THERE has never been an era of global shipping like today’s. The amount of cargo at sea has never been higher, dwarfing volumes during the Second World War and the Cold War. Simultaneously, disruptions to trade due to geopolitics have skyrocketed, rendering the record-large shipping fleet increasingly inefficient and, for now, profitable.

The world has spent decades on a globalisation path, developing new trade ties and demanding more ships. The benefits of vastly expanded trade were thought to be a deterrent to war and conflicts — which turned out to be wrong.

Now, very high global trade volumes have collided with very high conflict levels reminiscent of the pre-globalisation era.

There will be major consequences for shipping rates and asset values, either from an escalation of geopolitical tensions or an unwinding of restrictions. Shipowners, port executives, investors and bankers gave their views on how this could play out at the Capital Link New York Maritime Forum on Tuesday.

Parallel shipping universes

One of the broader themes was the bifurcation of global trade as sanctions and tariffs have escalated, and as the scale of shipping capacity ignoring Western sanctions has grown.

The schism is becoming so extreme that viewing the fleet in colour shades from dark to light is outdated, according to Mark O’Neil, CEO of Columbia Shipmanagement and shipowner Schoeller Holdings.

“Previously, we had various categories: the dark fleet, the grey fleet, the white fleet. Now there seem to be parallel universes, where both sides think they’re right and don’t have to apologise because there is much more independence in financial and trading markets from the US dollar and US clearing houses.

“We have a complete parallel universe — a complete parallel shipping industry — that chooses which rules to take and which rules to break. The rule of law seemingly does not apply to an increasing proportion of the world fleet.

“When we talk about the shadow fleet or the dark fleet, those descriptions are no longer valid,” he maintained. “We’re perhaps as much of a shadow of the dark fleet as its fleet is to ours.

“Imagine a situation where we go out into the streets here and there are cars driving around that are uninsured, the drivers don’t have licenses, they’re allowed to break every speed limit, they don’t have to stop at the red lights, and their attitude is ‘the rules don’t apply to me.’ That analogy is probably exaggerated for the moment, but we’re going to be getting there pretty soon.”

Consequences of parallel fleets

The sanctions-induced bifurcation of shipping capacity “raises huge safety issues and huge compliance issues and gives wholly unfair advantages, depending on which side of the line you fall”, said O’Neil.

Furthermore, as the fleet aligned with non-Western interests grows, cargo available to Western interests declines, said Hew Crooks, partner and chief financial officer at Ridgebury Tankers.

“As we’ve evolved back to a bipolar world, we’re at a point now where some powerful people have rethought their exposure to the [geopolitical] threat. With the Chinese, they generally like to control things. They now control a lot of tonnage. What has happened in certain sectors before and may happen in others is that the independent Western owners get frozen out and our world gets smaller.

“We’ve had global tailwinds for several decades in terms of globalisation and disinflation, and as we see a reversal of that, we could be facing a more hostile environment,” warned Crooks.

Investor Richard Diamond, the principal of Castlewood Capital Partners, argued that this bifurcation would be a positive for shipping returns. “I would consider that to be an opportunity, because in an inflationary environment, you want to own ships because they’re real assets and they can increase in value,” he said. “I can tell you that if people can’t use Chinese shipyards, prices are going to go way up and if you own secondhand tonnage, you’re going to be very lucky.”

The reverse scenario is that asset-price upside from fleet bifurcation subsides, either because of an end to the Russia-Ukraine war or demand for the shadow fleet hitting its natural ceiling due to cargo demand. The latter looks like it’s already happening, with many fewer secondhand acquisitions of older tonnage for sanctioned trades recently versus previous years.

According to Crooks, “In the past, we would buy a 13-year-old vessel and say it’s got seven more years of useful life and it’s going to be worth scrap value at year 20, so what is the rate we are underwriting that we’re going to have to earn over those seven years to have a decent return?”

A 20-year-old medium-range tanker would previously sell for $5m for scrap, he said. But last week, an MR that was close to 20 years old with a special survey due sold to undisclosed interests for $19m.

“The brokers and everybody else are marking these vessels as though they’re worth that, but they’re only worth that to some people who operate differently from the rest of us.”

Crooks used the analogy of the New York apartment market. “Apartments are historically valued on what people earn and what people can afford to pay. But what if all the sudden a small number of people were able to run them as very lucrative Airbnbs? Then I can’t buy an apartment, because I only make a certain amount of money and I want to live in that apartment, and I can’t compete with somebody else who can make a lot more money [letting] it.

“Everybody who already owns an apartment gets excited because their apartment used to be worth $1m and now it’s worth $3m, but this is only because pricing is being kept up by a very small number of transactions.”

The same applies to the increasingly small number of secondhand shadow fleet purchases, and it’s not sustainable, believes Crooks.

“I don’t think it can continue, and as it settles or unwinds, there’s the possibility of a really hard repricing of the tanker fleet, and that runs from the old ships all the way back up to the top.”

Extended closure of Red Sea expected

Another major geopolitical market driver, beyond sanctions, is the closure of the Red Sea. No one at the Capital Link event predicted an end to this disruption anytime soon. On the contrary, the consensus was that this will be long term and a “new normal”.

