Analysts are keeping an eye on how asset allocation may be affected by continued disruption of global supply chains in shipping ‘choke points’.
As rising geopolitical tensions in the Red Sea, Black Sea and China Sea continue to impact the global economy, market analysts are becoming increasingly conscious of ‘choke points’ through which international trade must pass.
Attacks by Yemen-based Houthi Rebels on international shipping are routinely mentioned by economists and central bankers in long-term GDP forecasts, with higher transportation cost forecasts resulting from disrupted global supply chains.
At the end of February, the Houthis claimed they had attacked 54 commercial vessels since November 2023, including a US oil tanker and US Navy ships in the Red Sea and Gulf of Aden with drones and missiles.
HSBC estimates the two “maritime shortcuts” of the Suez Canal and Panama Canal are conduits to approximately 10 per cent and 5 per cent of global trade volumes respectively, with heightening political tensions in the Middle East on top of low Panamanian water levels resulting in shipping delays.
In addition, container freight prices are soaring at a faster pace — up 2.5 times since early December — than during the early months of the Covid-19 pandemic. At the end of February 2024, daily vessel transits via Suez were down 54 per cent, compared to early December 2023, according to HSBC. Similarly, transits via the Panama Canal were down 33 per cent compared to more than a year previously, before implementation of drought restrictions.
“Trade evolves as efficiently as possible, through the shortest routes,” says Tony Foster, a shipping expert and fund manager at Marine Capital in London. “When there’s geopolitical disruption, you often have to source your goods from further away. To measure utilisation of shipping, you multiply volume by distance. The price that the ship owners are able to charge goes up because there’s less availability.”
Tanker frenzy
Any kind of disruption can exacerbate this situation, says Mr Foster. “The Russia and Ukraine conflict has been the prime example,” he says. “That sent the tanker market into a frenzy with upward pricing,” with many ships also curbing their use of the Bosphorus Strait in Turkey.
Sanctions regimes, such as the UN and Western measures taken against Moscow since its invasion of Ukraine, have a huge effect on shipping routes and sourcing of commodities. But they do not prevent countries such as Russia from doing business and fuelling their domestic economies, believes Mr Foster.
“Two things have happened. You had a product that Russia would have provided to Europe being purchased by Europe from further afield,” he says. “And you also had Russian oil and gas going almost entirely to India and China, which is longer distance. So irrespective of sanctions busting and who carried the oil, the total distance involved in the market increased enormously and the freight prices have gone through the roof.”
Transportation of Liquid Natural Gas (LNG) has been impacted most, he says. Russian and Ukrainian grain has typically been replaced by cheaper alternatives, including Brazilian and Argentinian soybean. Ukraine, he says, has “surprisingly” been able to ship out around 50 per cent of its grain harvest through alternative routes along the Danube and Rhine river systems, despite Russia’s blockading of Black Sea ports.
Sea corridors
Any eventual peace process between the two countries will focus on access to the Ukrainian port of Odesa, and other key Black Sea hubs such as Crimea, under Russian military occupation since 2014.
Russia is keenly conscious that Ukraine’s economy is only able to stay afloat because of the opening of a sea corridor in 2023, threading an economic lifeline to the outside world, an incredible achievement for Kyiv’s beleaguered authorities and military forces.
Andrey Stavnitser, co-owner of TIS port in Odesa, Ukraine’s largest maritime hub, calculates that despite ongoing shelling, the seaports handled 62m tonnes of cargo, compared to 59m in 2022. Exports increased 18 per cent, reaching 56.3m tons. Imports reached 5.3m tonnes, compared to 6.2m in 2022.
Since August 2023, more than 660 vessels have departed from the ports of Odesa, transporting approximately 20m tonnes of cargo to 32 countries worldwide. Seventy per cent of this cargo consists of agricultural products, with grain and vegetable oils predominating.
“Ukraine is demonstrating that we won’t silently watch as our country is being squeezed out of the global trade map amid ongoing aggressive warfare against us,” says Mr Stavnitser. “The success of this mechanism instils a lot of optimism. However, for now, the ports of Odesa are still operating at only a fraction of their pre-war capacity, which underscores the challenges we still face.”
