Trade through the Middle East will pick up again when the conflict between the US and Iran ends, but it will not be the same as it was before, according to Nicolas Tirogalas, chief executive of Tufton Investment Management and co-manager of the Tufton Assets investment trust.
The Strait of Hormuz remains severely disrupted after the tentative ceasefire between the two sides was abruptly ended at the start of last month, although drafts of a new agreement are being circulated between the parties, according to reports.
However, before the war few would have anticipated that the closure of the strait would be a realistic scenario, said Tirogalas. His Tufton Assets trusts invests in sea-faring transport vessels and has the apt ticker SHIP.
“People assumed there'd be conflict, but not that. Now that they have closed it once, people know for sure they can close it again,” he said.
As a result, countries are now in a rush to find alternative supply sources, as they now understand the tangible risks that come with using the Strait of Hormuz, which will lead to a huge reduction in future activity in the region.
“Maybe trade becomes 60% or 70% of what it used to be,” he said. “Some trade will come back from the region once it fully reopens, but [in our experience] it never returns to exactly how it was before.
“Nothing is going to come back to 100% of what it was – and even if it did, the lag for that repositioning is a minimum of four to six months for renormalisation and rebalancing of ships around the fleet.”
Indeed, at the outbreak of the conflict Tirogalas noted that Asian countries reliant on Middle Eastern oil had to find the commodity from elsewhere, which led to a rise in the demand for ships in and around the US Gulf. This more than doubled the distance, however, compared with ships transporting oil from the Middle East.
Tirogalas said it took a “couple of months” to reposition the entire world fleet, or a large part of it, out of Asian and Middle East waters and into the Atlantic – or to the Pacific rather than the Atlantic. The same will be true of returning vessels back to the Strait of Hormuz when it eventually reopens at the end of the conflict.
As a result, people should expect a minimum of half a year before trade fully resumes (albeit at a likely lower peak than previously), he warned.
This could have a large impact on inflation, which has remained elevated around the world as energy prices have ratcheted higher.
“On inflation, it's very much about the perception of what happens to the price of energy – in this case oil. We saw it [the oil price] jump over $100 last month and now we're back under $100. As soon as everyone thinks there's a risk of conflict, you see the price of petrol or gasoline go up, and it comes back down as the risk eases,” he said.
This makes shipping 'an absolute inflation hedge as an industry', because rising demand for commodities pushes up both prices and the volumes that need to move. With more cargo competing for the same fleet capacity, freight rates climb too, so shipping revenues tend to rise alongside inflation rather than lag behind it.
However, Tufton Assets is not solely invested in oil tankers. In fact, it is predominantly invested in dry bulk ships that move grains and agricultural produce.
“We bought these dry bulk carriers because we estimated mid-teens returns on the investment. So at different points in time, different sectors offer different returns based on our own analysis,” he said.
“Today, dry bulk is very attractive; tankers are very attractive that's why our positioning is weighted towards tankers and dry bulk carriers and less so towards elevated-price sectors.”
Liquified natural gas (LNG) is also attractive, although the manager noted that it costs around $100m per ship, a tall ask for an investment trust with a market capitalisation of $361m.
One area that has gone off the boil is large shipping containers, which were in vogue during and after Covid as the world re-opened and pent-up demand caused backlogs at ports around the world.
“Back in 2021/22, if you owned a container ship, you were going to become a millionaire overnight. Today, you're going to make good money, but not the same millions and billions that a lot of ship owners made back in 2021/22,” he said.
Tufton Assets is 11–12% leveraged on its fleet and aims to pay a dividend yield of between 7% and 8% per year, while its shares trade at a 17% discount to net asset value.