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Why Geopolitics Matters to the Global Shipping Industry

The shipping sector is poised to make progress toward financial recovery in 2018, but uncertainty over trade and security relationships will be compounded by a variety of other constraints.

Rising fuel costs, the introduction of larger vessels and new environmental regulation standards could result in slower growth.
Even as Washington and Beijing reach a preliminary agreement on trade, the rest of the world’s response to U.S. trade policy — amid continued uncertainty surrounding Iran — will serve as a downward force on shipping growth.

Global shipping is a behemoth of an industry. It has a direct and indirect economic impact of more than $400 billion annually, and more than $4 trillion worth of goods move by sea freight each year. But it’s also a delicate sector, closely tied to the health of major economies, prone to cyclic swings and vulnerable to the world’s reaction or overreaction to any number of political events.

The Shipping Industry’s Comeback

A decade after the global financial crash precipitated a crippling overcapacity crisis, the global shipping sector has been struggling to recover. Since of the start of 2018, though, things have been looking up. With supply and demand in better balance, idle capacity figures (which indicate the percentage of ships and containers that sit unused) have dropped from the 2016-2017 winter high of 8.8 percent to just 1 percent. The sector continues to consolidate, as evidenced by a recent merger involving multiple Japanese shipping companies, and global growth projections are largely positive.

The Looming Complications of Geopolitics

Yet, as capacity grows in the wake of new, larger ships, the geopolitical uncertainty caused by major events — U.S.-China trade disputes, sanctions related to Washington’s position on Iran and new environmental standards — threatens the industry’s nascent recovery.

The U.S.-China Trade Spat

Though the U.S. and China have hit the pause button in their ongoing tariff threats over trade, the details of the deal are vague. With so many potentialities still in play regarding trade, the shipping industry is at risk of having to respond to a number of different outcomes.

According to PIERS research and the Journal of Commerce, the $50 billion in tariffs officially announced by the United States — along with China’s equal retaliatory tariffs — would have put nearly 7 percent of U.S.-China container trade at risk. If imposed, the tariffs would most impact eastbound transpacific trade, causing a pain in the form of imbalances in container supply and demand. Should the tariffs come into force at some stage in the future, experts anticipate that they would not substantially change the volume of goods being moved, but rather the direction of the goods’ movement. For instance, one hypothetical could see China ship additional partially assembled goods to Thailand, Vietnam or Mexico. Forcing supply chains to use less optimal locations would increase inefficiencies across the sector as a whole.

Aside from the container sector, bulk shipping would also be impacted in a regional sense. Even when the “big” hitters of soy and steel are included, the calculated trade loss would only be a fraction of the global dry bulk market. However, general uncertainty can magnify perceived reality.

Potential U.S. Sanctions on Iran

As trade negotiations move in fits and starts, U.S. foreign policy in the Middle East has added another layer of uncertainty to the shipping sector. The United States’ eventual reinstating of sanctions on Iran may push already climbing oil prices — Brent recently hit $80 per barrel — even higher, which could in turn up the price of bunker fuels used by ships. Indeed, the tanker sector is already being squeezed by the pending sanctions; European buyers have begun looking for alternative sources of oil because they can’t source tankers willing to work with Iran. If these alternatives come from Iraq or Saudi Arabia, they may not have too much of an impact on tanker routes. However, should they come from Russia, the shipping industry will definitely need to adjust.

New Environmental Regulations

Finally, the global shipping sector recently completed negotiations about how to reduce emissions from ships. On April 16, the United Nations International Maritime Organization approved a strategy meant to eliminate carbon dioxide emissions altogether by 2100. The new plan, along with plans to reduce sulfur emissions by 2020, will require additional spending from shipping companies. Any new wave of ship orders and deliveries, to compensate for new fuel requirements or in response to positive indicators, could result in the industry facing another oversupply problem.

All the above geopolitical events leave the shipping sector on the precipice of both success and failure in its recovery efforts. Beyond economic drivers, uncertainty derived from U.S. foreign policy towards China, Iran, North Korea or even Europe could serve to push the shipping industry off course. And an inability to react to geopolitical developments with thoughtfulness and versatility may deliver a push the sector wasn’t looking for.
Source: STRATFOR , Hellenic Shipping News !!

Published On Jun 12,2018 @ !!!

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