Hormuz standoff: ‘Carriers have no alternative but to wait and see’

The Strait of Hormuz has become the central flashpoint of the military conflict in the Middle East. Iran has unleashed its most potent economic lever by turning it basically into a no-go zone, unless very expensive tolls are paid, and it is not likely to give that up very lightly.

As for the US, at the start of this week, it imposed a naval blockade of Iranian ports, not of the strait itself as President Trump initially indicated.

This has triggered a cautious waiting game on the part of the two protagonists’ sides against the backdrop of a fragile ceasefire. Meanwhile, China is reported to have reached a shipping agreement with Iran and warned the US against any interference, thus adding to the geopolitical tension.

In a webinar on the outlook for the container shipping market, maritime research consultants, Drewry, noted that amid the “noise and bluster,”, a clear timetable has yet to emerge for a resolution (of the stand-off), but in contrast, there is plenty of scope for re-escalation.

“In our view, until there is something substantive, something that is acceptable to all sides, that holds some degree of permanency, the situation and the risks for container shipping won't change,” observed Simon Heaney, Drewry’s senior manager of container research.

“Carriers really don't have any alternative but to wait and see and continue serving the Middle East in the patchwork fashion that they quickly adopted after the start of the war at the end of February.”

Gulf Heavily Dependent on Imports

Unlike the COVID period, where severe supply constraints coincided with a surge in demand, the current conflict carries a meaningful downside risk to demand, he explained.

“So, any escalation in military activity is going to weigh heavily on global trade and, in turn, on carrier profitability and their share performance.”

In terms of global world container port throughput, the Gulf’s share is less than 5%. Nevertheless, disruption, higher costs, and increased volatility are already evident, and these risks will intensify depending on the duration of the conflict, Heaney pointed out.

Moreover, while not a dominant container market, the Gulf region economies are heavily dependent on imports of consumer goods, machinery, construction materials, and food, box freight staples, and its ports function as big transshipment and bunkering hubs.

Two Potential Scenarios

Because of uncertainty over how long it's going to be before Hormuz is fully operational again, Drewry has drawn up two potential scenarios and the implications they will have for container shipping.

According to the first, a base case scenario, there will be a short disruption of the Strait that will last until the end of June this year. The second scenario is more pessimistic; a prolonged disruption that will last for 12 months, through to the end of February next year.

Under the base case scenario, a short disruption is going to result in little more than a temporary spike in freight rates driven by higher fuel surcharges. There will be a modest dip in global volumes, particularly into the Middle East, and there will be a familiar demonstration of supply chain resilience.

A prolonged disruption, however, will be far more consequential. A one-year disruption that drives oil prices up to, say, US$140-150 per barrel, would deliver a much more severe shock to the global economy, triggering a toxic mix of energy and food shortages, rapid inflation, and very possibly recession in import-dependent economies.

“In our view, under this scenario, global trade growth would contract, and geopolitical tensions would intensify as the major powers scramble to secure alternative supply routes and to access strategic reserves.”

However, what successive global disruptions – from COVID to the war in Ukraine and US tariffs show is that container lines have become increasingly adaptable. Trade finds a way, and liners have responded to this. crisis with a combination of caution and improvisation, Heaney underlined.

Three-Phase Carrier Response

Drewry has split carriers’ response into three phases: the first, a complete withdrawal from the Gulf; phase two, a reintegration of the Gulf via alternative networks; and phase three, preparation for escalation scenarios.

After the initial shock, carriers moved pretty quickly into the second phase, typically within one to two weeks, to restore flows into the Gulf via indirect solutions, such as land bridges to reach destinations in the GCC.

“We've seen a network or a ring of alternative hubs emerge outside of Hormuz that enables cargo to be rerouted into the region. But these hubs are still within striking range (of military attack), and therefore, they're also subject to war risk surcharges and remain very expensive. And if we were to see any significant disruption at these nodes, further contingency measures would have to be implemented, including diversions to substitute ports such as Colombo or Nhava Sheva.”

Escalation Threat

Container shipping to the Middle East is likely to remain indirect and disrupted. At the same time as plugging the Middle East back into lines and networks, carriers are having to simultaneously prepare for escalation scenarios, Heaney observed.

“Fuel is at the top of most of their thinking. It's becoming increasingly both a cost and a strategic risk to shipping lines, which necessitates contingency planning. Global bunker prices have risen by 60 to 80%, and there's significant regional divergence.

Major carriers were very quick to announce emergency fuel surcharges, and if prices continue to move upwards are likely to be repeated, he warned. “But the risk of bunker shortages, while real, is not an immediate threat in our view.”

The result is a highly dynamic and fragmented operating environment for the duration of the conflict and potentially beyond, if mine-clearing operations are still required.

Lasting Changes

For now, liner disruption remains manageable – just about. Heaney noted.

“Global container volumes have not collapsed. Trade flows have bent rather than broken. But even if the Middle East conflict stabilizes and Hormuz re-opens, within our base case timeline, it has already exposed some structural vulnerabilities in the market which could lead to lasting changes, not just temporary disruption. Top of the list in my mind would be a redesign of liner networks that will try as much as possible to avoid choke points.”

The Houthi attacks on shipping near the entrance to the Red Sea, which started at the end of 2023, have led to networks shifting from being cost-optimized to more risk-managed and resilience-focused.

“I think this may become a more permanent feature in the future. Lines will look to reduce their dependency on any single corridor, whether that be Suez, Hormuz, or Bab al-Mandab, or anywhere they really want to avoid. The conflict could also accelerate the trend towards more near-shoring.”