Shifting Tides: Geopolitical Events And The Shipping Industry

23rd Jan by Keelan Cooper

19 comments 1328 reads

A number of volatile geopolitical events, marked by the Houthi rebels' attacks on commercial ships in the Red Sea, and simultaneous crises in major shipping canals, have triggered a ripple effect across the global shipping industry.

The attacks by Houthi rebels in Yemen have forced major shipping companies to alter their routes, avoiding the Red Sea and opting for longer, costlier journeys around the Cape of Good Hope.

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Source: Financial Times

This redirection away from the Suez Canal, which is responsible for around 15% of global trade, has led to a spike in freight rates. Container shipping rates on key global routes have, on average, doubled over the past month. The disruptions have also prompted a number of companies such as BP and Shell to pause shipping via the affected routes, underscoring a broader impact on global commerce.

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The escalating situation has led to serious concerns about the safety of maritime routes, with traffic along the Suez Canal down by 28% in early January, according to the IMF PortWatch. At the same time, climate-related issues, such as drought affecting the Panama Canal, have further contributed to the complexities faced by the shipping sector.

A silver lining for the shipping industry?

While the global shipping industry experienced a slump in 2023 due to high inventories and reduced consumer spending, recent geopolitical events have presented a potential reversal in fortunes. Shipping experts, such as Alan Baer, CEO of logistics company OL USA, anticipate that the higher rates resulting from the current disruptions could significantly boost the profitability of Vessel-Operating Common Carriers (VOCCs). If the situation persists for an extended period, profits may approach levels seen in 2022, offering a silver lining for an industry recovering from recent challenges.

Investors are now once again eyeing opportunities in shipping company stocks. Jefferies research note indicates that the turmoil in the Red Sea region is likely to disrupt shipping routes for the foreseeable future, keeping shipping rates high. The brokerage has raised earnings forecasts for shipping giants like Maersk, Hapag Lloyd, and ZIM, reflecting the positive outlook for the industry.

Navigating challenges and uncertainties

Despite the potential for increased profits, the shipping industry has faced several challenges and uncertainties over the past year.…

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DavidMcCabe

23rd Jan

Great article Keelan. Thanks

bohenie

Thanks for this - I'm just surprised that Suez Canal traffic is apparently only 15% - would have thought its a fair bit more - but are they going by number of vessels transiting or should they be more concerned with actual value of goods transported? Either way Egypt must be suffering.

Alphaflight

I've been running my own shipping portfolio for about 2 years (as there isn't an off the shelf ETF) . I don't own any of the shipping companies that you mention however. Instead I own the Dry Bulk and Tankers. Why? Because civilizations require oil, gas, coal, metals, fertalizer, et al in order to function. Whereas cheap tat from China isn't so important:-) Aside from that, the Dry Bulk and Tankers were completely out of favour for the last decade if you look at their charts(they still are) . Super high dividends too, over 20% pa in some cases eg Diana Shipping (NYQ:DSX) and so on...

Logical David

Hi Keelan,

"Maersk recorded profits exceeding $30 billion. Not bad for a company currently valued at just over $30 billion."

Can I please check if the above figure of $30 billion is correct?

Lord Gnome

Take a look at Tufton Oceanic Assets Epic: SHIP. Yield increasing to just under 10%, paid quarterly. Big discount to nav. Check out recent RNS on possible special dividend and break up. I hold.

Keelan Cooper

Hi DavidMcCabe,

Thanks for the comment. Glad you enjoyed it!

Best,
Keelan

Hi Logical David,

I've attached some links to highlight the company's 2022 results below.

https://www.ship-technology.co...

https://www.seatrade-maritime....

https://investor.maersk.com/fi...

Keep in mind that this is the EBIT figure, but it is still a remarkable achievement nonetheless.

Best,
Keelan

planetx

Freight industry is a nightmare to deal with closest thing to racketeering I ever dealt with .

UK importers have zero bargaining power when freight rates are set and shippers just get away with what they can and make excessive profits.

So yes profitable and a pretty non competitive market run by as cartel of price fixing gangsters .

Good investment yes.

But the kicker will be on the reverse with increased cost on landed goods, inflation, and reduced profits by importers exposed .

Still can’t argue with the investment case on shipping companies .

