Products available in e-commerce stores, local marketplaces and other venues go through multiple stages of the supply chain to reach your front door. Any imbalances in this supply chain can prolong the delivery of goods and impact prices.
Changes to the supply chain don’t only impact the delivery of goods. For shipping stocks, in particular, any variances to regular operations can adjust revenue and profit margins.
Investors who can spot supply chain trends can capitalize on changes by modifying their exposure to shipping stocks.
Understanding how these assets correlate with supply chain issues, such as the pileup of ships in the Panama Canal due to the region’s near-record drought, can help investors make better decisions:
— How the Panama Canal drought impacts the supply chain.
— How will the Panama Canal drought affect shipping stocks?
— Should you buy shipping stocks now?
— How debt affects shipping stocks.
— Is a solution within reach for the Panama Canal bottleneck?
— What other routes can shippers take?
How the Panama Canal Drought Impacts the Supply Chain
The Panama Canal is enduring a drought that has reduced the amount of precipitation and lowered water levels. This impediment led authorities to implement water conservation tactics, such as limiting traffic and restricting cargo weights. The initiative means fewer ships can travel through the canal at the same time, leaving a massive traffic jam in the process.
The Panama Canal is one of many components that make up the supply chain. However, it’s a critical piece of the pathway that allows goods to reach your home and local stores, says Robert Handfield, professor of supply chain management at the North Carolina State University Poole College of Management.
“The Panama Canal is a critical element in the global supply chain. It is a major channel for ships,” Handfield explains. “At the moment, water levels are so low, it is taking much longer for ships to pass through, up to three to six days, which is causing bottlenecks.”
If ships take longer to reach the canal, goods will take longer to arrive on the dock. A growing line of ships waiting in the Panama Canal can trigger a supply shock that increases the prices of goods. Many commodities go through the Panama Canal; so far, the disruption to containerships has been surmountable, but it could intensify as the holidays approach.
How Will the Panama Canal Drought Affect Shipping Stocks?
Shipping companies face some uncomfortable choices. The way these companies manage rising costs with the opportunity of heightened revenue will impact their bottom lines.
“Shipping companies will have freight on the water longer, which means that they will be charging more for their freight,” Handfield says. “If they ship their materials along alternate routes that are much longer (around the Cape of Good Hope), this will also cost a lot more, and they may need to go to different ports.”
Shipping companies may post higher revenue numbers due to the Panama Canal drought. Some companies can also post higher profits by passing the heightened cost onto their consumers.
Higher costs that end up making their way to consumers will contribute to inflation, which can reduce demand for products. According to the International Monetary Fund, a doubling of shipping costs causes inflation to increase by about 0.7 percentage point.
Lower demand is a risk for shipping companies, especially overleveraged ones. Fewer orders leads to insufficient liquidity for financial obligations. Higher freight costs can compensate, but investors should monitor whether the compensation is sufficient for the investment opportunity.
Should You Buy Shipping Stocks Now?
Investors look for opportunities, and if you look deep enough, you can find them in any market. While supply chain issues can accelerate inflation and present other concerns, shipping companies face a complex amalgam of advantages and disadvantages.
Investors should monitor shipping companies’ financial performance in the upcoming quarter to see how they navigate rising costs with higher prices. These companies may post higher revenue numbers, and some may also have higher profit margins, depending on how they raise prices and mitigate costs.
One of the advantages shipping stocks provide is high dividends. Many of these stocks have higher yields than most of the S&P 500 companies. Some of these companies offer elevated special dividend payments when they report significantly higher net income.
However, each asset also has its fair share of risks. Many shipping companies use leverage to build their fleets. Leverage can help shipping companies expand their market share. Rising revenue that offsets higher costs can increase profitability and help the business model. However, higher prices can also reduce demand, hurting revenue and profits in the process. Demand has to stay steady or grow during the current supply shock to reward investors who buy shipping stocks.
How Debt Affects Shipping Stocks
Shipping companies with less debt, especially less short-term debt, are better positioned to navigate the choppy seas. Investors should understand the two types of liabilities, short- and long-term debt, when assessing shipping stocks.
Short-term liabilities represent financial obligations that are due within the next 365 days. Long-term liabilities are financial obligations due in over 365 days. Investors should review a shipping company’s short-term assets to see if it can cover short-term liabilities. Long-term assets provide a picture of how many resources a shipping company has to cover long-term liabilities.
Companies that are overleveraged rely on a stable economy to make their loan payments and operate their fleets. Weakening economic conditions may force shipping companies to sell some of their vessels at lower prices and incur losses. These sales would also reduce a shipping company’s total capacity for its customers.
Investors should assess their risk tolerances and review their portfolio allocations before considering shipping stocks.
Is a Solution Within Reach for the Panama Canal Bottleneck?
The drought in the Panama Canal has slowed down the supply chain. However, with summer in the aft view, shipping companies are moving into the cooler months of the year. Reduced temperatures won’t provide an immediate resolution to the drought, though. The Panama Canal is warm throughout the year due to its proximity to the equator, which gives the drought more staying power.
“More than 110 ships are waiting to pass through the Panama Canal. Experts say this problem will likely last through 2024 and will not be solved anytime soon,” Handfield says.
Consumers can expect elevated freight shipping costs to last. While it’s always possible for the situation to get better sooner, the current projection is almost a year and a half.
Shipping stocks present opportunities for investors, but the investment thesis depends on how these companies balance rising expenses and if demand stays afloat.
What Other Routes Can Shippers Take?
The Panama Canal is a critical trading port that has established itself as a core component of the supply chain. Shippers have other routes available that will take longer, but the ongoing Panama Canal drought makes them more attractive.
Shippers may consider the Suez Canal in Egypt or the Cape of Hope in South Africa. These routes take more time and are normally more expensive, but now they may be cheaper alternatives. However, those routes aren’t as feasible for goods destined for the Americas due to geography.
Mexico has been working on the Isthmus of Tehuantepec trade corridor, which connects the Gulf of Mexico and the Pacific Ocean, as a viable alternative to the Panama Canal. The $4.5 billion project wouldn’t uproot the Panama Canal as a corridor, but it gives shippers a nearby choice. The corridor went through a test run on Sept. 17 and may be ready soon. With experts predicting the Panama Canal drought to likely last through next year, the progress of Mexico’s corridor is a welcome development for shipping companies and their investors.
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How Panama Canal Supply Chain Issues Impact Shipping Stocks originally appeared on usnews.com