Opinion: even with a ceasefire, the Gulf's maritime logistics have changed for good
By John Manners-Bell
Although there is still widespread caution, it seems that a deal has been agreed between the USA and Iran, which will end the three month old conflict in the Gulf. Under the terms of the agreement, the existing ceasefire will be extended by 60 days, during which the Iranian military will start clearing mines from the Strait of Hormuz and stop charging tolls on transiting ships.
The normalisation of traffic through the Straits of Hormuz will have a dramatic impact on the world's shipping industry. According to the major oil tanker owner, Frontline, 10% of the world's fleet is presently trapped in the Gulf, loaded with oil and ready to leave once a credible deal is in place. On the other side of the Strait, a fleet of empty tankers is already positioned to exploit the Gulf states' need to draw down on oil inventories, which have maxed out their storage capacity. When the news of the agreement was released, the oil price fell by 5% to $80 a barrel and has continued to fall, as traders factor in the additional supply.
However, once the initial wave of vessels has left, it will take time for the balance of capacity and demand to return to a pre-conflict state. During the war, many tankers were re-assigned to alternative markets, such as the US Gulf Coast, as other exporters stepped in to fill the gap. It will take many weeks for these vessels to complete their existing deliveries to Europe and Asia and make their way to the Gulf, although the high rates they will be able to command will ensure there is no lack of capacity.
The end of the conflict will also have profound implications for the global container shipping industry. Whilst the market has remained remarkably resilient, a significant proportion of capacity has been trapped in the Gulf, resulting in sustained upward pressure on rates.
However, there will be no immediate return to business-as-usual. Japan's Mitsui O.S.K. Lines has suggested that it would take two weeks to a month for the industry to become 'comfortable' that the situation in the Gulf has stabilised and that Iran will not close the strait again. Once this confidence has recovered and safe routing protocols have been put in place, it could take several further weeks for ships to be relocated from other routes and regions. Carriers will need to re-design complex shipping schedules which have only just adapted to the diversions forced by the closure of the strait. With the present levels of caution apparent in the industry and with no further disruption, it could be the fourth quarter before the major shipping lines resume normal services.
In the meantime, the major shipping lines have been compelled to drop Gulf-destined shipments to unaffected ports across the Indian Ocean. Even if things return to something close to normality, it will take many weeks to clear the backlog of containers piled up in ports such as Nhava Sheva in India.
However, in time, pressure on the land-bridge solutions which have been developed to connect ports in the Red Sea or Gulf of Oman with the Gulf States will lessen, providing importers and exporters with welcome relief. Whilst these new routes have added considerable time and cost to transits, they have at least kept the Gulf economies running under the most critical of conditions. The structures and networks which have been built are likely to remain in place even if the peace holds.
Whilst it seems that sailings are already getting under way – Hapag Lloyd has commented that three of its ships will exit the Gulf in the next week – shipping owners and operators cannot yet expect a reduction in insurance costs. It has been observed that insurance brokers work on a 'rocket and feather' basis – premia go up like a rocket and come down like a feather. Although accurate, this is perhaps not entirely fair criticism. Risk in the Gulf is still exceptionally high, not only due to the possibility that the conflict could flare up at any time, but also from the chance of collision from congested shipping routes and the risk from uncleared mines or other ordnance.
Perhaps the most important consequence of a deal to the shipping industry would, ironically, not be in the Gulf itself. For several years, the Yemen-based Houthis, backed by the Iranian authorities, have disrupted international shipping passing through the Red Sea, forcing carriers to route their vessels around the Cape of Good Hope. If routes are normalised as an indirect benefit of the deal, this would free up capacity in the market, drive down rates as well as reduce transit times. Whilst there may be congestion issues in the short term, both in the Suez Canal and at European ports, as shipowners and operators rush to take advantage of the faster routes, a return to pre-conflict shipping patterns would provide the global economy with a very welcome boost.
Even if the deal holds, the transport industry in the Gulf will be changed for good. In the future, the governments in the region, exporters, importers and shipping companies will be unwilling to expose their supply chains to the risks presented by the Strait of Hormuz. The new land-based structures which have emerged will continue to play an important role in supplying the Gulf, and new oil pipelines will be built by-passing the bottleneck. The region has learnt the hard way that ensuring resilient supply chains may cost more in the short term but that the risks of complacency are even higher.
Author: John Manners-Bell
Source: Ti Insight
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Klaus Zillner
Senior Consultant
klauszillner@yahoo.comAustralia
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