LectureSHIP: Tariffs and the Ox

Erling Naess, a Norwegian shipping tycoon, once said, “God must have been a shipowner, he placed the raw materials far from where they were needed and covered two thirds of the earth with water.” If only it ended there. Instead, governments add new challenges to the equation by imposing tariffs and other policies that bring serious disruptions and extra miles to trade routes. President Biden recently signed an executive order revoking Keystone XL’s permit, shutting down the construction of the pipeline that was intended to supply heavy Canadian crude to the US Gulf Coast (USGC). In its place, Canada will now need to rely on marine transportation to export its crude oil, much of which is now expected to be sent across the Pacific Ocean to Asia rather than to the USGC. Additionally, USGC refineries are expected to in turn increase imports of heavy crude from the Arabian Gulf. Under former President Trump, tariff escalation between China and the United States dominated the headlines, with grains and containerized trade being affected the most. Soybean exports from Brazil to China, which surged in 2018, displaced shipments from the United States, again bringing additional ton-mile shipping demand.

In December 2019, in Wuhan, a virus quickly spread to the rest of the world throughout the ensuing year. Outraged, China’s significant trading partner, Australia, insisted on an independent investigation into the origins of the virus. An agitated China retaliated with a litany of trade sanctions and tariffs on Australian barley, coal, cotton, beef, wine, as well as many more commodities. Australia accounts for 40% of the world’s malting barley, well over half of which goes to China, the world’s biggest beer producer. With the reduced trade with one of their top trading partners, barley is piling up in Australia and will need to go to markets thousands of nautical miles further.  On February 12th, we had the start of the Year of the Ox. In Chinese culture, the Ox is a valued animal with positive characteristics, such as being hardworking and honest. Oxen are earnest, low key and never look for praise or to be the center of attention. They gain recognition through hard work.

The world now has numerous vaccines. Granted we have variants of the virus too. Manufacturers are hard at work producing enough vaccines to inoculate the world and modifications to combat the variants. Cavalier approaches to COVID have been abandoned. Governments and people around the world are fully focused and working together earnestly to halt the spread, in an effort to again enjoy the company of family and friends.  

As the world continues to adjust to a new normal, inventory replenishment is firmly supporting top of the cycle container ship charter rates while steadily maintaining the improving dry bulk market. In recent weeks, an injection of cargoes in the Black Sea and West Africa coupled with tighter tonnage brought a healthy recovery in the Suezmax sector, the only ray of light in the beleaguered crude oil and product tanker sectors.

The truth in Erling Naess’s statement about the dislocation between producers and consumers of hard and soft commodities, coupled with the all too often tariff tiffs, is what makes shipping and Marine Finance such an interesting alternative investment asset class.  Other disruption/variables – port congestion, weather, over/under supply of ships – introduce volatility into the mix, making marine a potentially attractive asset class.

Sources:

Review of Maritime Transport 2019

Year of the Ox

Barley trade routes redrawn as China tariff hits Australian farmers

Australian Trade Tension Sanctions China Growing Commodities

Congestion Related to Cold Weather and Coal Shortage in China Supported Counter Seasonal Strength in Freight Rates

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