The Maritime Industry Hopes for Silver Lining as Talks of Tariffs Escalate

Talk of possible trade wars has kept executives in a wide range of industries at the edge of their seats; this is even more true for people in the maritime industry, which  afterall is the hauling provider on a global scale. Trade wars imply lower trade volumes, which would be a monumental concern to the shipping industry.

The New York Stock Exchange. Image credit: Karatzas Images

Intuitively, trade wars are bad for the shipping industry; tariffs and higher barriers to trade result in lower trading volumes that lead to lower demand for ships, and that, in turn, results in lower freight rates. However, nothing is as simple anymore in today’s world: higher tariffs can also lead to disruption of established supply chains, which, in the short term at least, can mean longer and less efficient paths between manufacturers and buyers, which could mean a lengthier than normal supply chain.  Talks of dismantling NAFTA, for instance, has led Mexican importers of grains to substitute imports from the U.S. with imports from other countries, primarily from countries in South America. U.S. grains to Mexico are mostly shipped from the ports of Texas and Louisiana to Veracruz in Mexico in a week’s long sailing voyage; however, Mexican imports from South America take twice as long to transport, and, all being equal, this shipping trade has been beneficial for the (international) shipowners.

Trying to assess the impact of possible trade wars on the maritime industry and try to plot an optimal strategy are in the minds of small and large shipowners alike worldwide. If a shipping company, for instance, was planning for an expensive fleet renewal, the potential of trade wars likely to be a cause to chart a new course of action. Who wants to be investing in expensive new ships when the prospects are less than rosy?

There are many permutations of possible scenarios of international trade wars as there are many variables; mostly, however, there are many theories and lines of thinking, as well as egos involved, and also grave political implications to consider, or ignore that could affect potential outcomes. On one extreme, there is the scenario for maximum tariffs on an international scale that could lead to a complete collapse of trade; at least for now, the probability for such a catastrophic scenario seems slim, thankfully. Focusing on the more likely scenario of small to moderate tariffs but where logic and economic sense would still drive decisions for the most part, it seems to be a more probable scenario.

A consideration to ponder is that the U.S. strategy so far seems targeted on imposing tariffs mostly on finished-products imported to the country, and such tariffs seem to be encompassing many industries and also being most disruptive to the supply chains; for example imports from China often have been sub-assembled in other countries and the supply chain in these countries is impacted too. China, Canada and Mexico so far seem to apply a more surgical approach by placing tariffs on mostly raw materials and commodities that concentrated political impact and relatively small collateral damage to the supply chain.

International trade bridging the seas… Image credit: Karatzas Images

Under a probable scenario of moderate tariffs and under the current modus operandi, different segments of the shipping industry will experience a varying degree of disruption.  The containership industry likely to experience a direct negative impact as import containers are mostly filled with consumer and other end products. Head-haul trade routes from China, whether to the West Coast or via the Panama Canal to the East Coast of the U.S. seem to stand at bull’s eye, but the impact  will percolate to other trade to Europe and other smaller traders localized trades. Earlier in the summer, there has been a noticeable increase of input volumes in U.S. ports and strong export data have been reported out of China; this positive impact has mostly been attributed to seasonality, as some of the peak season volumes were moved forward to dodge the first round of tariffs imposed in early July. The heightened trade due to timing considerations is expected to taper off and eventually volumes to tick downwards. Liner containership companies with their modern, huge boxships, especially those with focus on the China to North America trade, stand to be impacted most.  Localized containership markets that feed on the main trading routes had been the bright spot of the long-challenged containership market in the last couple of years, but now there are signs that smaller feeder containerships are getting off-hire at an alarmingly high rate.  It seems that pro-actively charterers opt to stop renewing charters in anticipation of reduced need for trade.

One of the great surprises in the energy world in the last decade has been the success of the shale oil production in the U.S. that potentially can make the country a net exporter for oil. Energy seemed to be getting a free pass from tariffs, but with escalating threats, now it seems to be fair game as well.  China and Far East are the biggest consumers of oil these days, and slowly the success of the shale oil in the U.S. was forming into a new trade of exporting crude oil from Corpus Christi in Texas to China via supertankers (VLCCs); this potentially could had been a game-changer trade for the crude oil tanker market given the large ton-mile numbers involved and also given the overall disruption in the trading patterns for VLCCs. This trade now seems in jeopardy, although just earlier in the week it was announced that Trafigura was still considering building a deep sea oil export terminal in Texas; but again, just this week, Chinese stated-controlled Unipec was suspending oil imports from the U.S., rattling the crude tanker market. To the extent that long term contracts will be honored or competitive pricing for U.S. shale oil can be obtained, there is a scenario of petroleum product tankers benefiting from the trade as well, whereby refineries will be focusing more on export trades. The U.S. natural gas LNG trade could also be adversely impacted by tariffs, and this is most unfortunate as the LNG tanker market desperate needs some hope in chronically oversupplied market; in addition, U.S. LNG export infrastructure is still being built up, and talks of tariffs possibly will stall some of these much-hoped-for projects.

The dry bulk market seems to be least impacted from talks of tariffs as the trade concerns mostly commodities and raw material used in the first steps of industrial production. For now, these trades seem safe, and, in the case of the grain trade to Mexico mentioned earlier, and grain trade worldwide, this would be a downright positive development for the shipping industry. Tariffs on Chinese steel will eventually catch up with China’s imports of coal and ores from Australia and Brazil and could negatively affect big-sized dry bulk vessels (capesize and Newcastlemax vessels).

The shipping industry is impacted by a wide range of factors, and the impact of tariffs is not isolated or easily quantifiable, and definitely at this stage, still much is unknown on how tariffs will be applied in terms of products, levels, reciprocity or exemptions, etc; on the other hand, no doubt some shipowners will find talk of trade wars a convenient excuse to blame for the industry’s and even their own companies’ structural problems.

Shipowners internationally have maintained a sanguine approach to talks of tariffs and trade wars. To a certain extent, this is understandable as the shipping industry has proven to do better at times of conflict, high uncertainty and interrupted trading patterns. On the other hand, continuous talk of trade wars can sap investment and trade sentiment, and trading volumes, that cannot be good for shipping. Or, anyone else.

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