Analysis: Freight rates may rise over Middle East security concerns

Attacks on two tankers near the Gulf of Oman Thursday is likely to push freight rates loading in the region higher, while adding to insurance and security costs even as state-run agencies step up the drive to enhance maritime protection, several market participants in UK, Italy, China and Singapore said.

If such attacks persist or become more frequent, a sharp spike in rates cannot be ruled out, they added.
The latest incident is expected to impact the crude and tanker markets in several ways, including the possible imposition of Additional War Risk premia for loading in the region, enhanced security arrangements and delay in transit through the Strait of Hormuz, Masood Baig, director of Singapore-based shipping brokerage, Strait Shipbrokers, said.

The Strait of Hormuz, which leads to the Persian Gulf, is a critical chokepoint through which 30% of the world’s seaborne oil passes through.

More than 135 VLCCs loaded crude in the Persian Gulf and Red Sea region in April in spot market deals and another 118 in May, according to brokers’ estimates. So far, 132 of such spot market fixtures have been done for June, the estimates showed.

As of now, the VLCC market is little changed because of ample supply of ships, but brokers said things can change quickly if owners become reluctant to move their tonnage into the region unless they are paid a hefty premium over the prevailing freight rates.

Charterers are currently covering their tanker requirements for end-June loading, while they wait for next month’s cargo stem nominations. “Next two weeks are expected to be crucial,” Baig said.

NSURANCE PREMIUMS FOR PERSIAN GULF LOADING TO RISE
Close on the heels of the attack on four tankers in the same region last month, the Joint War Committee of the Lloyd’s Market Association, or LMA, had added Gulf of Oman and the Persian Gulf to its list of areas for Hull War, Piracy, Terrorism and Related Perils.

“As JWC has listed the area, it is now down to individual underwriters to assess the ships requiring [risk] cover and to adjust terms and conditions accordingly,” the committee’s secretary, Neil Roberts told S&P Global Platts.

Several among the shipping industry executives, who had gathered in Shanghai for the Enmore Tankers Conference earlier this week, said that the attack on the four tankers last month could arguably be dismissed as a one-off incident. However, with the latest attack, the situation seems much more serious.

Some of the shipowners said their insurers are already seeking a higher premium for loading in the Persian Gulf.

However, they also pointed out that their ability to pass this premium to the charterers will hinge on the overall market situation, including the demand and supply of tankers.

“An additional cost to charterers in the short term is unavoidable, the additional risk premium that these ships will face may not be exactly quantified yet, but there will be one,” a UK-based analyst with VesselsValue, Court Smith, said.

Since this is not the first incident, it is quite clear that the security is compromised. There will be shipowners, who will try to refrain from going near the Strait of Hormuz, while insurance costs will most probably rise, Enrico Paglia, Genoa-based researcher with global shipping brokerage and consultancy Banchero Costa, said.

LONGER VOYAGES, HIGHER CARGO COSTS IF TENSIONS HEIGHTEN
A disruption will increase the average length of voyages, but should exports from the area be severely affected, there are very few alternative sources, which could replace that supply in the short term, Paglia said.

There are others who believe that a disruption may not happen.

While charterers will be forced to pay more for freight in the short run, there is no clarity as yet on the medium term impact. Nevertheless, shipments may continue, as had been the case during a similar incident in the region three decades ago, Smith noted.

However, should tensions escalate, the impact on the tankers market, particularly that of the VLCCs, could be very significant, if not dramatic, Paglia added.

A maritime security corridor may have to be created along the Strait of Hormuz, Strait Shipbrokers’ Baig said. This may entail extra costs, which the charterers would have to bear, as is the case currently when armed guards escort ships in the Red Sea region, driving cargo prices even higher, sources said.
Source: Platts