Westports Holdings Bhd executive chairman and group managing director Datuk Ruben Emir Gnanalingam.
PETALING JAYA: The rising geopolitical tension in the Middle East could provide some relief for the transportation and logistics sector, which benefits from higher charges, but could be inflationary when passed on to end-users.
Shipping lines and airlines look set to see gains as the conflict has led to higher sea-and-air freight rates, but analysts also warn disruption of shipping lanes will increase unit costs that will translate to higher prices for consumers and logistics providers.
The growing threat of spillover from the Gaza war, especially the threat to international commercial shipping via the Red Sea route and the Suez Canal, has seen global carriers like Maersk suspend sailing through the route till further notice.
The move to re-route vessels through the Cape of Good Hope off south Africa by companies like Maersk and Hapag Lloyd came with newly introduced surcharges for using routes to or from the Middle East, for shipments between Europe and Asia or calling on the ports in the region.
Fitch Ratings noted that re-routing around Africa can increase travel time from the Far East to Europe by 50%, which could reduce effective global container shipping capacity by 10% to 15%.
“Container ships could increase vessel speed and reduce the number of port calls to counteract longer routes. Current levels of idle capacity are already low.
“However, we do not expect disruptions to last long enough to have a meaningful impact on global shipping’s supply-demand balance in the medium term,” the international rating firm stated in a recent report.
It said container shipping is likely to enjoy the largest freight rate increases from the event, followed by bulk carriers. Tankers, many of which originate from the Middle East, are already enjoying high rates, so rises may be limited.
Fitch believes air cargo rates may also benefit from demand for time-sensitive shipments.
About 50 ships pass through the Suez Canal daily, evenly split between container ships, tankers and bulkers.
“We estimate that 25% to 30% of global container shipping volumes pass through the Suez Canal, most of them serve trade between Europe and Asia,” it said.
Meanwhile, Westports Holdings Bhd
executive chairman and group managing director Datuk Ruben Emir Gnanalingam expects a limited impact from the re-routing of operations by major shipping groups.
“I do not believe there will be much impact to services calling Malaysia. Transit times for goods towards Europe may take longer due to the diversion (via the Cape) and freight rates may rise accordingly.
“Transit times are likely to increase between 10 and 14 days in one direction. Costs really depend on supply and demand and how long this situation lasts,” he told StarBiz.Other analysts also generally agree on the point, suggesting there might be some gain to be had as well.
“It is unlikely that local sea port operators will be negatively affected. Conversely, longer travel times translate into higher meal costs and other ancillaries that increase sea port revenues.
“In some cases, air cargo will become a more viable option. However, the winners from air cargo are likely to be few and less pronounced,” said Khair Mirza, executive director and chief executive officer of Integral Capital Pte Ltd.
Furthermore, Fitch clarified that not all container ships are being diverted from Suez while noting it expects supply of container shipping capacity in 2024 to outstrip demand growth by about four percentage points, which is bound to put pressure on freight rates.
An escalation of the conflict would be a major concern but for now, the bigger concern is the deteriorating outlook for the shipping sector, mainly reflecting the continuing challenges for the container shipping that has more supply capacity than demand, which could lead to year-on-year worsening of the results.
Fitch foresees the easing of supply chain pressures will result in further earnings weakness for container shipping companies in 2024, despite the risks of adverse dislocations and the sustained impact from the war.
A potential increase in trade protectionism could also see changes in trade flows and limit demand across a few high-margin or critical products.
Hence, within the transportation and logistics sector space, analysts seem to favour aviation sector players like Malaysia Airports Holdings Bhd (MAHB) and logistics service providers like Tasco Bhd, Perak Transit Bhd and Swift Haulage Bhd.
RHB Research, in a report yesterday, said MAHB looks set to benefit from the sustained recovery in international tourism at its Malaysia and Turkiye-run airports, helped by the new visa-free entry rule for Indian and Chinese travellers and increased mobilisation of airline capacities.
“We also look forward to the resolution of regulatory overhangs in the first quarter of 2024,” the research house said.
This concerns the new operating agreement, encompassing development capital expenditure, expansion planning and benchmark passenger service charge rates for its domestic operations, which remain undecided.
RHB Research expects the new visa-free entry rule will boost inbound numbers from the two countries and drive up MAHB’s income.
Apex Securities Bhd, meanwhile, is “overweight” on the transportation and logistic sector due to the undemanding valuation.
It said valuation of the logistics sector is considered attractive at this point, trading at 16.1 times price-earnings multiple (18.2 times historically), and at the tail end of the global central bank interest-rate hike cycle and expectations of a gradual recovery in the global economy, particularly in China and the semiconductor market.
The research firm likes Tasco due to its positive earnings growth and Swift Haulage on expectations the domestically-driven logistics player will benefit from the resilience of the local economy and the recovery of external trade.
