Container Shippers Stock Prices Fall on Possible Easing of Red Sea Hostilities

By Dominic Chopping

Shares in shipping and logistics providers came under heavy selling pressure Tuesday as investors digested news of a possible cease-fire between Israel and Hamas, which could see merchant vessels return to the Red Sea and send freight rates sharply lower.

Houthi rebels in Yemen began attacking commercial vessels in the Red Sea in December last year in response to the war between Israeli forces and Hamas in the Gaza Strip, forcing container ships to take longer, more expensive routes around southern Africa's Cape of Good Hope to avoid the region.

With vessels busy sailing the longer routes, a market that suffered from overcapacity became tight and sent spot freight rates surging, prompting shippers in recent weeks to increase their profit expectations for the year.

Having previously expected a tough year on overcapacity and low rates, Maersk and Hapag-Lloyd both raised guidance along with their first quarter earnings as the Red Sea conflict pushed prices up.

Kepler Cheuvreux chief analyst Axel Styrman said in a note that capacity utilization in the container shipping market is currently at around 85%, with four percentage points of that coming from the diversion of vessels mainly because the distance ships must travel from China to Europe--one of three main routes in ocean container shipping--has increased by 32%.

The Shanghai Containerized Freight Index, a spot price index, rose 82% from early April to June 7, largely driven by the diversions and seasonality, he said.

However, on Monday evening the UN Security Council approved its first resolution endorsing a cease-fire plan, increasing the likelihood of a ceasefire between Israel and Hamas and a peace process going forward.

The U.S. says Israel has agreed to the deal, which includes an initial temporary cease-fire, the release of hostages, and the withdrawal of Israeli forces in Gaza, while Hamas told Arab negotiators they would accept a deal only if Israel commits to a permanent cease-fire.

It is likely that this will lead to a reduction or complete stop of Houthi attacks on ships in the Red Sea, which could see container ships return to the Red Sea and means that 4% of global fleet capacity will come to market in three to four weeks, according to Styrman.

"This will lead to a collapse in spot prices with a decline of at least 50% from current levels, a scenario we have anticipated gradually in the second half of 2024-2025," he said.

Hapag-Lloyd said in a statement it has no plans to passage through the Red Sea yet. "I would not expect that to happen within the next months to come," a spokesperson said.

Shares in Maersk and Hapag-Lloyd both fell over 6% in afternoon trade in Europe while Asian carriers Cosco and Yang Ming both closed around 10% lower.

Write to Dominic Chopping at dominic.chopping@wsj.com

(END) Dow Jones Newswires

June 11, 2024 08:36 ET (12:36 GMT)

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