How Iran War Impacts International Shipping

The Iran War significantly impacts international shipping in the immediate present and potentially long-term future.

If the immediate impact was summed up with one word, it would be “disruption.” In international shipping, disruption tends to result in increased costs and delays for not just shipments to, from, and through the disrupted area but beyond. We’ll get into exactly how ocean and air freight is being disrupted below.

In the long-term, the impact could be positive rather than negative. Iran is by far the largest state-sponsor of terrorism in the world, and that terrorism negatively impacts international shipping. Secretary of State Marco Rubio, when addressing reporters on Capitol Hill about the U.S.-Israel strikes on Iran, emphasized the U.S. objective of destroying Iran’s naval threat to global shipping:

… our mission and our focus is the destruction of their ballistic missile capabilities and their ability to manufacture them as well as the threat posed by their navy to global shipping.

Twice Rubio brought up eliminating Iran’s threat to global shipping. And over the last couple years, we’ve seen serious negative effects to shipping caused by Iran, not to mention deaths of mariners and more.

The regime that has gripped Iran in totalitarianism for close to fifty years funds, trains, and arms many terrorist groups in the Middle Eastern region, including Hezbollah, Hamas, and the Houthis. After Hamas attacked Israel, Houthi maritime aggressions forced container shipping away from the Red Sea, Gulf of Aden, and Suez Canal for over two years.

Lives were lost, ship voyages were lengthened in distance and time, and freight rates soared.

Eliminating this regime, which has already lost 40-48 high-ranking leaders, including Supreme Leader Ayatollah Ali Khamenei, to U.S.-Israeli strikes, has the potential to bring much more stability and safety to international shipping through the Middle Eastern region in the future.

But in the meantime, much of the international shipping in the region is halted altogether. We’ll start with a wide scope of the war’s impact on international shipping and shippers and then get into some of the details.

General Shipping Risks from the Iran War

Sea Shipping Line (SSL) sent out a letter to customers and partners yesterday titled Middle East Conflict: Ongoing Impact on Global Freight and Supply Chains that gave a pretty solid list of risks to shippers of ocean freight in the face of the disruption of shipping in the Middle East:

• Force Majeure
  
• Schedule delays
  
• Vessel diversions or rerouting
  
• Extended transit times
  
• Introduction of an Emergency Conflict Surcharge (ECS) or War Risk Surcharge (WRS) [which we’ll talk about below]
  
• Amendments to existing quotations or booked shipments

Let’s get into some details of what’s happening.

Shipping Companies Diverting from Middle East

Just as it seemed container shipping was finally starting its return to the Gulf of Aden, Red Sea, and Suez Canal, ocean freight carriers are diverting away from the area again.

Stuart Chirls reported Saturday in a FreightWaves article:

Houthi rebels in Yemen warned they will resume drone and missile attacks on Red Sea shipping after Israel and the United States on Saturday launched attacks on Iran.

…

Media reports quoted two anonymous senior Houthi officials as saying attacks on merchant vessels could begin as soon as Saturday night. There was no official confirmation by Houthi media.

It’s no surprise the Iran-backed Houthis would return to attacking ships with any ties to the U.S. or Israel during this conflict (it would actually be surprising if they stuck to only those ships), causing carriers to keep vessels away. The Persian Gulf waters just north are effectively off limits for carriers and their ships too.

Chirls continues his article with:

Iranian military forces on Saturday barred vessel traffic from the Strait of Hormuz, the narrow gateway to the Persian Gulf. About 20% of the world’s crude oil supply, or 20 million barrels per day, moves through the region.

Iran has effectively shut down the Strait of Hormuz and shipping in the surrounding waters with reported strikes on tankers and ports in the Persian Gulf.

From a collection of carriers’ statements and various news source reportings, here’s a list shipping lines and their actions in suspending Middle Eastern shipping:

• Mediterranean Shipping Company (MSC): The world’s largest container line by capacity suspended all new cargo bookings to the Middle Eastern region until further notice.
  
• Maersk: Formerly the world’s largest ocean freight carrier by capacity, Maersk suspended all vessel transits through the Strait of Hormuz. It also paused Red Sea transits and rerouted its ME11 and MECL services down and around Africa.
  
