The huge cost of international shipping: from "freezing" to "slow thaw"

（Source: China Economic Herald）

Originally from: China Economic Herald

The image shows a near-1-year chart of WTI crude oil futures prices captured by our reporter on the Investing.com website (www.cn.investing.com) on the afternoon of April 1.

On March 25, Iran announced that non-hostile vessels could safely transit. That same day, COSCO Shipping Container Lines announced the resumption of new booking services for the Middle East. Global shipping is transitioning from a “freeze” to a “slow thaw” state, but the Iran–U.S. war has dealt a severe blow to this industry.

Although ship insurance can still be underwritten, London’s major maritime insurers have confirmed that the root cause of the decline in shipping activity is that security risks continue to rise—not that coverage is being reduced. The London insurance market currently requires ships to renegotiate premium terms based on factors such as vessel type, cargo nature, and the flag state, while demand for transit insurance has also fallen off a cliff. David Smith, head of the maritime insurance research department at McGill University in Canada, said that the situation is changing too fast, causing premiums to fluctuate almost every hour.

More deadly still is the question of where the marine fuel oil that drives the global container-fleet operations “comes from” and “how it is supplied,” which has become the key to freight rates getting out of control. The Middle East is a major source and export region of marine fuel oil globally, especially high-sulfur fuel oil. However, military conflict has turned supply in this region from a “hub” into a “bottleneck.”

According to data from the International Energy Agency, refineries in the Persian Gulf produce 20% of the total volume of fuel oil for global international trade. In addition, the residue available from crude oil output in the region is much higher than that of WTI crude oil that can be used to manufacture fuel oil. Therefore, even if Asian refineries switch to purchasing alternative crude oil from the United States and Russia, they still cannot produce the same quantity of fuel oil.

Typically, the total export volume of fuel oil through the Strait of Hormuz is about 3.7 million tons per month, with more than one-third shipped to Asian markets. Fujairah Port in the United Arab Emirates is even the world’s second-largest vessel fuel oil bunkering center after Singapore and Rotterdam. In January this year, its sales reached 636k cubic meters, roughly 630k metric tons, setting a new high in nearly four months. But in February, Fujairah Port’s sales volume of high-sulfur fuel oil fell 35.6% month-on-month, because it is highly dependent on local Middle East refining byproducts; by the end of March, it was basically shut down.

Singapore’s supply line for importing fuel oil from the Middle East nearly broke off in early March, and several other ports in the global top ten have also begun to show problems.

In a report released recently, the European Federation for Transport and Environment said that since February 28, the global shipping industry has cumulatively paid fuel, transport, and environmental cost surcharges of as much as more than 4.6 billion euros. For example, Singapore’s very low-sulfur fuel oil price rose to 941 euros per ton, up 223% from the start of this year—an all-time high. Global LNG prices rose 72% in March, further increasing shipowners’ operating costs.

At present, liquidity in the fuel oil market is nearing exhaustion. In the real world, buyers are purchasing refined products such as gasoline, diesel, and fuel oil; the export-side price from refineries is the true cost to the real economy. Currently, the linkage between crude oil benchmark prices and fuel oil prices has broken. In the oil industry, fuel oil is often referred to as a “bottom-of-the-barrel product,” and historically has been cheap and overlooked. Now, however, it has become one of the most expensive bulk commodities in the world. If the supply chain for fuel oil—an intermediate product—collapses, container ships and bulk carriers will be forced to stop sailing and transmit the shock to the real economy through channels such as soaring freight rates and cargo delays.

To transport fuel oil between U.S. and Singapore ports, some traders have had to give up existing orders. Currently, shipping giant Maersk is sourcing alternative fuel oil supply from different locations and different suppliers around the world, such as Rotterdam, Gibraltar, Long Beach in the United States, and Panama. Starting March 25, it has imposed an emergency fuel surcharge to cope with increased distribution costs.

Whether the fate of the global shipping industry can improve still involves substantial uncertainty. On March 28, the Yemeni Houthi forces issued a statement saying that, in response to the escalation of the situation in the region, they have carried out their first military action. As a result, the Red Sea–Suez Canal route—the core trade corridor connecting Asia and Europe—also faces instability. The Bab el-Mandeb Strait, which serves as a gateway to the Suez Canal, may again face disruptions. The two major global shipping arteries could form overlapping pressure, leaving the global shipping system—once able to maintain a certain degree of slack capacity—with unprecedented coordination and scheduling pressure.

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