Fallout will ripple across globe amid Strait of Hormuz ‘doomsday scenario’

THE TRADE effect of the Strait of Hormuz closure comes down to duration, said executives and analysts speaking at the Capital Link International Shipping Forum, held in New York on Monday as the crisis continued to unfold.

The strait has been effectively closed to the vast majority of non-Iranian traffic for 10 days. There is no sign that Iran will unconditionally surrender anytime soon.

“It’s hard to scenario plan for something like this because this was kind of the doomsday scenario,” said Joe Kremak, president of the World Shipping Council.

“The million-dollar question is: What is the duration of this event?” he said — and calling it a million-dollar question sounds like an understatement.

Risk of extended closure

Severe short-term trade disruptions and subsequent inventory restocking would be highly positive for shipping if strait traffic normalises within a few weeks.

But if there is an extended closure, it could be highly negative, for two reasons: it would shut in too much cargo demand and pummel the global economy.

“My concern here, like many of the panellists, is the duration and ripple effects going forward,” said Chris Robertson, shipping analyst at Deutsche Bank.

“In a situation where this sticks around for some time, there’s not going to be enough transport work for shipping,” said Jorgen Lian, shipping analyst at DNB Carnegie. “The fact of the matter is: as long as this corridor is closed, you remove the lifeblood of shipping for many of the sectors.”

“In a nutshell, you have choked off about 90% of all throughput to and from that cul-de-sac. Is this sustainable? Absolutely not,” said Rene Kofod-Olsen, group chief executive of V.Ships.

“We need to put a structure in place were we can safely go through, because otherwise the global economy is exposed, and that is obviously a problem for all of us.”

According to Jacob Meldgaard, chief executive of Torm, “The longer the Strait of Hormuz is not safe for shipowners, the more stress there will be in the system.”

Wiley Griffiths, global head of transportation banking at Morgan Stanley, said, “You’ve got a conflict where we don’t know the duration and depth. We’re in the early innings in terms of how to read this, but as you cut through from maritime shipping to global economics, my biggest concern is inflation and energy prices and how that impacts the perception of economic growth, because that will always trickle down into all the verticals.

“Right now, many people believe the global economy is going to be okay and growth isn’t going to be curtailed significantly, but that’s the number-one concern people are focusing on,” he said.

Saudi Aramco chief executive Amin Nasser warned in a conference call with reporters on Tuesday of “catastrophic consequences” for oil markets if the strait remains closed.

“The longer the disruption, the more drastic the consequences for the global economy,” said Nasser, citing the possibility of a “severe chain reaction” impacting “aviation, agriculture, automotive and other industries”.

Panellists at Capital Link described a number of fallout scenarios covering a range of markets.

Potential for sustained LNG disruption

The most immediate consequence of the war was the shutdown of Qatar’s liquefied natural gas exports. The duration effect on LNG exports is more extreme than on the crude side, given the nature of the LNG shutdown and restart process.

“We have approximately 22% of the world’s LNG supply shut in right now because the strait is closed,” said Gordon Shearer, senior advisor at Poten & Partners.

“The longer this goes on, the worse it gets. When you let an LNG plant warm up, you warm it up very slowly so you don’t crack the metal, which is under tremendous thermal stress and is very expensive and difficult to replace.

“The reverse happens when you want to start it up again. You have to cool it down very slowly,” said Shearer. “If these plants sit idle for a month, it will probably be at least one to two months of additional lead time to get them back up to capacity, so this could be a sustained interruption.

“Three things have to line up before we see Qatar back in the export market,” he continued.

First, its upstream production must be safe. “All of Qatar’s fields are offshore, within five miles of the Iranian border. They’re almost impossible to defend. If Iran decides to unleash all havoc on Gulf energy infrastructure, they could take out the offshore gas fields; replacing them would be a massive undertaking.”

Second, Qatar’s liquefaction plants must be safe. “The liquefaction plants are not hardened to withstand military attack,” said Shearer.

Third is shipping safety. “You’ve got to get the ships through the Strait of Hormuz.”

The Red Sea crisis highlights how difficult it could be to meet the third requirement. With very few exceptions, non-Russian LNG carriers have steered clear of the Red Sea route since January 2024.

“If you look at the Houthi example, it wasn’t that they needed to sustain daily attacks,” said Robertson. “It was periodic and sporadic, and that has been enough to disrupt global shipping for years at this point.”

Ramifications of extended LNG disruption

There is not enough LNG in the world to replace Qatari supply, and inventories are low coming out of the Northern Hemisphere winter.

The loss of Qatari LNG cargoes has led to a scramble for replacement supplies in Asia, causing spot rates to surge. Spot rates for two-stroke LNG carriers were at $205,000 per day on Tuesday, according to Clarksons Securities — 6.6 times spot rates the day prior to the war.

“You would think that would be great for shipowners, but in fact, there are almost no ships available that are controlled by shipowners in this market,” said Shearer. Of the 200 two-stroke LNG vessels, only five are under owner control (one of which was just chartered).

