Hormuz hangover to last ‘a couple of years’ with consumers paying the price
RAMIFICATIONS of the current crisis in Iran could linger across shipping and the global economy for an extended period, as Asia feels the heat from disrupted energy flows.
G2 Ocean managing director SK Lim emphasised that this is not only a Middle East problem, but rather, an issue that will impact Asia too, unlike the Russia-Ukraine war.
“There is huge trade from China to the Middle East. Practically almost everything in the Middle East is imported. The majority is imported from China. So right now, that trade has stopped, or that trade has trickled down to a very minimal volume,” Lim said.
Because of this, Lim foresees China finding new homes for its exports in Asia. This, he said, will shake up trade flows in Asia.
“I hope we don’t see countries in Asia starting to put up tariffs on intra-Asia cargo movement, because the one thing that will kill trade is tariffs, quotas, anti-dumping and sanctions” he said.
China and the Middle East have a symbiotic trading relationship. The Middle East exports raw materials such as crude oil to China, while China exports finished products to the Middle East.
The disruption on the Strait of Hormuz has kept the world on edge as key flows are choked. Vessels are carefully weighing the risks of sailing through the strait given the risk of being hit by a missile, whether intended or not.
A dry bulk vessel owned by Thailand-headquartered Precious Shipping was hit earlier this month, raising alarm bells for other Asia-Pacific players. The attacks do not seem to follow a pattern, making it hard for shipping to navigate.
But some vessels have taken a gamble and are seeing it pay off through the so-called “Tehran Toll Booth”.
Two Indian liquified petroleum gas carriers this week managed to transit the strait through an IRGC-approved diversion. A Chinese boxship was also able to sail through the strait unharmed using the toll option.
But even if the majority of ships can begin moving through the strait, the consequences are set to linger. Higher costs incurred by shipping through increased bunker fuel prices and the new IRGC toll charges will eat into shipowners’ margins.
And this will undoubtedly transcend shipping. As Lim says, “Shipowners will always, always pass on the cost to the consumers.”
Lim was referring to the emergency fuel surcharges that shipping lines have placed on charterers to mitigate increased costs from rising bunker prices.
Maritime and Port Authority of Singapore chairman Ang Wee Keong assured attendees that “there is sufficient bunker supply to meet the industry's demand” against the backdrop of surging bunkers.
MOL senior managing director Jotaro Tamura expects the geopolitical impact from the SOH disruption to linger for some time.
“It’s not long term, I should say, but at least for a couple of years. We have to be prepared for it as a direct impact,” Tamura said.
He also indicated that the price for the current geopolitical turmoil will eventually be passed on to consumers through the free market.
Tamura’s main concern was for seafarers transcending the strait as they are putting themselves at the heart of where the risk lies.
“It is our utmost concern, and we must, as an industry, raise our concerns and appeal that this must be solved as soon as possible,” he said.
Ang also noted the same, stating that the MPA has issued advisories to Singapore-registered ships and is in close contact with those in the affected region.
Infrastructural cost
Beyond shipping, the damage to infrastructure will weigh down consumers globally as major energy producers will look to offset the cost by raising commodity prices.
Energy intelligence firm Rystad Energy estimates a $25bn repair bill from damages and shutdowns affecting liquefied natural gas trains, refineries, fuel terminals and critical gas-to-liquids facilities across the region.
Of this, 6% comes from damages incurred by logistics facilities and vessels.
The biggest cost is set to be incurred by Qatar’s Ras Laffan Industrial City, with 17% capacity lost and an estimated five years required to restore production.
Shadow markets could similarly be impacted by rising costs as its fleet operators too will look to pass on increased costs to consumers.
“Iran’s legal exclusion from Western supply chains means it will have to rely on Chinese and domestic contractors, which is a technically feasible approach that could be slower and more expensive,” said Rystad head of supply chain research Audun Martinsen.
Persistently higher cargo values will leave shipowners little room to raise freight rates, as charterers and consumers are likely to resist any further cost increases.
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