Shipping giants halt Suez Canal routes

Suez Canal authorities have said that they are monitoring the situation. Since November, around 55 ships have been rerouted from the Cape of Good Hope instead of the Suez Canal route.

It is also the quickest route from Asia to Europe, making it a preferred trade route. If the situation persists, it could lead to higher shipping rates, persistent inflation, and shortages or delays in the delivery of goods, whether they are raw materials or finished products.

G Shivakumar, CFO of GE Shipping said that the situation was evolving and it could end up seeing an increase in freight rates, especially in the container market. The tanker market, where there are more Indian shipping players , could be impacted as the market is already “tight”.
Growing demand may result in higher freight rates. The recent offer from the US to send convoys for ship support has provided some relief to the markets, but its effectiveness remains uncertain.
Recent global crises have driven up freight costs, with the Baltic Dry Index surging over 50% in October 2023 compared to September. Long-term estimates suggest a potential 30-40% increase in transportation expenses.
While higher freight rates may lead to reduced volumes and increased costs for importers, shipping companies could benefit, driving up earnings and share prices. For instance, GE Shipping, a major player in the industry, has experienced significant earnings growth in the last 4-6 quarters due to trade disturbances, according to Vikram Suryavanshi, Vice President of Institutional Research at PhilipCapital.

“What typically happens is that when trade disturbance occurs, shipping companies have to make longer journeys which increase tonne-mile demand for the same amount of cargo. This reduces supply-side shipping capacity and ultimately impacts freight rates. This is good for shipping companies. Most of the increases in costs like insurance, and fuel will be borne by the importer/exporter,” he says.
For the last six quarters, the freight rate increase in the tanker has been very significant and tanker shipping companies have been very much benefited from these global disturbances, right from the Russia-Ukraine conflict.
Listed shipping companies, like Shipping Corporation of India, Great Eastern Shipping, Essar Shipping, SEAMEC, and Shreyas Shipping & Logistics Ltd, are expected to benefit from increased freight charges and a rise in travel distances.
“Conversely, companies focused on exports may encounter challenges as a result of the escalated transportation costs,” Awanish Chandra, executive director and head of institutional equities, SMIFS, adds.

On December 19, shares of shipping stocks were trading in the green with gains of 2- 5 percent across the board. The biggest gainers were Great Eastern Shipping and Essar Shipping, with around 4 percent each. But while the stocks have seen a boost, most analysts advise that one should wait and watch before taking a specific call on shipping stocks based on the ongoing situation. Major implications on businesses and stocks would take some time to show, they said.