“This is a market of subletting. All of these ships controlled by major oil companies, LNG exporters and trading houses. Companies like Shell, BP, Vitol and Glencore are now sitting on a potentially massive windfall.

“It’s a very strange market. It’s as if all the oil majors had snapped up all the crude carriers and decided to trade crude oil tankers instead of oil.”

The secondary ramifications of the sudden LNG shortfall could be widespread, he continued.

“There’s only about 10 days of LNG storage available globally onshore, while the crude oil market, excluding strategic stocks, is at 60 days-plus. And those 10 days are not evenly spread. Japan has five weeks. China, depending on the terminal, has different levels of storage. Taiwan has about 10 days of storage.

“Fifty percent of Taiwan’s power is generated from natural gas, 100% of which is imported in the form of LNG. If you’re in Taiwan right now, you’re getting a little bit nervous.

“If you’re in Washington right now, you ought to be getting very nervous, because your AI industry is now threatened. If the power goes out in Taiwan, all the advanced semiconductor manufacturing goes down.

“And it’s not just LNG, it’s helium. Helium is a big input in semiconductor manufacturing and the world’s second largest producer of helium is Qatar, and almost all of Qatar’s exports went to Taiwan’s semiconductor industry,” he added.

“We have some serious potential knock-on effects here — from a broad macroeconomic and strategic standpoint — that apparently weren’t quite factored into the decision to start lobbing missiles at Iran.”

Positive and negative dry bulk consequences

One consequence of the scramble for LNG is that Asian countries, with the exception of Singapore, can replace it with coal.

“LNG will be substituted by other forms of power generation — look for the return of coal,” said Shearer. “If I was an Australian coal producer right now, I would have a very big smile on my face.”

According to Martin Fruergaard, chief executive of Pacific Basin, “I am fairly sure that some countries are looking at coal again instead of oil and gas. That seems quite logical and would be good for us.”

There are also looming implications for grain trades, with a lag effect.

Agribulk production faces spiralling costs due to the war-induced fertiliser shortfall (on top of tariffs in the US). Roughly a third of the world’s urea fertiliser comes from the Middle East, as well as a quarter of the ammonia fertilizer and one-fifth of phosphate fertilisers, according to the New York Times.

“We are also potentially looking at demand destruction [from high LNG prices] in terms of chemical plants shutting down — ammonia producers shutting down in Europe — because they’re being priced out of the market,” said Shearer.

“We’re seeing shocks hitting the ammonia market because ammonia’s main feedstock is natural gas, plus the Middle East is a major exporter of urea and sulphur, which are key components in agricultural fertilisers. So, the knock-on effects keep building.”

Robertson said, “The longer this crisis goes on, the more likely we’ll see global demand destruction in various industries, whether that’s due to input prices for food, jet fuel and its impact on travel, etc.”

According to Harris Antoniou, founder of Neptune Maritime Leasing. “It’s not just energy prices. There’s also a risk in relation to food prices because of the fertilisers coming from the Gulf. If this continues, it could have an impact on the cost of agricultural commerce. Affordability is going to be a major issue going forward. We need to be mindful of what that would mean for shipping credit and the interest-rate environment.”

Cost inflation for ocean transport

There will also be ocean transport cost inflation. It will be more expensive to ship cargoes around the world, whether they are bulk commodities or containerised.

Not only are tanker and LNG shipping spot rates surging due to war-driven dislocations, but bunker fuel prices are spiking.

Higher fuel cost is passed along to containerised goods shippers. “That will be very, very quickly get reflected in special surcharges for fuel,” said Bill Rooney, vice president of sea logistics development at Kuehne+Nagel.

In bulk commodity shipping, the time charterer pays for fuel, and in the spot market, higher fuel costs lead to slower sailing speeds and reduced vessel supply.

Diversification of supply and stockpile expansion

The longer-term effect of the Middle East war will be a diversification of commodity sourcing and a rise in inventories, the same pattern seen for containerised goods after the pandemic, said panellists at Capital Link.

“In a world where the theme is security of your supply chains, especially in relation to energy security, [the war] highlights that having a concentration of risk through one supplier in one region that’s prone to geopolitical risk is a bad idea,” said Robertson.

According to Lian, “Once we get out of the current situation, you’re in a world where people will preemptively store whatever they can get their hands on. The willingness to pay for storage and have inventory to sustain during periods of disruption is probably going to be a very beneficial long-term driver for shipping.”

Antoniou said, “What we may see is a change in the way people perceive the value chain. We’ve been working for many, many years with just-in-time production systems, even for oil. We may a see an increase in inventories because we move from ‘just in time’ to ‘just in case’.”

According to Richard Diamond, principal of Castlewood Capital Partners, “With LNG, you have a number of countries that have taken an insane amount of risks. But over time, no one is going to say: I need just one and a half days of supply [referring to the UK’s LNG supply]. No one is going to say: I want to be dependent on one supplier in one geographic area. They will look at supply chains differently.”