Wars and pandemics – geopolitical and global health crises that cause widespread suffering and death – have the side effect of increasing profits in some industries. Wars inflate revenues for defense contractors. The pandemic has been a bonus for some pharmaceutical companies.
Shipowners have benefited from both, due to supply chain issues. Container line owners have made fortunes during the coronavirus crisis. The Russian invasion of Ukraine has raised rates for tanker companies.
Now there is a new geopolitical crisis – the war between Israel and Hamas in response to the terrorist attack carried out by Hamas on Saturday – and the distinct possibility of escalation into a regional conflict.
It may seem insensitive, but the job of shipping analysts and shipowner executives is to offer their views on how military conflicts impact their markets and stock prices. On Tuesday, three days after war was officially declared in the Middle East, shipping analysts and executives gathered at the Capital Link New York Maritime Forum on Manhattan’s Upper East Side — and there was no avoiding the topic.
If we were talking last week, it would have been like this: We have a war in central Europe. “Well, now we have a war in the Middle East,” said Robert Bugbee, president of Scorpio Tankers (NYSE: STNG).
He added, “What could happen in the Middle East, unfortunately on a humanitarian basis, is a positive thing for the structure of (tanker) prices, just as happened in the Russian war.”
According to Nicholas Tsakos, CEO of tanker company Tsakos Energy Navigation (NYSE: TNP), “We were trained in shipping to be able to adapt to geopolitical events. And here we are again, back to the drawing board. We have been through three crises, one after the other.” Covid, then the Ukrainian situation, is now a problem in the Middle East.
The implications for the bottom line vary by shipping sector. Container and dry bulk shipping are less directly exposed to potential impacts than crude oil and product tankers and liquefied natural gas (LNG) and liquefied petroleum gas (LPG) tankers.
Container shipping and dry bulk shipping
The war in Israel, if it expands beyond the country’s borders, poses risks to two key shipping points: the Suez Canal, a major waterway for all types of commercial ships, including container ships, and the Strait of Hormuz, which is pivotal for Israel. Oil and gas shipping.
The Suez Canal is an example of an “open choke point,” that is, one around which ships can turn. If the canal is closed due to a regional conflict (as happened in the conflicts in which Israel was involved in 1956 and from 1967 to 1975), ships could take a longer route around Africa, reducing the available ship capacity, which constitutes a positive incentive for rates. Shipping.
Israel considers itself a small market for container shipping. Linerlytica said on Monday that Israel’s main ports of Ashdod and Haifa handle just 0.4% of global output, and “the threat of disruption to the flow of container trade across the Mediterranean region remains limited.”
Zim (NYSE: ZIM), the tenth largest marine tanker in the world, is headquartered in Haifa. The company confirmed on Wednesday that there may be an interruption in its services to Israel and that it would impose a war risk premium.
Zim has employees who will be called up for military service, and the government of Israel has a “golden share” or “special state share” in the company that guarantees government access to Zim’s fleet “in time of emergency or for national security purposes.” (This item is not expected to have any impact on market capacity.)
The broader issue surrounding container shipping is the same issue facing dry bulk shipping, another sector not as acutely affected by the war in Israel: both shipping sectors are highly vulnerable to the health of the global economy.
“We may see oil prices rise very significantly at some point, which could lead to a recession,” warned John Wobbensmith, CEO of dry bulk carrier owner Genco Shipping & Trading (NYSE: GNK).
Crude oil shipping
The Strait of Hormuz, unlike the Suez Canal, is a “closed choke point” – meaning you can’t go around it. Huge amounts of oil and gas exports depend on opening the strait.
If cargo had to circumvent the Suez Canal, it would be positive for freight demand measured in ton-miles (volume multiplied by distance) because it would increase the miles in the ton-mile equation, while tons would remain constant. Closing the Strait of Hormuz will close volumes that cannot be fully redeemed, which is negative for ton-mile demand because the tonne-miles lost will exceed the miles gained from partial-replacement volumes.
The most likely scenario in the near term for tankers is for the United States to take strict measures against Iranian exports, which could be positive for prevailing tanker rates. The Biden administration is being criticized for not enforcing sanctions on Iran strongly enough, allowing Iran to benefit from exports to China, thus providing financial support to Israel’s enemies.
“There has recently been a more flexible stance towards Iran by the US government, which has allowed Iran to increase its crude oil exports by more than 600,000 barrels per day since the beginning of the year,” offshore brokerage BRS said on Monday. “If the Biden administration cracks down on Iran over its ties to Hamas, this will likely lead to higher oil prices.”
