It has been nearly two weeks since attacks ensued on Iran’s military and nuclear sites, and markets continue to struggle to make heads or tails of developments both on the ground and in geopolitical arenas. Despite the escalating tensions which came to a crescendo with the US military targeting three specific nuclear sites inside Iran, markets have remained largely unchanged.
Prognosticators have floated Iran’s closing of Straits of Hormuz as a retaliatory measure effectively cutting off 20% of the World’s oil supply and nearly 35% of its petrochemical production, but to date that has not happened. The Straits are too vital to Iran’s own economic interests and closure of the Straits would further alienate Iran from its neighbors in the region. Nearly all of whom are aligning their interests with the West. It would also place Iran’s interests squarely at odds with some of their largest trading partners, so for the time being shipping traffic continues to cautiously move into and out of the region.
Conventional wisdom suggests that a conflict of this magnitude would send energy and commodity pricing soaring, as was the case when Russia invaded Ukraine in February of 2022. Ironically, prices have remained largely unchanged and crude oil prices have given back most of the gains seen since the first shots were fired, calling into question the current state of demand globally.
Despite the elevated tensions, additional war risk premiums (AWRP) on vessels have remained largely unchanged, further defying the norm. This has brought welcomed relief to Owner/Operators and Shippers already facing tighter margins. While the situation in the region remains fragile, the hope is that the current ceasefire will hold, and business will continue without disruption.
Unraveling Decades of Globalization
The shipping markets depend on consistent volume to keep vessels moving. This volume is dependent on robust demand for chemicals.
The onset of Covid-19 in early 2020 exposed massive gaps in supply chains, and the notion of “just in time” inventory was quickly replaced by “just in case”. More importantly, the shortages revealed how dependent countries had become on imports for even the most basic of needs placing decades of “Globalization” under the microscope.
The reality is that globalization has been shrinking for more than a decade with China’s emergence as a manufacturing and export powerhouse. Under the auspice of free trade, China has increased the production capabilities far beyond their own needs while pricing out manufacturing abroad. This has resulted in massive trade imbalances, increasing trade tensions globally.
Years of open trade and open-border policies have given rise to increased nationalism and a rise in authoritarianism around the globe. With these values, there is realignment of policies geared more towards isolationism and protectionism. The US initiated trade war embodies these principles. The general perception has been that buyers and sellers alike were drawn to the sidelines waiting for the proverbial dust to settle before taking any positions. Despite the ninety-day pause, a general framework in place between the US and some of its largest trade partners, the major events in the Middle East did little to kickstart the product and shipping markets, again creating questions about the overall state of demand. In recent decades, China’s rapid growth and seemingly insatiable appetite for inputs, helped global markets rebound from major market corrections, however this time around as the World’s second largest economy contends with a real estate crisis, high unemployment, slower than expected growth, and weak domestic demand.
Where to go from here
As the quarter draws to a close, it is still too soon to say what the extent of the fall out of the trade war will be, however there is a notable destruction in demand, which will take time to build back.
With the ceasefire in the Middle East in place, the chemical and chemical shipping markets are leaning heavily on stability in the region as producers contend with weaker margins and questions about overall demand. We can anticipate further consolidation among the producers and continued rationalization of aging production assets as businesses adjust to weaker margins and changes in demand.
Given the apparent weakness, we expect that shipping markets will continue to go through their own correction, following a very strong up cycle. Thereto we will see further consolidation among the fleet which will be brought about by a confluence of factors including more stringent environmental requirements, US-imposed tonnage taxes on Chinese owned and operated vessels, and a growing need for industrial-scale shipping to optimize cost and improve margins.
These changes in the markets will require shippers to look objectively at their supply chains to tap into opportunities in the marketplace. @Quincannon Associates, we are working with our partners on both the Chartering and Owning side to navigate the changing landscape and find scalable solutions to their business. For more information on how to optimize your own marine supply chain, reach out to one of our shipping experts today.
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By Patrick Quincannon
President and CEO
Quincannon Associates