The indefinite extension of a ceasefire, which both the United States of America and Iran accuse the other of breaching although with violations so far largely limited to maritime activity, may signal a shift to a new phase of the conflict. If a "status quo" emerges in the short term where there is no escalation trend, but with freedom of navigation through the Strait of Hormuz compromised, the world is still looking at a situation where disruption at the Strait affects ~20% of global energy flows, ~30% of fertilizer flows, alongside significant aluminum and petrochemical flows. Heavy rhetoric and threats of wider destruction continue from all sides, sustaining volatility in the markets.
The crisis is deeply impacting the economies of countries with no part in the current conflict. During the ceasefire window, diplomacy and political maneuvering has accelerated. While Pakistan tries to mediate between the USA and Iran, it concurrently attended a trilateral meeting hosted by Turkey with Qatar on developments in the Iran war. This meeting took place last week at a gathering of leaders of 150 countries in Antalya as President Erdoğan seeks to cement Turkey's geopolitical influence, while exploring responses to the Hormuz crisis.
The effect on manufacturing supply chains globally, with approximately 30,000,000 mtpa of bulk liquid chemical supply being disrupted to global markets, is seismic. Some chemical producing countries with strategic positions such as Oman, and the USA, are benefitting immediately from spiking demand for accessible product and a boost to prices. To prevent even tighter markets, the USA has temporarily waived sanctions on limited volumes of Russian oil, although supply of that is being disrupted by relentless Ukrainian attacks against its energy infrastructure.
While world economies calibrate policy, relationships, and actions, to mitigate exposure to the crisis, for Gulf economies, it is even more serious. Qatar, looking at a huge cashflow shortfall following significant damage to its energy infrastructure, has quickly moved to cut its investments in non-core, economically exposed sectors such as Dubai hospitality. The United Arab Emirates is seeking a US dollar swap line to safeguard its economy, saying it may otherwise need to switch to Chinese Yuan and other currencies for oil sales.
While negotiations between the USA and Iran are ongoing, there is the theoretical chance of a settlement which restores more regular transit through the critical choke point, in some form. At various times, elements of a framework have been floated, including Iran allowing vessels to exit via the Omani side of the Strait without interference. However, the established Traffic Separation Scheme separates inbound and outbound traffic through both Omani waters and Iranian waters and varying these channels would be operationally awkward and significantly less efficient.
Traffic volume through the Strait has collapsed into sporadic windows of movement as the situation on the water varies day by day. Pre-crisis flows of circa 120–140 merchant vessels per day now range from as low as 3 vessels reported to brief spikes of around 30–35 in a day during short "reopening" periods. Charterers and owners clash over the counting of time under charter party terms, and last Friday's declarations that the Strait was "open" saw pressure by charterers to get their fixed ships proceeding outbound. Owners' hesitation was vindicated the following day after reports of fresh attacks. Friday also saw base oil charterers enquire fleetingly for large movements ex Gulf westbound, demonstrating there is cargo waiting to make a break for the exit.
The costs of ships sitting inside the Gulf are high. Pricing of war risk premiums and associated insurance has stepped up sharply, with AWRP for a 10-year-old 25kdwt chemical tanker seen quoted around $110,000 for 14 days inside the Gulf, and significant Crew War Risk bonus also applying. IMO2 MRs are fixing spot demurrage levels inside the Gulf of $150,000 per day. These costs are about 4-5 times pre-conflict levels.
A Strait divided up and accessed via specific arrangements could be the "solution" for a period, which could be complex, risky, and may deter many ship owners. This would lock in higher shipping costs going forward, including the effects on freight markets, waiting time, insurance, and other associated costs of transit, although it is impossible to quantify over the longer term at this stage, before more dust has settled.
The genie is out of the bottle now. The vulnerability of the Strait of Hormuz has been exposed, and regional friction is at its highest levels for decades, with the Iranian government still in place. Authorities continue to impose internet restrictions and have conducted military parades this week in a show of force, but the government has lost many of its senior figures. There is uncertainty around how cohesive and resilient the remaining power structure is, alongside reports of militias from Iraq crossing into Iran, and IRGC-linked foreign fighters, including Afghan units, being deployed internally.
Even a "new normal" at the Strait allows those who depend on it to plan, invest, and trade. It appears we are still several weeks away from a negotiated outcome, and stability may take additional weeks or months to materialize thereafter.
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By Simon Cass
Managing Director
Quincannon Associates DMCC