China's Monitoring of Philippine Supply Run: Implications and Opportunities for Investors

China's recent monitoring of a Philippine supply run to a grounded warship on the disputed Second Thomas Shoal has raised geopolitical tensions in the South China Sea. This article explores the implications of this development and potential investment opportunities that may arise from the situation.

The South China Sea is a critical waterway for global trade, with over one-fifth of global trade passing through it (UNCTAD, 2016). The ongoing dispute between China and the Philippines over the Second Thomas Shoal has the potential to disrupt shipping lanes, leading to increased insurance costs, rerouting, and potential delays, which can negatively impact the economies of both countries and the broader region.

Economists have generally been hesitant to put specific numbers on the impacts of the disruptions, though previous research by the International Monetary Fund found that when shipping costs double— as they have in the past month—it can cause global consumer prices to rise by 0.7 percentage points in the coming year. The size and timing of that effect, however, would depend on how long the blockade lasts.

The business and investment impact varies by sector. Companies that ship products or buy foreign components, for instance, are likely to feel pressure because of rising freight rates. About 21% of global container ships travel through the South China Sea, according to Jefferies.

While the disruption to the South China Sea has forced companies to reroute ships, some have benefited from the rise in freight rates. Maersk and Hapag-Lloyd, for example, have seen their stocks rise since the beginning of the year. Maersk's stock is up 32% since bottoming in November, while Hapag-Lloyd stock is up 49% from its December low.

Other kinds of companies are affected too, with the Wall Street Journal reporting that mining giant BHP will divert shipments, potentially impacting materials used in industrial applications. Oil and liquefied natural gas tankers are somewhat less affected than container ships, according to Jefferies. Some oil tankers have continued to traverse the sea, but not all of them. The shipping issues are one reason international oil prices have risen in recent weeks.

It's also created some investment opportunities. In particular, oil product tankers classified as long range II, or LR2, have seen their rates jump to their highest levels in four years, according to Platts. In 2022 and 2023, rates averaged $40,000 a day. This past week, they crossed $100,000, according to Jefferies. Scorpio Tankers owns more of the tankers than any other company and should see significant gains as rates rise, according to Jefferies analyst Omar Nokta. He boosted his price target to $90 from $74 on Friday. That implies 26% upside for the stock, which closed on Friday at $71.65.

In conclusion, the ongoing dispute between China and the Philippines over the Second Thomas Shoal has significant potential economic implications for both countries and the broader region. While the situation may present challenges for some sectors, it also creates opportunities for investors in the shipping and energy industries. As the situation evolves, investors should monitor the geopolitical landscape and adjust their portfolios accordingly to capitalize on potential investment opportunities.