But importers hate them due to the master servant relationship .

Hi bohenie,

In terms of the value of goods transported, you're looking at around $1 trillion worth of goods annually. So the figure refers to the value of the goods transported rather than the number of vessels.

Around 30% of all container ships cross through the Suez, so yes, this is a big hit for Egypt! I've just seen a Reuters article confirming that revenues from the Suez are down 40% in Jan 2024 compared to Jan 2023.

Best,
Keelan

One more comment .

You really have to ask yourself this

Why should a Suez Canal / Houthi rebel issue actually lead to extra profits - that’s called profiteering .

Similarly it is arguably morally questionable that excessive and off profits were generated for shipping lines as a result of a global pandemic .

Baroness Michelle Mone got hammered for profiteering yet the shipping magnates get away without any criticism or comment .

Anyway making extra profits at someone’s expense due to external issues. By all means pass on the extra costs that is fair and equitable .

But to make increased profits in these situations is just not right unless of course you own shares in a shipping company .

john2

'Why should a Suez Canal / Houthi rebel issue actually lead to extra profits - that’s called profiteering'

Well many ships are diverting via the Cape of Good Hope, which adds 6000 miles and three weeks to the journey. There are fuel costs and also other costs involved in the running of the ship for three weeks. Moreover, insurance for those ships continuing to use the Suez Canal has skyrocketed, for good reason.

Hi Alphaflight,

That's a great point regarding dry bulk and tankers. Diana Shipping (NYQ:DSX) looks interesting, Genco Shipping & Trading (NYQ:GNK) is another one on my radar at the moment. The dividends in the good times can be extraordinary, lots of value out there.

Best,
Keelan

muckshifter

One small point on MPCC that I think is worth mentioning is that for the 18 months or so that I've had their shares, they have indeed paid fantastic dividends, but also lumps of cash paid as return of capital which doesn't seem to suffer the Norwegian tax take. I've always assumed that it represents the proceeds of ship sales but never checked that.

That’s no problem to pass on those extra incurred costs, these are added as standard practice , eg “fuel surcharge “ etc

So pass the costs on absolutely no problem

This is not additional profit

Profiteering is the adding of the xtra profit to the actual increase .

I did 30 years import export that’s how it works .

If the additional costs are passed across that’s all fair and agreeable, but not an increase margin

Yes lots of value out there. I own Genco Shipping & Trading (NYQ:GNK). Also look at Star Bulk Carriers (NSQ:SBLK) (Note: Michael burry still holds this I believe). DHT Holdings (NYQ:DHT) Teekay Tankers (NYQ:TNK) Frontline (NYQ:FRO) are the blue chips companies of these two shipping sectors I mention. Most of these have >5X upside in my opinion, you just have to hold them for long enough while receiving the dividends. A lot of these companies have already gone bankrup in the past and the shareholders were wiped out, debt holders were converted to equity etc.

BenHazz

Great article Keelan, thanks for covering some of the areas rarely discussed on the SCVR. I enjoyed your review of the mining sector as well. Going to keep tabs on Clarkson (LON:CKN), but looking at the run up in the SP maybe I've missed the boat on this one (pun intended) so will see if a little pull back happens in the next few weeks.

BattleOfBrit

24th Jan

A really nice article Keelan - one of the reasons that I'm a fan of Stocko.

MPCC looks interesting.

back2value

Supply and demand is the simple answer. I didn’t hear too many people sympathizing with container ship operators during the many years they were making marginal profits while investing tens of billions of dollars to build, and charter in, more efficient ships…. On average, shipping is a highly capital intensive but low return business.

26th Jan

Exactly.

Also, the big, massive in fact, elephant in the room here is that order books for new ship builds are a disaster area with various shipyards having gone out of business.

Ship builders are building container ships. However tanker, liner ships LNG carriers, dry bulk ships are deemed too risky and are not being built [mainly due to myopic ESG/net zero reasons].

As such, the favorable opportunity for patient investors arises from the unavoidable disparity between the demand and an industry that can solely generate supply with substantial capital...

Shifting Tides: Geopolitical Events and the Shipping Industry

A silver lining for the shipping industry?

Navigating challenges and uncertainties

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Keelan Cooper

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