Inflationary pressure is already having an impact on the tanker sector, from newbuilding and secondhand tanker prices, to the cost of capital for ship financing. In its latest weekly report, shipbroker Gibson said that “concerns over growing inflationary pressure across the global economy have been gaining ground. This was reinforced in the recent July edition of the IMF’s World Economic Outlook Update, which notes that whilst the recovery in economic activity is uneven, expansionary fiscal policy and accommodative monetary policy have resulted in strong price increases from consumer goods to commodities. In terms of the tanker market, the later may increasingly come to play a role as inflation expectations become reality”.

According to Gibson, “many expect oil prices to maintain upward pressure despite the recent OPEC+ output agreement that will add 400,000 b/d of crude to the market each month from August to December. The IMF forecasts oil prices to rise 60% above their 2020 levels. Brent and WTI have seen price increases of 40% and 46% respectively YTD due to growing oil demand as inventories decline, economies reopen, and refiners seek to increase their runs to supply additional products to meet demand where it exists”.

The shipbroker added that “rising oil prices driven by rising oil demand should be positive for tanker owners. However, higher prices raise the risk of demand destruction whilst increasing the attractiveness of typically higher cost renewables and low carbon fuels at oil’s expense. Therefore, whether higher oil prices are positive or negative for tanker owners will depend on the extent of price gains and how much extra oil is supplied to the markets. If rising oil prices continue to drive inflation higher then policy makers could be forced to act sooner rather than later”.

Gibson also added that “inflation could also significantly impact the newbuilding sector. As mentioned, commodity prices are an area of notable price inflation, with the IMF forecasting a 30% increase in non-oil commodities, especially for metals and other primary commodities. Despite the recent cooling in iron ore prices, the market is currently experiencing an increase in the prices of scrap metal and most importantly steel plate used in shipbuilding. Whilst shipbuilding prices are influenced by newbuilding demand and the availability of yard slots, the cost of raw materials also plays a critical role. Newbuild VLCC prices have increased approximately 11.5% YTD which shows the growing inflationary pressure facing owners’ newbuilding decisions and is likely to become a growing issue as yard capacity decreases. Likewise, second-hand vessel values have also increased in line with this trend. For example, a 5-year-old VLCC has appreciated approximately 10% YTD as have demolition values due to rising scrap prices; this may help to spur scraping and asset plays where it makes sense”.

“Another interesting area inflation could impact is ship finance in terms of the cost of capital. Eventually, Central Banks will be forced to act once inflation starts exceeding their long terms targets. This should lead to a gradual tightening of interest rates that will eventually be passed on to borrowers, increasing the cost of financing newbuilds adding further CAPEX to prospective investments. The tanker market is not immune from the rising inflation being experienced across the global economy. This should in theory require an increase in rates to offset the rising cost of owning and operating a tanker. Although if compensatory rate gains are insufficient, then the effect in real terms will be negative. Therefore, owners will have to carefully consider the impact this trend will have on their business. In Central Bank terminology this inflationary episode may not be so “transitory” as hoped”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide