Suez Canal congestion to impact rates ‘for weeks, if not months’: Analyst

Randy Giveans, Jefferies SVP of Maritime Shipping Equity Research, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss the latest on the Suez Canal traffic and impacts of the delays.

Video Transcript

KRISTIN MYERS: Now, maritime traffic through the Suez Canal has begun again. Now that the cargo ship Ever Given was removed after it ran aground and became lodged across the important shipping lane almost a week ago.

Let's bring in Randy Giveans, SAP of maritime shipping equity research at Jefferies. So Randy, I'm curious to know ultimately what the larger implications of this huge delay is going to be to global trade, if we can expect, for example, prices to be raised on goods over the coming days and weeks.

RANDY GIVEANS: Absolutely. Hey, thanks so much for having me. And as you mentioned, right, after around five or six days of being stuck there-- and fitting, on the second day of Passover, the ship has been freed from its bondage in Egypt. So now you are seeing the congestion that built up over the last four or five days getting up to 400 vessels both on the north side and the south side of the Suez starting to get a little bit of leave.

Now, that said, that will still take two, three, four days to get this 400-vessel congestion kind of back through the canal. We've already seen some diversions, right? These very large container ships taking cargo from Asia to Europe, instead of going through the Suez Canal, they said, we do not want to risk it. And they started diverting around South Africa, adding anywhere from 7 to 14 days to the voyage.

So these increased costs are certainly going to be trickled down and felt by the consumers. Now, we don't think it's going to be a huge inflationary pressure because it is relatively a short-lived kind of congestion and phenomenon. That said, the market is already very strong, right?

You've seen these shippers, kind of the importers, paying twice to three times as much for the shipping expense for any kind of cargo, any kind of commodity over the last year, right? Rates have gone very high. A lot of it is due to increased consumer spending on these containerized goods, on these finished products, right?

You're not spending your money on travel and going out to eat and concerts and sporting events. You're spending it on appliances and Pelotons and clothes and Amazon knickknacks, right? So that demand is keeping shipping rates very high. And we've heard from the liners already, the large ones like Maersk and MSE, and even Zim, that this congestion is going to see impacts for weeks, if not months, on rates and on line rates, which is also good for the container ship owners themselves, Danaos, ticker DAC, and Global Ship Lease, ticker GSL.

So all that being said, you'll see a little bit of price upticks. But you've already seen that over the last few months as a consumer.

ALEXIS CHRISTOFOUROS: You know, Randy, I know about 10% to 12% of global trade flows through that critical Suez Canal. You're talking about these higher rates. Tick off for us some of the companies or the sectors, the industries that were actually the winners from this huge cargo tank being stuck there for six days.

RANDY GIVEANS: Yep. Certainly, pretty much anything on international commodity shipping. We mentioned the container liners, the container shippers, like Zim and Danaos on the ship owner side. But also dry bulk, right? A lot of dry commodities go through that Suez Canal. Those are companies like Star Bulk Carriers, ticker SBLK, Eagle Bulk, EGLE, and Genco Shipping, GNK.

Also, as you can imagine, the tanker trade is massively impacted by this. All of the crude coming out of the Middle East going up through the Suez Canal into Europe and then some of the refined products coming out of Europe and the Mediterranean area going south through the Suez, naptha, for example, over to the far east. On the tanker side, companies like Euronav, URN, International Seaways, INSW, Scorpio Tankers, STNG, and Ardmore Shipping, ticker ASC, all of them benefiting.

And just to give you a little example of this. For example, if on the highway, there was a massive traffic jam, the taxis who had passengers sitting on the highway are still getting paid for that voyage. But also the taxis that are not on that highway can start charging more to their passengers because there's fewer taxis available. They're all tied up on that highway in the traffic jam. And that's the same thing we're seeing on an international scale with these very large vessels, the ships that are moving these commodities globally.

KRISTIN MYERS: Randy, I think this really highlighted just how fragile some of these supply chains really are. Are there lessons that are going to be learned from this, perhaps changes that are going to be made going forward?

RANDY GIVEANS: Absolutely. And we've seen it before, maybe not to the extent of a ship getting stuck in the Suez Canal, pretty unprecedented. But we've also seen some weather disruptions. We've seen piracy. We've seen attacks, vessels getting shot with missiles in the Arabian Gulf.

So a lot of people take for granted commodity shipping and the supply chain and this kind of just-in-time inventory system. But with all of these kind of wrenches that have been thrown at the industry over the last months and years, really, you're seeing a little more near-sourcing. You're seeing a little more inventory building because people don't want to be fully exposed to one route or to one producing nation or region.

So that's why you've seen a little more diversification of where importers are taking in their goods, be it from containerized goods to dry bulk commodities to tankers, right? And also on an accident like this, it certainly brings into question the safety of these very, very large container ships, right? These things are four football fields in length. The Empire State Building floating, right?

So you might have some more speed limits that are being enforced on a global scale, slow down your speeds. But right now, everybody's in such a rush. You want your Peloton today, not six weeks from now, right? So these containers know that. And these freight forwarders and shippers know that. So they're going full steam ahead. So that might be a lasting impact as well is kind of a requirement to slow down, especially through these very important waterways like the Suez Canal.

ALEXIS CHRISTOFOUROS: Hey, Randy, I'd love to know the effect this had on gas prices. Or have we seen it yet? Because I'm checking AAA, across the country, gas prices are actually down about $0.02, averaging $2.86 a gallon for unleaded. So have we not yet felt the impact at the pump, or are we not going to?

RANDY GIVEANS: Correct. I would say not yet and maybe not going to as it pertains to the Suez Canal. We had very high inventory levels already going into this kind of disaster last week. Demand has been relatively low. People aren't driving. I'm down here in Houston, Texas. And there's usually terrible traffic, right? Now it's just bad traffic.

So fewer people are driving. Certainly, fewer people are traveling. Just look at kind of jet fuel demand and how many planes are in the skies, right? So demand is low. Inventories are still pretty high because of that. So with those kind of factors at work, you have some margin. You have a little bit of room for something like this that is not blowing out prices, and you're going to see gasoline prices going to $4 or $5 a gallon immediately.

That said, as demand continues to improve-- the US, we're getting vaccines. Texas is really vaccinating people. All these other states are as well. Europe's doing the same thing. So as the vaccine rollout expands and as demand for these end-user commodities increases, you'll certainly feel it at the pump, right?

Now, there will be some production response. OPEC will start bringing back production. Refineries will start increasing their utilization and producing more gasoline, jet fuel, diesel for the end user. That said, we see prices staying here if not going higher in the coming months as the economy reopens.

KRISTIN MYERS: All right. Thanks so much, Randy Giveans, senior vice president of maritime shipping equity research at Jefferies.