“A decline in Iranian crude exports may lead Saudi Arabia to ease its additional voluntary cuts to fill the gap,” BRS noted.
This would be positive for spot rates for major crude oil tankers that carry Saudi crude and are not involved in Iranian trade.
LPG shipping
Owners of liquefied petroleum gas tankers known as VLGCs (very large gas carriers) can also see higher freight rates.
VLCCs transport liquefied petroleum gas (propane and butane) which competes with naphtha as a raw material for Asian steam crackers. Higher oil prices following the Middle East war would lead to higher naphtha prices, making naphtha less competitive with LPG, and increasing demand for imported LPG in Asia and thus demand for VLCC transportation.
“If (geopolitical issues) continue to push oil prices higher, that has historically been good for our business, as long as oil prices don’t go up,” Ted Young, chief financial officer of Dorian LPG (NYSE: LPG), said at a Capital Link event. “It rises sharply and stifles demand.”
Shipping of duplicate products
Spot rates for product tankers – ships carrying goods such as diesel, gasoline and jet fuel – are already higher than normal for this time of year, while inventories are low, setting the stage for the new geopolitical crisis to push interest rates higher throughout the year. Winter, according to Bugbee.
“We have inventories going into this winter that are roughly at the same level as they were coming out of last year’s winter, which was one of the warmest winters on record. This winter may not be as mild as last year,” he said.
“Underlying demand is still up on a post-Covid basis. Gasoline consumption, jet fuel and everything else are up. So, the world is very vulnerable to carbon shortages.
“On trading desks, it’s all about fear and greed,” Bugbee said. “If you add fear in there, coupled with a normal winter, rates could of course go up. The unrest in the Middle East, in and of itself, should push interest rates much higher (where they are now).
LNG shipping
At the same time, countries purchasing LNG are looking to add more import facilities – floating storage and regasification units – and diversify their supply base. The war in the Middle East should intensify these trends.
“What is happening in Israel is terrible,” according to Richard Tyrrell, CEO of Cool Company (NYSE: CLCO), owner of LNG tankers. If things escalate, it will have an impact on the LNG business. And what it does now is it puts everyone on a high level of stress when it comes to energy security.
“People are very focused now on diversifying their supplies. If you’re China, for example, you don’t want all your LNG supplies to come from Qatar, because of the risk of a power outage in a certain place. People look at energy in a geopolitical way, to reduce its risks, By sourcing supplies from multiple places.This is why LNG shipping is so essential to this market.
According to Art Regan, CEO of Energas Infrastructure, which owns the FSRUs, “Everyone is reevaluating what their energy matrix should look like over the next 10 to 20 years. It’s not about energy transition, it’s about energy security.”
“It’s because of what happened in Ukraine and what’s happening globally right now,” Regan said.
“11 FSRUs were secured in Europe last year, about three to four times what is normally there. Anxiety is spreading. We are seeing it in Asia, South America, and Brazil in particular. Everyone is on edge and wants to know How to provide energy and electricity to their citizens.”
Shipping stock
Inventories of crude oil tankers, product tankers, LPG tankers and LNG tanker owners have risen moderately since the terrorist attacks and declaration of war in Israel.
“That’s one of the beauties of shipping, isn’t it? In a way, it’s a hedge,” Gregory Lewis, a shipping analyst at BTIG, said at a Capital Link event. “Disruptions and disruptions in general tend to be good for shipping. In periods of geopolitical uncertainty, there are certainly worse things than owning tanker inventory.
At the same time, there is widespread market uncertainty that limits freight stocks’ rise until freight rates really rise, according to Bugbee.
“If you look at the small picture of the product tanker market, you can be very confident. But how confident can you be about the big picture of the world in general and the global economic situation? It starts to turn a little grey.”
“The question now is not necessarily: What are the shipping risks? The question is: What is the geopolitical risk facing the world? What will happen in the next two years?”
“You have to have some empathy (with investors) because there are a lot of things to worry about. It’s very unpredictable, in terms of what could happen in the Middle East. So, we have this buildup: Will the world get through this?” Period? Will it be a soft landing or a hard landing?
“Right now, this uncertainty is overshadowing actual industry fundamentals (in stock pricing). This may be the case until you get a forced capitulation when prices rise. Strong interest rates will take care of everything.”
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