Red Sea windfall will only delay shippers' pain
Denmark's Maersk and Germany's Hapag-Lloyd, for example, have gained some USD18 billion in market value since mid-Dec, as militant attacks shut the Suez Canal, causing freight rates to double. Yet hopes for a lasting boost may be disappointed.
Shipping groups are now re-routing major trade lanes including the Asia to Europe traffic around Africa's Cape of Good Hope, which adds at 10-14 days of travel time.
The extra time and riskiness of the journey has caused freight rates to soar. Asia to Europe prices, for example, have nearly doubled since mid-Dec to more than USD4,000 per fourty-foot equivalent unit (FEU), Freightos data showed as of Jan. 3. While that's still a far cry from the more than 10-fold increase during the pandemic, the result should be a windfall for shipping groups.
If current freight prices are sustained throughout the year, Maersk's 2024 operating profit could rise by USD12 billion, according to Breakingviews calculations which assume that each USD200 increase in FEU costs brings in USD1.2 billion of extra EBIT. To justify the USD8 billion jump in market capitalisation, and an equivalent rise in 2024 net income, prices would need to stay at current levels for over 9 months, assuming a tax rate of 22%.
There are reasons to think they may peak sooner. Chinese factories are working around the clock before the week-long Lunar New Year holiday in Feb, keeping ships busier than usual. Global demand is also weakening.
And, unless the conflict in Gaza escalates across the region, there is likely to be a concerted international effort to reopen the canal. Annual freight contracts are cheaper than the spot market, according to one market participant, implying that prices are expected to fall.
When the boon fades, companies like Maersk and Hapag-Lloyd will still have to grapple with the legacy from the pandemic. Port congestions and quarantine requirements pushed up freight prices, taking Maersk's operating margin to 40% in 2022. But it also led to higher costs and over-investment in ships, which ultimately hurts prices. The percentage of idle fleets averaged around 4% last year, according to Alphaliner data. And a record number of vessels coming online in 2024 could add some 12% to total shipping capacity, Barclays analysts reckon. Maersk and Hapag-Lloyd shares have fallen by half and two-thirds since the peak in 2022. The Red Sea crisis may provide only a temporary relief.
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HannaSG : The increase in freight rates is due to the increased costs of detours to cover the increase in costs, which is unsustainable
bullrider_21OP HannaSG: The stocks may rise for the next few weeks. But in the medium term, they may fall.