Israel-Iran: seatrade flows even as the bombs fly

THE job of ordinally ranking crises in the Middle East is best left to professional historians of the region. But the exchanges of air and missile strikes between Israel and Iran already exceed those typifying the local armed conflicts that break out every other year or so.

Sane people can only view the spectacle of a nuclear-armed state slugging it out with a theocracy on the cusp of the bomb, as a US president not notably constrained by pragmatism ponders the merits of intervention, with a mixture of horror and bewilderment.

At times like this, the concerns of the specialist media inevitably appear at best parochial, at worst amoral. But stripped of ethical deliberations, war is ultimately a business environment, and ships are still trading.

The task of Lloyd’s List is to report on dispassionately and analyse the implications for owners, port operators and marine insurers. It is one with which we have become depressingly familiar of late.

Our starting observation is that this remains an air war, at least so far. Shipping has neither been deliberately targeted nor caught out as collateral damage.

There has been speculation that Iran may seek to close the Strait of Hormuz, a key international waterway. But while its political hardliners have talked in these terms, the move would clearly be illegal under the UN Convention on the Law of the Sea and difficult if not impossible in practice.

Additionally, the pragmatists running the show plainly recognise that it would be counterproductive to the extent it alienates other states in the Middle East Gulf.

Let’s start with the tanker segment, where spot rates have doubled for VLCCs and LR2s. That’s if you can find a tanker to take the booking, of course. Many owners are understandably displaying risk aversion.

Frontline chief executive Lars Barstad has said publicly that his company isn’t accepting gulf transits right now, and some other operators are following this lead.

There’s a degree of historical irony here. Frontline’s founder John Fredriksen made both his cash pile and his reputation carrying Iranian crude during the Iran-Iraq War of 1980-1988.

Iran has asked ships to leave its ports as a derisking measure. Oil exports in May were down more than 60% to around 1m barrels per day and are likely to dwindle in the weeks ahead.

But leading customer China has been stockpiling, and the feeling among shipbrokers is that Israel won’t take out Iranian oil infrastructure, largely because the US doesn’t want that to happen.

Marine insurers have also been handed a handsome profit opportunity, so long as they get their sums right. The trick here is for underwriters to offer owners the cover they need at a price that is fair to both parties.

The assessment both from the insurers to whom we have spoken and the influential Joint War Committee of Lloyd’s and London companies war risk underwriters is that the threat level remains unchanged.

But while stability is generally the favoured modus operandi of the war risk market, things can move rapidly when they have to, as anyone asking for a quote the day after a total loss from Israeli, Iranian or Tehran proxy military action will quickly find out.

Until then, insurers are picking up six- or even seven-figure dollar sums for every single local voyage of every single vessel. Nice for them, obviously.

Boxships are also taking things in their stride, with port rotations and Suez Canal transits again unaltered. However, the essential context here is that base level is much reduced.

Most major liners have already been giving the Red Sea a swerve for the past 18 months or so, on account of the onslaught against civilian tonnage mounted by the Tehran-sponsored Houthi faction in Yemen.

The Strait of Hormuz handles less than 4% of global container volumes, with Jebel Ali the biggest regional hub. Closure would be unpleasant if this happens to include your slice of the pie, but not a game changer for anyone else.

We have no word of ports shutting down yet. But given the Russian attacks on Ukrainian ports in the last three years, there are fears that either of the two belligerents could replicate the tactic.

If that does happen, the justification will no doubt be advanced that many ports are used by naval as well as merchant vessels.

Underwriters have already priced this scenario in, and rates for calls to Israeli ports tripling from 0.2% to 0.7%.

We do not know how much longer the fighting will continue, or if Donald Trump — whose comments to date have been capricious in the extreme — will throw the weight of the US behind Israel.

What we do know is that it has claimed hundreds of lives already, on the official death tolls announced by the participants to date. This is in addition to the tens of thousands that have died in the Gaza conflict, which is still ongoing.

At least four of the fatalities have been seafarers killed by the Houthis while doing their jobs.

Those making money in consequence of the renewed clashes between Tel Aviv and Tehran should at least remember that it is not their lives that are on the line.