Spot freight rates could surge further if Iran shuts Strait of Hormuz

Mint

4 hours ago

New Delhi: Global shipping freight rates, already rocked by the trade war unleashed by US President Donald Trump, are expected to become more volatile as the West Asia conflict escalates.
Over the past 7-10 days, since Israel attacked Iran, spot freight rates have increased by about 150% because of a shortage of vessels willing to go near the war-affected region.
Now, with Iran threatening to block the Strait of Hormuz after the US bombed its nuclear facilities, freight rates and premiums may increase further, increasing the landed cost of key supplies such as oil, industry executives and government officials said.
The Strait of Hormuz, a sea passage between Oman and Iran, sees nearly one-fifth of global oil shipments and about one-third of the world's liquified natural gas passing through it. While only about 2% of global container traffic moves through the region, if transshipment hubs such as the ports in Dubai are impacted, container movement would also become expensive, said an industry expert.
The shipping industry, which plays a major role in global trade, was already fighting a squeezing of trade routes through the Red Sea corridor due to Russia's continued attacks on Ukraine.
'Close to two-thirds of India's crude oil and 50% of its LNG imports are through the Strait of Hormuz, and the Red Sea handles 80% of its merchandise trade with Europe," said Darshan Ghodawat, managing director and chief executive, AVA Global Logistics.
Also read | Oil shock looms as Iran threatens Strait of Hormuz. What it means for India
If the Strait of Hormuz is closed, both oil prices and tanker and vessel rates on the route are expected to surge significantly. Shippers also fear the war cover provided to vessels operating in the region may be withdrawn if the Israel-Iran conflict escalates further.
Anil Devli, chief executive of the Indian National Shipowners' Association (INSA), said spot freight rates had increased by 150% since the start of the Israel-Iran war and could rise further if the movement of vessels along the Strait of Hormuz is disrupted.
Daily freight rates of tankers and vessels from West Asia to Japan and South Korea have increased to $50,000 from $20,000 about 10 days ago.
'Iran has not yet shut down the Persian Gulf, but its parliament has approved a measure to close the Strait of Hormuz—the key maritime chokepoint linking the Persian Gulf to global markets—in response to recent US strikes on Iranian nuclear sites," Devli said.
'Experts and analysts note that a complete closure is unlikely due to the severe economic and strategic risks for Iran itself, though the threat has already heightened tensions and could lead to increased harassment of shipping in the area," he added.
Also read | India concerned about crude oil supply disruptions in Strait of Hormuz
War risk premiums
Rising war-related insurance costs are also to blame for the recent increase in freight charges.
'The present conflict has increased freight and insurance costs. Crude shipping costs have risen by around 8-9% and war risk insurance premiums have more than tripled for those using the Red Sea," said Ghodawat of AVA Global Logistics. 'Longer routes around the Cape of Good Hope are an option but add increased transit times and higher operational expenses for the business."
The escalating Israel-Iran conflict is driving a sharp surge in marine insurance premiums and disrupting lifeline shipping routes, especially through the Strait of Hormuz, said Jitendra Srivastava, CEO of Triton Logistics and Maritime. Insurance rates for a ₹50-crore bulk cargo shipment can increase from ₹1.5 lakh to ₹6.5 lakh as ships need to add a war-risk cover to transit through risk-prone zones such as the Red Sea, he added.
'This rise in insurance costs, combined with greater security risk, is compelling freight rates to jump by 30-50% as shipping lines transfer costs to customers," Srivastava said .
Gaurav Agarwal, vice president, special lines, marine, Prudent Insurance Brokers, said the Persian Gulf has been treated as a high-risk area for several years now.
'Until (Friday), there was a status quo. But with the US entering the war, tensions are expected to escalate significantly. If the situation worsens, we may see a rise in war premiums for shipments to and from the Persian Gulf," Agarwal said.
'In an extreme scenario, insurers could even withdraw the war cover completely, similar to what occurred in the Black Sea area following the occurrence of the Russia-Ukraine war—a suspension that remains effective even to this day," he added.
Also read | Where the Iran war goes from here. Three scenarios for oil and stocks.
India's assets in the conflict zone
Rohit Chaturvedi, partner for transport and logistics at consulting firm Forvis Mazars in India, said container freight operators could face a shortage of containers and longer routes, additional factors that could increase freight costs, especially for the Europe-Asia trade corridor.
'The container shortages may have wider implications, causing disruption in trade along all the routes. Importers must plan for higher logistics costs, longer lead times, and explore alternative sourcing and routing strategies to mitigate supply chain risks," he said.
For India, the latest sea cargo threat highlights the need to 'bolster inland logistics and port-related infrastructure" and become 'a more reliable cargo hub", said Anil Kumar Yendluri, managing director, Vishwa Samudra Engineering Pvt. Ltd.
For India, the Israel-Iran war also means an urgent need to ensure the safety of its assets in the region. India owns and operates Chabahar Port in Iran, which may see its activities suspended as the conflict escalates. The Adani Group-operated Haifa port in Israel remains operational.
On a positive note, the Drewry's World Container Index, which tracks freight rates on eight major shipping routes, decreased by 7% to $3,279 per 40 ft container last week, mainly due to low demand for US-bound cargo.
Also read | Is the Israel-Iran war a billion-dollar threat to Adani Ports & SEZ?