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.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Shipping is Sailing Against Trade Winds, and Other Protectionist Concerns

With the dry bulk freight market limited to bouncing along the bottom for now, most of the resources – when not afforded for ships to (figuratively) stay afloat – are devoted at buying dry bulk vessels at cheap prices in the secondary market. It seems that everyone is convinced that asset prices at present offer a unique investment opportunity not to be passed up. After all, freight market weaknesses come and go, but markets of cheap ships do not present themselves often.

The weakness of the shipping markets is mostly attributable to tonnage oversupply, whereby there are just too many vessels chasing few cargoes. In general, demand for vessels – that is trade and cargoes to be transported – is only un-inspiring at present. The main concern is that there are many more ships than cargoes, but trade is still existent, just not robust enough to employ all available vessels. Too many vessels were built because of too much speculative investment in shipping, and also because of too much available liquidity and that, at a very low cost.

Most potential buyers of ships believe that there will be tonnage equilibrium as soon as older vessels and less efficient vessels find their way to the scrapheap. Thus, effectively, it’s a matter of timing and awaiting for the immutable laws of nature to work their unique rejuvenation of the markets by way of aging. After all, it often has worked out just like this in previous business cycles in shipping. It’s true, newbuilding orders have diminished in the last year while scrapping has been as strong as it has been in the last seven years; thus, tonnage supply is coming down, and that’s easy to verify in most cases.

Demand for shipping is a much more convoluted analysis since there are too many commodities and cargoes and trading patterns, and permutations thereof, to analyze. Then, one has also to take into calculation macroeconomic factors, political events, possibly technological developments, changing consumption patterns, trade barriers, etc, and all of them, to varying degrees of seriousness, affect demand for shipping. Quite frankly, often analyzing demand for cargoes (and shipping) in detail resembles the so-called the Butterfly Effect model.

Trying to view demand for shipping from 10,000 feet, one has to identify the long-term trends and ideally be on the ‘right side’ of those trends. As a rule of thumb, growth for international trade is twice as much as economic growth (GDP), as commodities, raw materials and finished products have to pass international borders often to reach the end consumer as the economies grow. Further, growth for international trade declines much faster than economic growth in decelerating economies, while growth for international trade increases much faster when economies grow. It’s intuitive, as, when an economy is slowing down, need for trade comes down fast, while as an economy starts growing again, there is fast demand for trade for products to be brought together and reach the end consumer. The fact that the IMF and OECD keep revising downwards world economic growth has not escaped the shipping markets that have been trading at almost all time lows.

While we all hope that there will be robust economic growth soon enough to save shipping, one has also to pay attention to the fact that international trade thrives when there is a receptive ground and open-minded trading partners. And, international trade, much glamorized by free-market economists, demonstrably has been exerting a positive outcome on our societies. But often, international trade has to get clearance by politicians, and from their voters. International trade agreements can formalize trading relationships among geographic regions or bloc of countries, and make trade easier to happen. While the World Trade Organization (WTO) is the large overreaching umbrella for trade worldwide, trade agreements can be negotiated at local levels by countries or group of countries. The EU started as a quasi-trade agreement and has evolved into a political union (its end results to be seen, however), while most readers in the US can recall NAFTA, the North American Free Trade Agreement, between Mexico, USA and Canada, and its eventful passing despite the ‘giant sucking sound’ warnings of jobs lost to the south borders of the NAFTA countries.

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Shipping keeps an eye on trade patterns

On a macro-level, one today has to notice a wave at the international level whereby voters have been turning much more ‘isolationistic, nationalistic and ethnocentristic’ and against (free?) movement of people and cargoes. For instance, just recently British voters opted for Brexit, which, while driven by desire against free movement of citizens within the EU, eventually will have to have implications on movement of goods, if and when Brexit gets to be implemented. Most definitely this is not a positive development for trade and for the shipping industry, especially given the fact that Great Britain has historically been a beacon for openness and trade, being an island nation with long tradition in and institutions for maritime and trade. Moving on to the Continental Europe, there have been reports that in the State of Bavaria in Germany there is very strong anti-trade sentiment against CETA, the Comprehensive Economic and Trade Agreement, between the 28-nation EU and Canada, finalized in 2014. And, in the USA, while the Obama administration has spared no efforts to fast track the Trans-Pacific Partnership (TPP), both presidential candidates – including his presumptive legacy preservationist Hillary Clinton – have come against the trade agreement. One cannot be sure of the outcome for these trade agreements, especially since they seem to be driven by voter angst against migrants from poor regions and/or possibly terrorist risk underlining, but the writing on the wall is clear that free trade is a ‘zero sum game’. Irrespective of one’s political or philosophical inclinations, trade and shipping will have to face some headwinds, at least in the short term.

Intra-region free trade agreements (FTA) such as ASEAN (Association of South-East Asian Nations), RCEP (Regional Comprehensive Economic Partnership), MERCOSUR and UNASUR in South America seem to be faring better, but these being localized agreements, their big impact on global trade (and shipping) is rather limited.

If there was ever any doubt on the beneficial impact of trade to shipping, in the following graph we present trade data from the WTO website, for total world exports and for exports from the USA and China starting in 1980 (in 2015 US$ value). China became formally member of the WTO at the end of 2001, and it’s apparent that trading values have increased for the world, USA and China since 2001. Of course, increased growth in trade since 2001 cannot totally be attributed to China’s ascension to WTO, but there is no doubt that China has been the primary driver. On the same graph, on the right scale in red, the annual averages for the Baltic dry bulk market (BIFFEX and BDI) are shown, and it’s clear that since 2001, the BDI had been trading – for most of the time – at a different plateau altogether.

Trade and BDI since 1980 (large)

‘One great wowing sound’ for shipping following China’s acceptance to WTO.

There is no dispute that shipping asset prices present great investment opportunities and that eventually enough ships will be scrapped to reach equilibrium with demand. On the other hand, the demand side of the equation has to be given proper consideration, in the light of present anti-trade sentiment in mostly the western world.

And, as a disclaimer, trade and trade agreements in this article are being viewed strictly from the point of view of a shipping man without imparting any political judgment or inclination, but bearing the strong belief that all trade is good for consumers and citizens and the society and culture, not to mention good for shipping, too.

Trade is not a zero sum game.


This article was first published on Splash24/7 under the title ‘Where’s the Growth in Trade?’ on August 8th, 2016. On August 14th, 2016, following A.P. Moeller’s quarterly report, Bloomberg published an article titled World’s Biggest Shipping Firm Warns Against U.S. Protectionism’.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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