The Iran war has led the shipping sector to wade through risk-priced, not demand-priced, waters; giving windfall gains to tankers and opening arbitrage opportunities across regions; even as the global economy stares at stagflation.
Disruption in the shipping sector, facing war risk premium, hits critical upstream inputs, leading to unsustainable cost-push factors, especially in the food, manufacturing and construction sectors, thus raising the risk of higher inflation and lower growth.
Demand destruction, margin compression and rising subsidy burdens have become the offshoot of disruption in the shipping sector, now grappling with industry consolidation pressures.
Geopolitical shock is affecting availability of both ships and tradable routes, as the Strait of Hormuz, which normally carries about 20% of global oil/LNG, leads to supply-side squeeze in available tonnage and operational inefficiencies.
The war has temporarily broken the global energy shipping system at its most critical chokepoint, which is reportedly operating at 1-5% of normal capacity. Some five to eight tankers pass through now compared to as many as 100-120 ships pre-war.
Only “approved” or “non-hostile” vessels are being allowed through the Strait of Hormuz, which has shifted from a free global trade route to a restricted, permission-based corridor.
Since March 13, Lloyd's have traced 33 transits via the Larak detour route. There have been no transits tracked via the "normal" route since March 15. Bulk carrier activity has been dominating, with an increase in westbound traffic after a weeks-long lull in activity.
Freight rates today are less a reflection of trade, more a price of navigating war. Logistics shock turned into a supply shock with the tanker segment witnessing unprecedented day rate spikes to $400,00 to $420,000 for VLCCs (very large crude carriers); and $250,000 for Suezmax, mainly driven by risk compensation and reduced fleet participation.
The resultant shocks led to supercharging of shadow fleet, which acted as central and shock absorber for the disrupted supply chains but with higher systemic risks.
Shadow fleet, a network of oil tankers operating outside standard regulatory, insurance, and tracking systems to transport sanctioned crude, has accounted for 83% tanker/gas carrier transits captured between March 19 and 25. This figure was 76% between March 12 and 18, according to Lloyd's database.
Global insurers have begun signing new war risk contracts for ships entering the Gulf and the Strait of Hormuz at 3%-5% of a vessel’s hull replacement value, renewable every seven days, compared to 0.15%-0.25% pre-war.
The supply shocks due to spiking oil and gas prices further turns into an economy-wide inflation, leading to many economies, especially in Southeast Asia resort to emergency.
Nigel Green, founder of deVere Group, an independent financial advisory firm which serves over 80,000 clients across 100 countries, had said households, businesses and investors should brace up for global stagflation.
“The figures show the severe impact the Iran war is already having on the euro zone economy,” he said, adding “but, like in the 1970s, stagflation could become a widespread global phenomenon characterised by high inflation, low growth, and high unemployment, heavily driven by oil price shocks.”
Besides, the shipping industry has to weather the challenges of crew safety risks, uninsurable exposure and political constraints as it meanders uneven crisis-driven super cycle.
Nevertheless, container shipping, which operates on network logistics, has not experienced the same upside as tankers owing to structural insulation (not heavy dependent on Hormuz Strait), operational flexibility (plausible rerouting), prior adaptation (due to Red Sea disruptions) and economic buffering.
The global shipping industry’s resilience will depend on diversification of routes and energy sources, investment in risk intelligence and alignment with geopolitical realities.