‘Choke points’ under fire
Shipping analysts say the world’s history is littered with examples of key ‘choke points’ or trade routes — central to effective functioning of the global economy — being contested by rival parties. Mr Foster points to the UK’s 400-year stand-off with Spain over control of the Straits of Gibraltar, and Japan’s bombing of Pearl Harbour in the second world war, to curb the US Navy’s blockade of the Malacca Strait trade route.
Today’s attempts by “Iranian proxies” to control Red Sea trade is part of a similar pattern, he believes. “Container shipping represents 50 per cent of world trade by value, but 15 per cent by volume. If you’ve got a container full of trainers at $100 a pair, the price difference will only be a few cents. if you’re talking LNG or oil products, there could be a significant difference. Delays are not the issue, it’s all about price.”
Currently, container ships must sail around the Cape of Good Hope to move goods between Europe and Asia. “The people currently screaming are the Egyptians, as a main source of revenue for the Egyptian economy is fees for Suez Canal use.”
As well as geopolitical factors, economists must also observe regional climatic changes, with the drought in central America vastly reducing water levels and shipping traffic through the Panama Canal.
“You’ve got restrictions in Panama and Suez at the same time, which is driving up ship values. Everyone in the shipping world knows that disruption tends to be positive for our markets,” says Mr Foster. “All ship owners are saying: my assets are going to be worth more, one way or the other.”
Attractive opportunities
These trends produce attractive opportunities for investors able to negotiate the shipping market’s inherent volatility, he says. As part of its investment strategy, Marine Capital highlights shipping companies involved in energy transition, through decarbonisation, or identifying more efficient fuels, such as methanol or hydrogen. The firm also provides equity to purchase and then lease back ships on a long-term basis.
“For institutional investors, this can be a substitute that goes into their fixed income bucket or infrastructure portfolio. Indeed the cashflows are very similar to infrastructure investments,” says Mr Foster. Yields can be as high as 20 per cent, with an IRR in low double digits.
Markets took an immediate hit following the Russian invasion of Ukraine in February 2022, an event most wealth managers failed to forecast or even talk about. The war is now entering its third year. But most corporates have since adapted their supply chains to mitigate damage, say investment experts.
Unlike the shocks to the supply chain caused by the Covid crisis, current trade route risks are no longer “existential”, say wealth managers, with little if any triggers to re-adjust asset allocations.
“An overall ‘risk on’ posture should prevail, with focus on high corporate margins and attractive Investment grade bond yields,” says Didier Duret, head of investments for family office advisers Omega and a former global chief investment officer for Dutch wealth manager ABN Amro.
Inflationary pressure
But the current uncertainty is not expected to lift anytime soon. Container group Maersk expects Red Sea diversions to persist until the second half of 2024, leading to heavy maritime congestion and delays of US-bound goods.
What has been crucial is the ability of market players to adapt to the latest stand-offs. Many are even started using rail to move goods from Asia to Europe, via Russia. “Recent disruptions of trade routes are perceived by many private family offices as incidental to geopolitical tensions, and not as troublemaking as during the Covid episode,” adds Mr Duret.
HSBC confirms that although container freight rates remain high, they are 70 per cent below their pandemic peak. And with the Chinese Lunar New Year demand rush over, with container lines settled into longer, circuitous routes, there is a chance prices could be peaking.
“The shock to the globalised supply chain system led to convincing adaptations at the corporate level, that are providing some sort of immunity to withstand current tensions,” says Mr Duret.
Official policymakers, he adds, are highlighting these trade route disruptions in their assessments of macro geopolitical uncertainty, though they are not in a position to judge immediately the benefits of adaptative measures, which corporations have implemented in reaction to the Covid-linked supply chain disruptions. “Analysts say we are yet to see a discernible impact on inflation,” he adds.
“The market has not yet reacted much to Red Sea disruption,” says the chief investment officer of a leading global private bank. “There has been a one third addition to length of shipping and costs from Singapore to Rotterdam. If shippers continue to put up costs, this can lead to inflation.”
Environmental concerns should also not be ignored. The United Nations Conference on Trade and Development (UNCTAD) estimates that a 70 per cent rise in greenhouse emissions from the Singapore-Rotterdam trip could be triggered by higher fuel consumption, from ships covering longer distances at higher speeds.