“I think this is a viable alternative solution — shipping has adjusted,” said O’Neil of Cape of Good Hope reroutings. “It’s not the most environmentally considerate solution, it’s not beneficial to the economy of Egypt, and it’s not beneficial to the consumer, but perversely, it is beneficial for shipping, because more vessels are needed.

“Should the world take a harder stance on the Houthis and take action? Where there is a threat, the threat has to be neutralised. It’s a question of how you neutralise that threat. I much prefer the idea of taking a longer route and avoiding the problem and neutralising it that way than taking out the Houthis,” said O’Neil.

According to Torbjorn Wist, chief financial officer of ro-ro operator Wallenius Wilhelmsen, “Now that the Houthis suddenly have a name for themselves outside the Middle East, we think they are going to try to stay there [in the spotlight] for quite some time. Also, as everyone knows, the Houthis are a proxy for Iran, and how long it takes for a solution to the current powder keg in the Middle East is anyone’s guess, so we should assume we will continue around the Cape.”

Shipping and trade can work around any disruption, including the Houthis, said O’Neil. “Global trade is like a rivulet of water. It always finds a way. The impact is on cost and time. Both of those are passed along to the consumer, and quite rightfully so.”

How one market handled Red Sea disruption

The Red Sea crisis offers a perfect example of the “rivulet” concept of shipping in the case of the global automobile trade.

Car carriers were particularly vulnerable and immediately ceased transits when Houthi attacks began. “If we get penetration of the hull next to the waterline and get water ingress, our ships will fall over, so there was absolutely no compromise,” explained Wist.

The extra fuel cost of the longer routes around the Cape offset previously paid Suez Canal tolls. “The people who run the Suez Canal have good calculators. They know how much extra fuel you have to burn to go around.” The real extra cost for car carriers was opportunity cost: the inability to load more volumes. This was counterbalanced by higher rates. “It exacerbated an already tight supply-demand balance, so in that sense it has been quite good for us,” said Wist.

Coincidentally, the Houthi attacks in the Red Sea and resultant Cape of Good Hope reroutings coincided with a major new market development: a surge in Chinese automobile exports. “China has now surpassed Japan as an exporter of vehicles and that ties up a lot global ro-ro tonnage in long passages, so any shock to the system – like we see with the Red Sea – tends to further increase the balance of power in favour of the operators,” Wist said.

Due to the confluence of record Chinese car exports and the Red Sea crisis, more new automobiles are now being transported by containerships and bulkers.

“Last year, we did around 3,000 containers of new automobiles because they weren’t able to find ro-ro capacity. This year, we’ll do about 100,000,” said Beth Rooney, director of the Port of New York and New Jersey.

“It’s just another example of how supply chains adjust to all of the issues that are thrown at them. Moving new automobiles in containers is not the long-term solution. The logistics and infrastructure that’s needed to support that is significant. It’s much easier to drive a new car onto a ro-ro and drive it off than to deal with new automobiles in containers.”

Hamish Norton, president of Star Bulk, explained how the squeeze on ro-ro capacity was affecting dry bulk.

“Cosco came up with this scheme to put car racks in open-hatch handysizes,” he said. “The idea was that you fill the open-hatch ship with forest-products cargo to China and then [after unloading] you put racks in with cars, taking the cars back the other way. These racks have been piling up in ports, because there’s nothing that carries the racks back to China. But they make enough money transporting the cars that it’s okay to use the racks just once.”

US-China relations and looming presidential election

On top of sanctions and the Red Sea crisis, there is the “biggie” of bifurcated trade risk: worsening relations between the US and China. That issue, in turn, hinges on the US presidential election outcome on November 5. Donald Trump is more confrontational to China than Kamala Harris. Trump has announced plans for massive tariffs on all goods from China.

“It’s very difficult [to assess] because there’s the Trump ‘show’ and then there’s what he could actually do,” said Scorpio Tankers president Robert Bugbee. “I don’t think you’d get all the things that Trump says he’s going to do with regards to trade, because a lot of his voting bloc is dependent on cheap imports from certain countries.”

According to John Wessel, managing director of Oldendorff Overseas Investments, “With the decoupling situation [for world trade], it doesn’t matter who’s going to be in office. Whoever wins, I think the future will hold tariffs and subsidies.”

Rooney highlighted the threat of a proposal to charge all Chinese-built ships calling at US ports, a concept announced in March by US unions alleging anticompetitive Chinese shipbuilding practices.

“The container carriers are telling me this would be over $1m per voyage. I don’t know what it would be for car carriers or bulk ships, but here in New York, we’re doing over 6,000 foreign deep-draught arrivals a year, and I guarantee you that at least 75%-80% of those ships are built in China,” said Rooney.

“It’s not like these ships would not come to the US, because there isn’t an alternative. So, these costs would be passed on to the consumer. It would hit us all at the cash registers.”

The consensus of panelists at the Capital Link forum was that the apocalyptic trade scenario between China and the US would not happen because neither side could afford it. Global trade is indeed bifurcating and fleets are increasingly operating in parallel universes, but there is a limit to the schism due to the economic needs of governments, given how far globalisation has already gone.

“I sense there is an element of mutually assured destruction,” said Wist.