Freight Going Down the Suez
Off the Radar
Keith McLachlan – CIO of Integral Asset Management
Readers are likely aware that conflict in the Middle East has spread to attacks on commercial vessels traveling through the Red Sea. Naturally, this has had the effect of collapsing trade through the Suez Canal (Figure 1).
Figure 1: Expected versus Actual Freight Volumes Through the Suez Canal
Adding to the Suez problems, the drought in the Panama Canal has limited global freight routing capacity further. Thus, many commercial vessels are being forced to re-route through alternative routes (Figure 2).
Figure 2: Alternative Asia-to-Europe Freight Routes to Suez Canal
Simplistically, this has had the result of seeing these alternative routes’ freight rates skyrocket (Figure 3 – using the Shanghai Index as a proxy for East-West trade costs). These re-routes have added another two to three weeks to most East-West charters that could create a range of real-world impacts (which we are now all-too familiar with due to the recency of the pandemic-led supply chain disruptions), but discussion on this is beyond the scope of this article.
Figure 3: Shanghai Containerized Freight Index
I would like to zoom into those few stocks on the JSE that may actually benefit from this spike in freight rates, particularly if the disruption lasts for several months (Maersk’s CEO at Davos recently said that he expects the disruption to last for “…at least a few months.”).
There are only two stocks in the shipping industry on the JSE: Santova (SNV) and Grindrod Shipping Holdings (GSH). Digging a little deeper into the more general transport industry, Grindrod (GND), Textainer (TXT) and Trencor (TRE) emerge as well.
Immediately, we can discard Trencor as a cash shell basically winding up and we can ignore Textainer as a container lessor. While ships on key routes will benefit from higher freight rates, the containers on the ships are less affected by re-routing them and, thus, beneficiaries of container lease rates are unlikely to be the best way to benefit from the above.
Grindrod as an owner and operator of mostly port & terminal assets may indirectly benefit from increased trade along its coast. But most of the re-routed volumes are not destined to South Africa (or even Africa) and, thus, Grindrod is unlikely to materially benefit from current events (although it is benefiting from Transnet woes but that is another story).
Finally, while Grindrod Shipping stands as a beneficiary to shipping rates, it operates a predominantly bulk commodity shipping operation. This ties its revenues more to the Baltic Dry Index, which is down c.-20~30% since the Houthi attacks started, and, thus, Grindrod Shipping is not positioned to win here.
That leaves only Santova: As a non-asset based global logistics company, Santova earns across a range of trade routes that include the East and the West. Recently, the Group just entered the important USA market. Not just is the Group well positioned to benefit from a jump in alternative route demand, but the Group should gain from a higher freight rates and an increasingly complex global freight environment pushing more clients to use more of their services and solutions.
All in all, I both still hold and still like Santova and, indeed, current global events just add to its appeal. While luck does play a role in business and Santova’s current favorable positioning appears lucky, it is amazing how often well-run, good businesses get “lucky”!
For more background on Santova, read some of my older articles here:
- Could Santova be a multi-bagger? (Spoiler: Yes, I believe so. Update: I still believe this.)
- Santova: A Great Business
THIS ARTICLE INITIALLY APPEARED ON MONEYWEB.