ANDREW PIKE | Counting the knock-on costs of the Middle East war

One of the certainties emerging from the current Middle East war, besides the tragic loss of life and infrastructure, is that the consumer is going to bear the brunt of the cost.

As the war rages on, the Strait of Hormuz remains de facto closed to shipping. This means 20%-25% of the world’s oil supply is stuck. Ships that are inside the Persian Gulf cannot get out. Ships that are stacked outside the Strait of Hormuz cannot get into the Gulf to load and will eventually have to look for cargo elsewhere in the world.

The limited comfort offered to shipowners by insurance

To compound matters, the war seems to have triggered more Houthi activity in Yemen, yet again ramping up the threat to shipping passing through the Red Sea to transit the Suez Canal. All of this uncertainty has meant that war-risk insurers — the insurers that provide cover for damage to and loss of ships caused by war — have ramped up their premiums. Some are no longer even offering cover for the region. The increase in insurance cost alone could add somewhere north of $1m per voyage transiting the area.

US President Donald Trump has spoken about providing government-backed political risk insurance to encourage ships to move through the Persian Gulf. Frankly, if I were a shipowner that sort of insurance cover would offer cold comfort. Apart from that I would still stand to lose my ship and have to replace it, and lose all the business I would have had during the replacement process, the issue many commentators (and the US government) seem to be ignoring is the safety of the crew on those ships. It is unconscionable to ask crew to sail through dangerous waters with a high probability that they might lose their lives.

The upshot is that cargo ships that would otherwise have transited to Europe through the Suez Canal route will now have to come south around the Cape. Many of the container lines have already announced that this is what they will be doing in future.

The impact of more demand combined with a shortage of fuel

Although since the Houthi crisis started in 2023 many ships started coming around the Cape rather than sailing through the Red Sea, this latest development means there will now be a higher volume of ships sailing southwards and placing increasing demand on limited fuel supplies, despite the increase in oil prices.

So, the additional cost of sailing around the Cape is not only about using a lot more fuel (a rough estimate: around 1,500 tons per voyage) but also about paying 50% more for that fuel. Before the current oil prices the net additional cost to a ship, including all extra operating costs of a longer voyage, could be as high as $1.5m.

The cost is partially offset by ships not having to pay the Suez Canal toll fee, which can be as high as $800,000, depending on the size of the ship. Coming around the Cape means ships will, of course, also avoid the high war risk premium. This cost gets passed onto consumers.

To make matters worse, the additional voyage time, averaging between 10 and 15 days, means time-sensitive cargoes could start coming under pressure. However, there is another problem: an effective reduction in the world’s shipping fleet capacity.

This arises because a ship that takes 10 to 15 days more to reach its destination will inevitably sail fewer voyages over a given period. Fewer voyages mean less shipping capacity. This is currently estimated as a 10%-15% reduction in fleet capacity. Less capacity means more demand and a corresponding increase in freight rates (the cost charged by ship owners for carrying cargo).

What does this mean for SA?

South Africa will undoubtedly see more shipping traffic. Because the voyage is so much longer, ships will have to refuel and reprovision somewhere along the subcontinental coastline, and South Africa is one of the obvious stopping points. However, it is equally affected by the oil squeeze in the Persian Gulf, does not have unlimited oil reserves, and certainly has limited oil refining capacity. In addition, the country’s priority is to provide bunkers and provisions to those ships that regularly trade to and from the country, rather than to ships that are simply passing through.

A potential shortage of bunker fuel for passing ships could be further aggravated by the strain on port resources. Although the South African ports system has recovered significantly from the drama of two years ago, an increase of anything from 50%-100% in passing traffic would test even the most efficient of port systems.

A potential fuel shortage, coupled with strained port and bunkering operations, presents a perfect storm that could create a crisis for the provisioning of ships coming around Africa. Although theoretically all the additional traffic could be a boost for the region’s economy, it could just as easily spark a different crisis and may in the end be bad for the region.

Taking all the additional costs and constraints into account, we can expect to see freight rates soar in the near term and remain high both for as long as the crisis continues and for a while thereafter, until refining and storage infrastructure is rebuilt and the Middle East oil business can resume. Those freight rates will, of course, all get passed on to the consumer.

There is very little good news coming out of the Middle East crisis, particularly for the consumer. One can only hope that somehow or another reason prevails and this madness can be ended sooner rather than later.

• Pike is head of ports, rail and logistics at Bowmans.