Another Less Discussed Aspect of the Red Sea Crisis
The Red Sea, a vital waterway for shipping goods between Europe, Asia, and Africa, has become a hotspot for conflict. Since October 19, 2023, Houthis, a Yemeni rebel group backed by Iran, have been launching attacks on commercial ships traveling through the Red Sea.
Houthi militants have fired on various countries’ merchant vessels, particularly in the Bab-el-Mandeb, which, as the southern maritime gateway to the Egyptian Suez Canal, is a a chokepoint of the global economy. As a result, vessels cannot access Egypt’s Suez Canal to cut between Asia and Europe and, instead, must sail thousands of miles around Africa to move goods.
The Houthis have attacked numerous civilian-operated cargo ships near the Yemeni coast and while they claim their attacks are in response to Israel’s actions in the Gaza Strip and that they will continue to attack until Israel ceases its war against Hamas, many of the targeted ships do not appear to be related to Israel.
Connecting the conflict in Bab-el-Mandeb to the conflict in Gaza creates a complex situation with far-reaching consequences.
While the Red Sea crisis poses a significant threat to global trade and regional stability, it is also crucial to acknowledge a less discussed aspect – its potential financial impact on shipping companies. This paper explores the complex relationship between the crisis and the financial well-being of these companies.
The Pre-Crisis Landscape: Overcapacity and Reduced Profitability
Prior to the escalation of Houthi attacks in the Red Sea, the global shipping industry was already facing challenges due to overcapacity. In shipping terms, this is defined as a scenario whereby there are more ships than there is cargo. This overcapacity resulted in:
- Decreased profitability: With more ships competing for fewer contracts, freight rates (the cost of shipping goods) declined significantly. This negatively impacted the revenue and profitability of shipping companies.
- Reduced share value: As profitability dropped, the market value of companies in the shipping industry alsodecreased.
Data and analysis support this observation. For instance, The Maritime Executive forecasted containership overcapacity to last until 2030 or beyond, and S&P Global reported a 71% decline in freight rates in 2023 compared to 2022.
The Red Sea Crisis: A Potential Opportunity?
The diversion of shipping routes due to the Houthi attacks has had a paradoxical effect on the financial situation of some shipping companies. While the crisis is undoubtedly a negative development for global trade and regional stability, it has inadvertently created a situation whereby:
- Increased demand & limited supply: By diverting ships away from the Red Sea, the available supply of vessels on other routes has decreased. This, coupled with unchanged demand, has created an imbalance resulting in a surge in freight rates, with the cost to ship a container from China to the Mediterranean jumping by 44% to $2,413.
- Potential for increased profit: Shipping companies have the ability to pass on these higher costs to consumers, potentially leading to increased profit margins.
“For them [shipping companies], this is going to deliver increased profitability that they didn’t expect to have,” said Michelle Wiese Bockmann, a senior shipping analyst at Lloyd’s List Intelligence.
“The longer they have to divert, the higher their freight rates. They are definitely winners.”
As an example, the share price of ZIM, an Israeli shipping company, surged by 50% following the escalation of attacks. Similarly, shares of Maersk and Hapag-Lloyd, two of the largest container shipping companies, have also seen significant increases of about 20% and 17%, respectively.
The combined market capitalization of the world’s largest publicly traded shipping companies has jumped by about $22 billion since Dec. 12, when the assaults really ramped up.
The phenomenon of rising shipping rates amidst supply chain disruptions is not new. Historical precedents, such as the closure of the Suez Canal during the 1967 war, have shown that geopolitical crises can lead to “golden ages” for shipping, where operators and owners reap significant profits due to skyrocketing freight rates.
The Red Sea crisis is undeniably a significant event with global implications, warranting serious attention due to its impact on international trade and security. However, as demonstrated, shipping companies have managed to “benefit”from the ensuing consequences of the conflict. While such benefits highlight the adaptability and resilience of the shipping industry, they also remind us of the intricate interplay between geopolitical events and global commerce. This scenario serves as a testament to the multifaceted nature of international crises, where adverse conditions can simultaneously generate unforeseen opportunities for specific sectors.
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