• CMA CGM: Another of the world’s largest container shipping line, CMA CGM suspended all sailings through the Suez Canal and the Red Sea, rerouting vessels down and around Africa. The company has also suspended cargo bookings to the Middle East and ordered vessels in the Persian Gulf to seek shelter.
  
• Hapag-Lloyd: The major container line Hapag-Lloyd suspended all vessel transits through the Strait of Hormuz. While it has not fully suspended all regional bookings, it warned of significant delays and introduced a $1,500 War Risk Surcharge (WRS) per container.
  
• Ocean Network Express (ONE): ONE, formed by the joining of Japan’s top three shipping lines, suspended acceptance of all new bookings for cargo moving to and from the Persian Gulf.
  
• COSCO Shipping Lines: China’s shipping giant instructed all vessels already in the Persian Gulf to proceed to safe anchorage and suspended “high-risk” sailings through the Strait of Hormuz.
  
• HMM, OOCL, PIL, and Wan Hai: These carriers also reportedly suspended Middle East cargo bookings or adjusted in-transit vessels to avoid the conflict zone. 

Introduction of ECS and WRS Fees

Shippers are familiar with several freight-rate-increasing fees like the Peak Season Surcharge (PSS), General Rate Increase (GRI), the Bunker Adjustment Factor (BAF), the Currency Adjustment Factor (CAF), and even plain demand surcharges – which are very similar PSS – from parcel carriers like UPS and FedEx.

Now, shippers have the Emergency Conflict Surcharge (ECS) and War Risk Surcharge (WRS) to add to that list. While there are two names, each with its own matching acronym, used by different carriers, the fees (which also can vary) are basically synonymous. Shipments through riskier ports, waters, and areas because of war or conflict are subject to additional shipping fees.

As risk increases, factors like equipment availability, security for ships, and speed ships can move through waters and load/unload at ports create higher costs. Shippers are also paying for the increased risk to the ships and their crews themselves.

A World Cargo News article reported on one example of these fees:

Hapag-Lloyd also confirmed the introduction of a War Risk Surcharge (WRS). “The dynamic situation around the Strait of Hormuz and the necessary operational adjustments are causing disruptions throughout the network, which will impact schedules and equipment supply. Therefore, a War Risk Surcharge will take effect for cargo to and from the Upper Gulf, Persian and Arabian Gulf,” the company said.

Insurance Cancellations & Likely Increases

Insurance Journal shared a Reuters article by Emily Chow and Jeslyn Lerh about marine insurers canceling war risk coverage as the Iran War escalates. It talks of insurance not only getting canceled but also being increased:

Marine insurers are canceling war risk coverage for vessels and oil shipping rates are set to surge further after the widening Iran conflict left at least three tankers damaged, a seafarer killed and 150 ships stranded around the Strait of Hormuz.

While the focus in the article is more on oil tankers and shipping, container and cargo insurance faces a similar risk of increase.

Air Shipping Halted with Many Middle Eastern Countries

With Iran striking at several Middle Eastern countries with ballistic missiles and drones, air space for many countries in the region has been closed. Obviously, this also stops air freight from moving to, from, or through these countries.

SSL’s notice letter mentioned above also lists Middle Eastern countries with air space shut down until further notice:

• Iran
• Israel
• Iraq
• Jordan
• Kuwait
• Qatar
• Syria
• United Arab Emirates (UAE)

Conclusion

In situations of war, things typically get worse before they get better. The Iran War creates significant disruption to international shipping through the Middle East.

That so much cargo shipping was rerouted from the Gulf of Aden, Red Sea, and Suez Canal over the last couple years actually mitigates some of the wider freight rate impacts of this disruption. When those diversions started, ocean freight rates spiked to incredibly high levels before coming back down, even before a return to the Suez Canal. The industry is already adjusted to a large amount of diversion away from the region.

However, around 20% of the world’s oil gets shipped out of the Persian Gulf. That could push oil prices up significantly, which also puts upward pressure on global freight rates risking high BAFs.

Hopefully, there will be a long-term benefit to international shipping with reduced terrorism and increased peace and stability in the Middle Eastern region with the removal of Iran’s leadership that has so long plagued the area with terrorism and conflict.