MNI INTERVIEW: Iran War Risks Broadly Higher Shipping Costs

An extended U.S.-Israeli  conflict with Iran would push up shipping costs around the globe, further feeding oil price hikes and affecting container traffic and goods going well beyond oil, the  co-founder of an initiative aimed at providing port data to governments told MNI.

Seven-day average transit volumes through the Straits of Hormuz, which handles about 20% of global oil maritime trade volume, fell by almost one million tonnes to 3.30 million tonnes in the week to March 1, according to data from PortWatch,  a joint initiative between the IMF, Oxford University and TU Delft aimed mainly at governments.

While ports could play catch-up if the conflict is short-lived, a longer war will force more vessels to be rerouted, said Jasper Verschuur, PortWatch’s co-founder and an assistant professor at TU Delft.

"Everyone is talking about oil, of course, but the thing I'm worried about mainly is that some of the smaller ports in East Africa, for instance, are usually not big enough to have direct shipping connections with China, for instance,” Verschuur said in an interview.

If shipping companies have to re-prioritise routes they could "get rid of those lines and then put everything to Europe," he said.

"Instead of having an efficient system, where you have ships coming from both directions, and then rotating these containers, now you need to have these big ships going all the way, and that means that the system just becomes a lot more inefficient. So, if this will be a longer-term thing, yes, of course, we'll see an increase in shipping prices," Verschuur said. (See MNI SOURCES: ECB's Ukraine Lesson Lowers Oil Shock Tolerance)

An increase in freight or insurance costs is too marginal to stop shipping activity altogether but could have a greater upward effect on oil prices because of its lower value relative to ship size, he said.

RED SEA

A re-organisation of shipping, in particular away from Middle Eastern ports such as Dubai, is already visible, he said, noting that the impact of attacks in the Red Sea by Iran-backed Houthis' in 2023 is still being felt, with shipping volumes halved on that route.  (See MNI INTERVIEW: Long Conflict A Risk To China Chemical Output)

"The tricky thing with the Strait of Hormuz... is that there's no alternative," he said. "Oil can get through some of those pipelines to Saudi Arabia, but the capacity is super small," he added, so "it's not a feasible alternative."

There could also be a "really unfortunate double effect" with the Red Sea already being a "sort of no-go area, and now people [are] trying to avoid the Persian Gulf." 

Activity in the Red Sea is still "around 50% of what it used to be," Verschuur said.

For the UK, "it could be that you have reallocation of transport, and it means that more, bigger ships are going to arrive at Felixstowe and it could maybe lead to congestion or something like that," he said.

However, if there is a clear end to a conflict, negative effects can be swiftly overcome.

"In most cases … there's a post-disaster surge in activity,” he said, noting that "ports generally don't work at their maximum capacity level."

This is "assuming that today everything is over and the shipping lane is free," he said, adding that if shipping companies perceive that the threat remains then that could also have a lasting effect.

Verschuur was unconvinced by the idea that higher shipping insurance costs will reduce trade volumes. "These are relatively marginal increases, especially in this world of tariffs."