Any Good Shipping Stocks Amid Red Sea Tensions

Despite recent airstrikes against Yemeni rebels threatening shipping routes in the Red Sea, risks in the region appear far from resolved. This leaves some shipping stocks well-positioned to benefit. 

Escalation or Backing Down?

Last week, the US-led coalition conducted large-scale airstrikes against Houthi militants in Yemen on two occasions. Ostensibly, the goal was to dissuade the rebels from further attacks on shipping in the Red Sea. However, yesterday, the Houthis went as far as striking a US-owned vessel in the Gulf of Aden and launching a missile targeting a US warship, which was intercepted. Both the US and UK had pledged continued airstrikes against the Houthis should assaults on Red Sea shipping persist. The latest attack on the dry bulk carrier caused no injuries but suggests the Houthis remain undeterred.

The US-led Combined Maritime Forces tasked with securing transit through the straits has advised vessels to avoid the area. An increasing number of ships, including tankers, have opted for the longer route around the southern tip of Africa, lengthening supply transit times between Asia and Europe. However, some companies, such as Qatari LNG, still express intent to traverse the Suez Canal despite diverting southwards initially. This could indicate that shipping firms have not abandoned hope of stabilising the Red Sea situation in the near term.

Impact of Rising Freight Rates

The increasing shipping costs have led to higher freight rates, which investors are analysing as positive for major shipping companies. Maersk, the world's largest container shipping company, saw its share price increase 37% in the latter half of December as tensions exacerbated. Analysts suggest that while some form of de-escalation may be achieved in the short term, shipping could take several months to normalise, resulting in continued higher freight rates during that period. 

As of 7 January, traffic in the Red Sea had nearly halved, with general cargo seen as most affected. Container liners such as Hapag Lloyd and Maersk had witnessed falling margins through the previous year as supply chains stabilised and the global economy cooled. However, analysts now expect profitability to rebound in the first quarter, at least thanks to the higher rates. Shipping companies such as Golden Ocean Group also benefit from drought in Latin America, making passage through the Panama Canal more difficult.

Golden Ocean in C&H Pattern

Golden Ocean shows a potential cap and handle pattern, pending a bullish continuation past the 'cup' top at  $10.60, with any short-term pullbacks considered as the "handle". If the stock accelerates higher, the measured-move projection points at $14.30. Prior to extending there, bulls must flip $11.70. If $8.40 is lost, the entire structure could be a larger rangebound market, if not a bullish correction that would imply further declines. Either way, $7 is strong support.

Source: SpreadEx / Golden Ocean Group

Key Takeaways

Recent airstrikes against the Houthi rebels in Yemen have failed to deter attacks on shipping vessels in the Red Sea. The Houthis have struck both a US vessel in the Gulf of Aden and a US warship, demonstrating their unwillingness to back down. As a result, shipping companies have been advised to avoid the Red Sea route, and many vessels have opted for the longer route around Africa. However, some companies still intend to use the Suez Canal, hoping the situation will stabilise soon. The higher shipping costs and freight rates caused by the tensions are seen as positive for major shipping lines, with analysts expecting profitability to rebound for container liners in the first quarter due to the increased rates.