Iran-Israel flare-up: Traders, shippers brace for fresh price shocks

Freight costs, war risk premia on marine insurance rise

The shipping industry, still recuperating from the Red Sea crisis' unprecedented price shocks earlier this year, is now bracing itself for a further surge in ocean freight rates and insurance premia amid the risk of a wider war in West Asia following Iran’s drone and missile attack on Israel last weekend.

“Regardless of immediate outcomes, we anticipate heightened uncertainty in shipping markets,” said Christian Roeloffs, co-founder and CEO of Container xChange, an online platform for global container trading and leasing. “This comes at a time when tensions have already been simmering since the end of November, particularly in the Bab-al-Mandab strait and the Red Sea. Now, the Strait of Hormuz emerges as a new focal point, with significant implications for Dubai, specifically Jebel Ali, a core transshipment hub in the region.”

Experts warned that any disruptions in the region can have immediate implications for global oil markets, affecting oil prices, shipping routes, and energy security worldwide.

According to Indian freight forwarders, traders have already witnessed a price rise of nearly 20 per cent in some categories and are bracing for further impact, sparking fears of inflation. “The entire logistics sector is on tenterhooks right now. West Asia remains a highly vulnerable zone,” said Dushyant Mulani, chairman of the Federation of Freight Forwarders Association of India. “The situation has de-escalated, but one never knows. Consequently, insurance costs have gone up. Depending on categories and destinations, overall freight costs have gone up by 5-20 per cent and further.”

Mulani said that the immediate impact of this would be faced by smaller exporters. “Top Indian exports have the wherewithal to negotiate through various channels, but it is the smaller exporters who face the huge costs.”

According to Drewry’s World Container Index (WCI), container prices had peaked on January 25, 2024, at nearly $4,000 per 40-foot container in the wake of the Red Sea crisis. By April 11, container prices eased to $2,800 per container.

Roeloffs emphasised the strategic importance of the Strait of Hormuz, coupled with its role as a key transit point for maritime traffic. “The significance of this latest escalation is underscored. Furthermore, the implications extend to major transshipment hubs like Jebel Ali in Dubai, amplifying the potential impact on regional trade and shipping operations.”

Experts suggested that while diversion risks exist, the status quo may not pose those risks due to the importance of ports like the Jebel Ali port in global shipping networks.

The Strait of Hormuz, one of the most strategically significant chokepoints globally, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea, making it vital for global energy security.