In the wake of the Covid-19 pandemic, excited analysts were quick to proclaim a new commodities “supercycle”, forecasting a prolonged period of high prices. While that theory stumbled somewhat as prices cooled, war and sanctions have since sparked further chaos in energy, metals, and food markets.

But are we on the cusp of a shipping super-cycle? The changing world order, spurred by a combination of Russia-Ukraine situation and the pandemic, appear to be providing a catalyst in that direction. Supply chain restructuring at the cost of efficiency and economic benefits has been pushed to the forefront in major consumer nations for ideology and security reasons. Debate is being reignited about whether the world is heading towards the Bretton Woods III, an envisaged polycentric global monetary system, where demand for commodity reserves will rise at the cost of foreign currency reserves. For shipping, one of the most influential consequences of those macro developments is “trade diversion”, according to Braemar ACM analyst Alexandra Alatari. That will boost the length of shipping routes and, accordingly, the tonne-mile demand. And what moves this beyond a short-term market shock is the political context of isolating one of the world’s biggest commodities exporters, and the potential long-term implications for trade patterns.

“When the world moves away from efficiency to justice, it brings us an unprecedented opportunity,” Yan Hai, a shipping equity analyst at Shanghai-based SWS Research, recently told investors. The changes are already manifest in the product tanker and smaller crude tanker markets. Countries and trading companies in the Europe Union are turning to more distant regions, such as the Middle East and the US, for oil exports as part of efforts to punish Russia for its invasion of Ukraine. This comes as the bloc has already trimmed its refinery capacity thanks to goals to tackle climate change, and hence must import more fuels. The disruption and dislocation to trade have given a boost to the freight markets. In the second quarter of 2022, time charter equivalent rates for aframax tankers, for example, were being fixed at $43,700 per day compared with $13,200 in the first quarter, tanker company International Seaways recently said. Medium range tanker earnings surged nearly 60% over a similar period, according to peer company Ardmore Shipping. More rate increases are expected to affect other areas of shipping when countries imposing sanctions and trade restrictions on Moscow deliver on their promises, and others such as China begin to scoop up Russian commodities, according to Ms. Alatari from Braemar. “It takes time for all the long-term contracts to unwind. From later this year onwards, we think trade diversions will expand,” she told Lloyd’s List.

EU countries have already agreed to ban imports of Russian coal. This will take full effect from mid-August. All eyes now are on oil and gas. After a recent gathering, the G7 nations, the US, Canada, Japan, Germany, France, Italy, and the UK, committed to reducing their reliance on Russian energy, including by phasing out or banning the import of Russian oil “in a timely and orderly fashion”. Meanwhile, persistent high inflation and financial strikes launched by the US and its allies against the Kremlin have raised the vigilance of Beijing, amid its souring relations with Washington and the escalating tensions in the Taiwan Strait, about the risks facing its $3trn foreign reserves. China has the impetus to cut its exposure to US dollar assets, and stockpiling commodities from a country it deems friendly appears to be a good alternative, said Ms. Alatari. “If some producers divert their cargo originally destined for China, for instance, to Europe or other countries that impose sanctions [on Russia], China might have the extra incentive to import deeply discounted Russian commodities. If that is the case, we are talking about a huge tonne-mile boost.”

China has temporarily removed its tariffs on Russian coal from May to March next year. Analysts see the move largely as a prelude to China taking in more Russian imports in the coming months. Ms. Alatari said the trend would lead to greater demand for ships, with the supply of tonnage expected to be tight. The size of the dry bulker orderbook currently stands at 8% of the existing fleet — the lowest level in 20 years. The ratio of tankers is at a similarly thin level of about 7%. The newbuilding market cannot spoil the momentum, either, with yards slots swarming with orders for containerships and liquefied natural gas carriers and any new deliveries pushed back to 2025, if not later. Expanding capacity will also be difficult for shipbuilders, due to higher raw material, energy, and labour costs, according to Ms. Alatari.

The very large crude carrier market, which has been barely keeping its head above water since 2021, is also anticipated to turn a corner. Euronav, one of the world’s largest VLCC owners, recently argued that the dislocation in freight patterns driven by the conflict in Ukraine had also indirectly affected prospects for the segment as the rerouting of oil trade lanes has increased overall tonne-miles. US crude exports have already increased by 1m barrels per day based on four weeks’ rolling average since January, and the first VLCC cargo for two years between Abu Dhabi and Europe set sail in April, according to the company. Mr Yan from SWS Research said that the re-arrangement of trade routes could mean “a once-in-six-decade super-cycle” for tanker shipping and their stock investors. He argued that VLCC daily earnings could “far exceed” the previous peak of about $300,000 per day in the first half of 2020 that was triggered by a steep contango in crude oil markets. “In a strong market where vessels are in short supply, freight rates tend to be linked to the value of the cargo rather than the ship’s operational costs in order to filter out cargo owners that cannot afford the shipping prices,” he said. “The previous apogee was reached when the oil price was around $30, now it’s more than $100.”

There are risks, however, that could derail the optimism. Protracted inflation is stalling the world’s economic recovery. Some believe the pressure can be tamed, yet warnings of a global recession against the backdrop of the Ukraine situation and lockdown-induced slowdown in China are growing. “My base case is that we are facing an economic slowdown, not a recession,” said Ms. Alatari. “Based on supply and demand fundamentals, shipping can fare that successfully.” But the world can go either way, she admitted, as there are too many factors, including the geopolitical wild cards, at play. Talks have already emerged about the increasing likelihood of the US imposing secondary sanctions on buyers of Russian oil, which would effectively make the purchase as difficult as buying Iranian oil. If this scenario materialized, it would further drive-up pump prices and inflation. EU countries would be forced to compete for cargo with countries such as China, said Ms. Alatari. “Almost all commodities, including oil, are facing a production bottleneck. So realistically speaking, it might be the case that [the US and its allies] might relax the control on China and let it pick up certain types of Russian imports.”

In the extreme event of China invading Taiwan and inflicting a full-scale set of western sanctions on the world’s largest trading nation itself, the impact could be disastrous for shipping. “China imports massive amounts of all commodities that the rest of the world could not possibly absorb,” said Ms. Alatari. “But [the invasion of Taiwan] is a very hypothetical scenario and is not something that we are facing and actually worried about at the moment,” she added. “But of course, on February 23, I would probably say the same thing about the war in Ukraine.” Russia began its military operation in Ukraine on February 24.