on assembling a coalition to safeguard ships in the Red Sea, where several vessels have fallen victim to Houthi attacks. Unfortunately, the coalition has not yet been successful in preventing these attacks, which the Houthis claim are retaliatory measures against Israel’s actions in the Palestinian territories. Furthermore, companies are facing delays and additional rate hikes in the Panama Canal due to capacity reductions caused by an ongoing drought that shows no signs of subsiding.
Positive Outlook for Shipping Stocks Despite Challenges
A.P. Moeller Maersk, one of the world’s largest shipping companies, has seen a remarkable 33% increase in its stock price over the past month. Other shipping industry giants, such as Hapag-Lloyd, ZIM, Star Bulk Carriers, Golden Ocean Group, and Genco Shipping & Trading, have also experienced upward growth.
The Future of Shipping Rates
While it is anticipated that the recent surge in shipping rates will somewhat taper off in the coming months, unless there is a more widespread conflict in the Middle East, it is likely that the disruptions will persist for several more weeks. As a result, companies may be compelled to pay a higher risk premium for shipping goods over the long term.
The Impact of Avoiding the Suez Canal on Shipping Companies
Shipping companies have been forced to find alternative routes to avoid the Suez Canal, and the implications of this change are significant. A rerouting through Africa’s Cape of Good Hope has doubled the journey time for ships traveling from Singapore to the Mediterranean, increasing the round trip duration from 48 days to 92 days ^1^. Consequently, delays in picking up subsequent loads are inevitable.