As US election polls have lately shifted towards another Trump presidency, financial markets have already begun to move, slowly pricing-in such probability and weighing the impact on various asset classes. The bond market has always been the first and most reactive to longer term policy changes and during the last week or so the interest rate curve has shifted to reflect the potential for increased deficits, and thus higher long term interest rates.
However, a second Trump presidency will very likely also affect global geopolitics and ocean shipping sits in the forefront of any change in the current status quo. Shipping is currently enjoying some of the highest returns in decades and expectations are for a continuation of the current cycle for the years to come. Nevertheless, we see an increasing risk of a disruption to the upcycle following a potential leadership change in Washington.
Looking at the global geopolitical map, there are a number of areas to consider: First, the posibility of some resolution in the two+ year-long war in Ukraine is something that analysts believe could happen in the early stages following a Trump win. Without getting into all diplomacy and policy matters, the main issue here has to do with all the established economic sanctions against Russia and more importantly the oil flows to the West that have been significantly reduced and redirected to further away Asian destinations. Clearly, any sanctions relief that reestablishes pre-war trading patterns for oil and refined products will be a negative for the tanker market. For dry bulk, the resumption of full capacity grain exports out of the Black Sea will also be a negative for the sector as it improves the efficiency of the fleet, although much less than the highly sanctioned oil trades.
However, we believe that it is unlikely that we will return to the pre-war trading world order anytime soon as politics and goverments in Europe might remain firmly against any such full sanctions relief, at least in the medium term. Additionally, the initial shift in trade patterns was quick and mandatory while this time around traders would look at underlying economics to make any such a shift and it is not clear to us that Russian infrastructure is in the same shape as it was pre-war in terms of export capacity and potential flows adding to permanent inefficiencies and increased costs. Net net any sanctions relief will be a negative for the tanker market but would not be a return to the pre-war commodities shipping status for Russian oil exports.
The second major geopolitical event that has greatly affected shipping is the vessel diversions away from the Red Sea passage and the Suez Canal due to the risk of Houthi attacks, which has added significant sailing distances to all shipping sectors ( i.e. longer distances means more shipping demand), with container carriers being the most affected, closely followed by oil product carriers. Once again, it is unclear what policy a second Trump administration will follow, but given the willingness to project American power globally, we believe it is unlikely that the US will continue to remain relatively passive to attacks against ships, especially US-owned ones. It is difficult to rate the operational difficulty of protecting the Red Sea passage, but our view is that the US is likely to take a more aggressive stance against Iran and the Houthis, in the process aiming at allowing a safer passage to commercial shipping traffic through the Red Sea. Overall, we believe a Trump presidency seems to carry a higher probability of bringing the current attacks against commercial shiping to an end versus the existing situation, all else being equal.
Finally, a more aggressive stance against China and the increasing use of tariffs advertised by Trump is a negative for global trade and thus shipping. Globalization has been in the forefront of ocean trade growth, and any policy that disrupts global trade is a negative for all shipping. In addition, such policies also will ultimately hurt China’s economy that highly relies on exports, negatively affecting domestic demand for raw materials and commodities and reducing imports of oil, coal and iron ore, the three pillars of commodities shipping.
In summary, we view a potential Trump presidency as a risk for the current shipping upcycle that relies a lot on geopolitical issues, which will most likely be disrupted by a change in Washington following the upcoming November elections. Unlike the treasury futures curve, the freight futures curve (as well as the “long duration” shipping equities) have not reacted to a higher probability of the above scenarios, which could meaningfully affect freight rates in the years ahead.