MISC & SIA may benefit from Red Sea attacks
- Container shipping freight rates have risen the most since the Houthi attacks on commercial ships in the Red Sea began in mid-Nov 2023.
- MISC could benefit as aframax tanker rates have increased due to Suez Canal and Panama Canal issues, although the benefit is likely to be modest.
- SIA may benefit from any spillover to airfreight, as Asia-Europe shipping has more than tripled in cost and also takes longer via the Cape of Good Hope.
Houthi militant attacks caused container freight rates to spike…
Houthi militant attacks on marine traffic through the Red Sea have had the effect of curtailing shipping traffic through the Suez Canal, forcing many ships to take the longer route via the Cape of Good Hope (COGH). The impact has been the most apparent on the container shipping sector, as all Asia-Europe services and some Asia-East Coast North America (ECNA) services use the Suez Canal, through which about 20% of containerships in gross tonnage (GT) terms transit in a normal year. About 80-90% of containerships have rerouted via the COGH in order to avoid the Gulf of Aden, which caused Asia-Europe container shipping services to lengthen by some eight days (30%) at the minimum, and for Asia-Europe container freight rates to more than triple. Asia-ECNA services would add an extra four days (15%) via the COGH vs. the Suez Canal, or an extra 10 days (34%) via the COGH vs. the Panama Canal, which is facing issues related to low water levels. Asia-ECNA and Asia-West Coast North America services have seen their freight rates more than double over the past five weeks since 8 Dec 2023.
…with spillover into oil tanker rates, and potentially airfreight
Higher container shipping freight rates to both Europe and the Americas from Asia may spill over into airfreight cargo rates, in our view, or at the very least, help moderate the sequential decline in 1Q24F from the seasonal peak in 4Q23. Our Add rating on SIA is premised primarily on the strong passenger airline business, where load factors and yields will likely be very strong between Oct 2023 and Mar 2024, and we also expect SIA to reward shareholders with a bumper 40 Scts final DPS in May 2024F. Positive surprises in airfreight rates arising from the Red Sea crisis may add a further tailwind to an already strong story. The impact of rerouting via the COGH is less significant for the oil trade, as only 9% of the global oil tanker fleet transit through the Suez Canal in normal times. Also, 72% of the oil tanker transits are of Russian oil exports to Asia, and we think Russia may not reroute these ships because of its close relationship with Iran. As a result, VLCC rates have fallen since 8 Dec 2023, suezmax rates only rose slightly, although aframax rates have risen by a more significant 66%. Nevertheless, MISC’s high term coverage for its aframax fleet means that it will only partly benefit from the aframax rate rally. While we have a Hold call on MISC, a successful delivery of the FPSO Mero-3 in 1Q24F could improve sentiment on the stock. Sector upside risks include the potential Houthi retaliation against US/UK attacks that would force more ships to reroute through the COGH, and cause freight rates to rally further. Sector downside risks include a resolution of the Israel-Hamas war that could reduce political risk in the Middle East and result in a downward normalisation of freight rates.