As world markets hold their collective breaths over the crisis in Egypt, the potential for a disruption of the Suez Canal could affect shipping stocks, particularly tanker shares. Tanker shares soared by as much as 10% last Friday. Reports on Monday that a shutdown was less likely than initially thought triggered a reversal of those gains – particularly shares of companies such as Frontline (NYSE: FRO), Overseas Shipholding (NYSE: OSG), North American Tanker (NYSE: NAT) and General Maritime (NYSE: GMR).
Still, there are a couple of reasons why shipping stocks could be, as Dahlman Rose CEO Simon Rose said in an interview on Tuesday: “If you’re looking for a hedge on a crisis, I think that shipping is a very interesting, discounted, way of playing it right now”.
Here’s why: about 1 million barrels of crude oil and refined petroleum products transit the Suez Canal each day, and some 8% of global shipping moves through the choke point. That means even a short-term blockage or temporary closure of the canal can have a significant impact on shipping. Without the ability to travel through the canal, ships would have to travel around South Africa to reach their destinations — adding 6,000 miles and up to 16 days to that journey.
Now, if you’re a company that moves goods through the region by ship, your shipping costs will rise dramatically– and that translates into better earnings for shipping companies. Because of the higher margins on crude and refined products, tanker companies have far more leeway to raise prices than do dry goods shippers.
That’s one reason why the latter, which includes companies like DryShips (NYSE: DRYS) and Genco Shipping & Trading (NYSE: GNK) never really got the bump that tanker shares experienced in Friday’s frenzy. Also, dry goods shippers have had to contend with other recent problems — Australian floods and lower Chinese commodity shipments– which have battered their bottom lines. Excel Maritime (NYSE: EXM) did better last week, but its 7% jump was largely due to its release of strong fourth quarter earnings.
The last major shutdown of the Suez Canal — which lasted eight years — followed the Six-Day War of 1967. According to a report by Morgan Stanley, freight rates initially increased five-fold and competition between shipbuilders to increase capacity spurred the rise of the supertanker.
While a shutdown of the canal today would certainly have an impact, the Sumed pipeline now offers an alternative that did not exist in 1967. Still, a breakdown of the Russian tanker Tropical Brilliance in November 2004 closed the canal for three days and delayed 135 ships. Many tanker shares jumped 24% in the three weeks following the incident.
Even if the Suez Canal remains open, security issues could disrupt shipping. Tankers and container ships at the Port of Suez have not been able to obtain military escorts. This is a big deal because of the rising threat of piracy, particularly in the Gulf of Aden — nicknamed “Pirate Alley”.
The unrest in Egypt comes at a time when tankers and dry goods shippers are trying to climb out of a recession-fueled shortage of demand combined with enormous excess tanker capacity. As a result of the glut and the recession, tanker companies and dry bulk shippers have seen their rates fall through the cellar over the past three years. But Middle East unrest and uncertainty — while bad news overall — may be just the medicine the sector needs to boost rates and beef up the bottom line.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.