Shares of major European maritime shippers such as Maersk and Hapag-Lloyd have substantially surged in value due to Red Sea disruptions, with increased costs passed on as higher freight rates. Goldman Sachs and J.P Morgan analysts discuss whether this trend is likely to last.
ADVERTISEMENTIn recent weeks, shares of leading European maritime shippers, such as Denmark's Maersk and Germany's Hapag-Lloyd, have seen significant rallies.
This surge is primarily attributed to the ongoing logistical disruptions in the Red Sea, spurred by Houthi militant activities off the Yemen coast.
The Root of the Rally
Leading the rally are shares of Denmark’s Maersk and Germany’s Hapag-Lloyd, which have seen their values soar by 30% and 55% respectively since mid-December. The ascent began when Houthi militants launched a missile at a Maersk vessel, an event that underscored the growing risks of navigating the Red Sea.
Due to the risks associated with passing through the Red Sea, major shipping companies are now avoiding the route, which typically includes passage through the Suez Canal. As a direct result, these companies are now using longer routes, notably around the Cape of Good Hope, to avoid the troubled region.
This rerouting has profound implications for shipping economics. The longer journey not only increases transit time but also raises operational costs, leading to substantially higher freight rates.
For instance, unlisted French group CMA CGM decided to raise its rates by up to 100%, reflecting the higher costs and longer journey times associated with the rerouting.
Consequently, the spot rates for forty-foot-equivalent (FFE) containers have seen a dramatic increase, soaring from about $2,000 in early December to more than $5,000 by January 4th. This spike in rates is a direct response to the heightened demand and constrained supply caused by the rerouting.
Analyst Perspectives and Market Outlook
Financial analysts are closely monitoring these developments. Nordnet's Per Hanses suggests that the increase in rates should more than compensate for the heightened risks and costs associated with the new routes.
Goldman Sachs’ analyst Patrick Creuset, notes that a significant portion of global containerised trade, about 30%, is affected by these disruptions, leading to 70-80% of vessels re-routing as of late December.
The US investment bank anticipates further increases in freight rates, especially given the delays in vessel returns for loading in Asia, a critical period leading up to the Chinese New Year. That said, Goldman Sachs does not expect supply chain bottlenecks to reach Covid-era disruptions.
However, not all analysts are optimistic about the long-term benefits of this surge. J.P. Morgan adopts a more cautious stance, downgrading Maersk to "neutral" from "overweight". The investment bank views the disruption as a temporary boost, unlikely to provide a lasting benefit to earnings. J.P. Morgan predicts that once the Red Sea situation stabilises, the industry will revert to its pre-disruption state, characterised by weak fundamentals, including an oversupply problem.
Before the Red Sea attacks, companies such as Maersk were already grappling with a subdued economic outlook, evidenced by decisions to cut jobs and warnings of weak prices and increasing costs.
As the situation evolves, it will be crucial for investors and industry stakeholders to closely monitor these developments and their potential long-term impact on the global shipping industry. Additionally, it's important to recognise the potential for cascading effects on Europe's economic growth and inflation.
