According to Wikipedia, “freedom of the seas” is a principle in international law and the law of the seas. It stresses freedom to navigate the oceans. Over the last 13 years Sigma has posted several blogs discussing the increase in the potential for disruption at obvious choke points, including, but not limited to, Gibraltar, Hormuz, the Strait of Malacca, and the Suez and Panama canals.
Now we have a real-time example of how a relatively small country can hold the world hostage.
Obviously, there is nothing investors can do about this disruption of international trade. What they can do is to consider the probable consequences and how they may affect their portfolio strategy.
Investors should note that there are, to some extent, workarounds for most of these potential disruptions, but there is a wide range of effectiveness and cost. For example, the ship accident that blocked the Suez Canal for 6 days in March 2021, triggered various reactions from shippers, all of which resulted in delays and increased costs. The two primary approaches were to just wait, or alternatively, redirect cargos around South Africa.
Most choke point closings can be offset by rerouting cargos. However, this will generally result in delays and higher costs, all of which will probably end up increasing prices. Hormuz presents a different problem, as there are no alternative ocean routes. Currently, some cargos are being moved by truck from the Persian Gulf to the Red Sea. New pipelines and perhaps even rail are under consideration as longer-term answers to the geography of Hormuz.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
