Are ships a good hedge against today’s sky-high inflation? Many owners reckon so, but famous economists show the historical pitfalls of such theories. The last time global inflation was this rampant Ronald Reagan had recently turfed Jimmy Carter out of the White House, Raiders of the Lost Ark was about to be premiered and Soft Cell’s Tainted Love was top of the UK charts. Inflation is now a daily front page news item, with families around the world tightening their belts, looking at every aspect of their weekly spends as soaring bills hit home. Inflation has become a “clear and present danger”, a blog post from the IMF stated last week. The IMF is projecting inflation will remain elevated for a long time. “The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers. Furthermore, increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries,” the IMF warned.
The World Bank has also been discussing inflation, saying this week that the ongoing war in Ukraine will result in expensive food and energy for the next three years, intensifying fears that the global economy is heading for a rerun of the weak growth and high inflation of the 1970s. For shipping, however, many would argue today’s once-in-a-generation economic outlook is favorable. Splash Extra tuned into Slide2Open’s Shipping Finance conference in Athens last month during which much time was spent by shipowners discussing inflation.
“We are in a high inflationary environment and obviously this helps – it is good to own hard assets today because it helps protect investments,” Goldenport’s John Dragnis told delegates, a point picked up by George Gourdomichalis from Phoenix Shipping & Trading on the same panel, who said: “We are living in an inflationary world and that’s good for shipping.” Tobias Koenig, managing director of ship investment vehicle Lexington Maritime, reckons hard assets, such as ships, will indeed generally benefit from inflation and protect investments. In a high inflationary environment, real hard assets like ships ought to appreciate, agrees Khalid Hashim, the managing director of Thai dry bulk owner, Precious Shipping. Moreover, with the ongoing inflation of commodity prices, shipping rates ought to also increase, Hashim reckons, especially with the likely increase in ton-mile demand thanks to the ongoing Russian war in Ukraine.
Lexington Maritime’s Koenig suggests that right now, at this point of the cycle it pays to be a shipowner. “The charter rates are very healthy, the asset values are good and as long as the prices for raw material and the cost of labour will go up, you know that new vessels will be more expensive,” Koenig says. This is even more relevant, he argues, as Chinese shipyards are still hurting from Covid-19 disruptions and the focus is on high quality Korean shipyards, which has an impact on pricing exceeding inflation. In addition, rising ship values are meeting increasing financing costs. “That’s more than a shipowner could hope for,” Koenig says.
Phillip Clausius, who heads up ship investment corporation Transport Capital, points out that whilst ships will always remain depreciating assets it is reasonable to assume that the depreciation rate of vessels in the water will significantly slow – or even intermittently turn into value appreciation – in the current high inflation environment. Tim Huxley, chairman of Hong Kong-based shipowner Mandarin Shipping, tells Splash Extra that while historically inflation is beneficial for shipowners as it is an investment in hard assets, he warns that if inflation shrinks growth and prompts a recessionary environment, then it is not good for anyone. Roar Adland, shipping professor at the Norwegian School of Economics, agrees that owning real assets, like ships, can be a way to protect an investment portfolio. “High energy and steel prices will push up newbuilding and demolition prices and so be supportive of the entire secondhand price curve,” Adland says. However, the kind of inflation the world is experiencing now is supply driven, Adland argues, telling Splash Extra: “There’s simply not enough stuff to be shipped around.” In addition, as mentioned by Huxley earlier, high prices of inputs eventually lead to demand destruction, and so, says Adland, this kind of inflation is likely bad for the growth in seaborne transportation. “Add in the effects of less easy financial conditions from global central banks and a potential deconstruction of global trade into the West versus the rest and you could easily see poor earnings at the same time,” Adland says, referring readers back to the 1973 oil tanker crisis.
Also diving into the shipping history books to provide perspectives on today’s economic environment that shipping finds itself in is Dr Martin Stopford, the world’s most famous maritime economist, who tells owners to be careful what they wish for. While a modern panamax is worth $36m today, a massive 64% more than its $22m price 18 months ago, this is down to volatility, not inflation, Stopford argues, pointing out that 20 years ago in April 1990 a modern panamax also cost $22m and it’s been going up and down ever since. Even a $22m deposit at LIBOR in 1992 would have done better – it’d be now worth $44m. “Using ships as an inflation hedge may sound good but needs careful thought,” Stopford advises. An objection to the above is that there was not much inflation in the last 30 years, which is true. The US consumer price index has averaged only 2.5% per annum. However, if readers dial back the clock to the time of Carter handing the keys of the White House to Reagan, the period from 1979 to 1981 saw rampant inflation – 11.5% in 1979, 13.5% in 1980, and 10.3% in 1981. The scenario shipping faced in 1978 was very similar to the one shipping faces today, according to Stopford, the author of Maritime Economics. Initially ships did well. In 1978 a new panamax bulker cost $15m and by 1980 it had doubled to $30m. “Investors saw the merit of getting their cash – and their bankers’ cash – into floating assets and the predicted boom in the thermal coal trade fanned the flames,” Stopford recounts, adding: “Just to clinch the deal, the yards did a great job selling their new generation of ‘market proof’ eco bulkers.”
The year 1980 saw a new record for bulk carrier contracting but inflation was only half the story. As today, the inflation was driven by escalating oil prices. This proved to be deeply deflationary, grabbing consumer cash and driving world industry into deep depression. Inevitably, the record new bulker deliveries coincided with the trough, causing a deep bulk shipping recession and driving the panamax newbuilding price down to $13.5m in 1985. To illustrate the depth of the depression, Stopford recounts how a new panamax bulker contracted for $30m in the early 1980s was delivered in 1986 and resold a few months later for $8m. “This was shipping’s only encounter with super inflation over the last 70 years, and let’s hope history does not repeat itself,” Stopford says, adding: “So although ship asset price inflation feels good, super inflation is deadly serious and you need watch your back.” The only post-war bout of super inflation prior to the 1980s was in 1947, when US prices went up by 14%. Shipping market statistics for that era are a bit unsure, but it may be significant that in December 1946 that great shipowner, A.P. Möller, wrote to his son Maersk Mc-Kinney Möller: “My old saying ‘No loss should hit us which can be avoided with constant care’ must be a watchword throughout the entire organization”.