Is ZIM’s sharp share price rise due to a short squeeze?

Is the sharp rise in the share price of Israeli company ZIM Integrated Shipping Services Ltd. (NYSE: ZIM) in recent weeks due to a short squeeze and is it likely to continue. Towards the end of November, the container shipping company’s share was being traded at a low point of $6.6 and it has since risen just over 50% to $10.01, even though the business environment in which it is operating has become very difficult.

As a container shipping company, operating many routes between Asia and North America, as well as to and from Israel, ZIM has been suffering from the Houthi threat in the Red Sea. In response to the attacks by the Iranian-backed Houthi rebels, shipping companies have increased costs and rerouted away from the region, and instead of sailing through the Suez Canal, they are compelled to circumnavigate Africa.

ZIM came into the current crisis in a complex situation. After being the most profitable company in Israel in recent years, this year the company began recording losses, which amounted to $2.5 billion in the first nine months of 2023, among other things due to accounting reduction in the value of its assets, following the deterioration in the operating environment. Consequently, ZIM’s share price fell from a market cap of $10 billion at its in 2022, to a market cap of about 800 million dollars. After the recent increase in the share price, ZIM’s market cap is $1.204 billion.

Some believe that the rise in the share price this month is due to short trading in which investors gamble against a share by borrowing shares and selling it on the open market, planning to buy it back later for less money. When such traders wish to close their position in a certain share, they are required to buy back the stock. But when there is a large influx of short traders buying shares of the same company, the move leads to a sharp jump in the stock – a phenomenon known as a short squeeze.

According to Barron’s website, ZIM has a particularly high amount of short trades, with about 25%, or one share in four, of its stock in short positions at the end of November.

Popular for short trading

Psagot Investment House senior equity research analyst Yoav Burgan says that ZIM’s shares, perhaps contrary to expectations and different from its major European rivals, is seen as a retail stock in the US, which means that it is traded by many private investors (indeed, you can find quite a few mentions of it on social networks such as Reddit). “Many like to short it, and the short balances are high. As a result, even the smallest sound can create a short squeeze and force short traders to close their position and create a sharp upward move. This is what happened,” he believes.

Burgan observes, “The entire market is still in a difficult situation. The forecasts for the maritime transport industry in 2024 are very negative. In September-October, maritime transport rates reached low levels. At the same time, the balance in the industry is not in a good situation in terms of the number of ships, with excess supply developing for 2024.”

And then along came the Houthis

Burgen: “The Houthis story has caught the industry at a low-point. You don’t need much to spark a mini-rally in the sector. Even before the Houthis, there was a certain problem with the level of water in the Panama Canal that was causing container ships to divert and now the Houthis have created another bypass.”

Dramatic timing

Why does a negative situation like the Houthi attacks lead to a rise in share prices?

“It has begun to push up shipping prices and ZIM has also begun to put up prices. So there is already a certain rise in prices, sometimes even quite sharp, because we had reached a low point and on some routes prices have risen more than 20%. On top of that the timing of the rises has created an opportunity, or problem, depending on which direction you look at it from. On January 1 annual shipping contracts are renewed. If there is suddenly a jump in prices that might reflect on the annual contracts for 2024. It’s possible that if this story had happened in the summer or at the start of the year, the reaction of the share price would have been less sharp.

“Beyond that there is the element of the relationship between demand and supply. As the distances of routes become longer (following the abandonment of the Suez Canal and sailing around Africa), the companies will need more ships to meet demand. So the problem of excess supply in solved for now.”

Is there more upside in ZIM’s share price?

“There certainly is. As long as this continues, if the opinion begins to be formed that this is a permanent situation, it will reflect positively on the entire sector.”

However, Burgen warns that the price increases are not necessarily sustainable. He says, “The story of the Houthis’ threats may not last long. It is starting to ‘hurt’ too many players – the Americans, the Europeans, the Chinese, the Indians. They will apply pressure, and the story could calm down quite quickly.”

Published by Globes, Israel business news – en.globes.co.il – on December 21, 2023.

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