Is the Strait open or closed?
The US and Iran signed a Memorandum of Understanding in mid-June through which they agreed in principle to reopen the Strait of Hormuz. The US ended its blockade soon after and Iran committed to allowing vessels to pass – toll free – during the 60-day period set to negotiate a final peace agreement.
So the strait has technically been reopened since June. But even if there were complete calm in the waterway – which has not been the case – estimations are that it will take weeks to months for traffic to rebound to pre-war levels. The recovery will take time because Iranian mines, which could take months to remove and demining may not start until a final deal is reached, have made the main central passage unpassable.
As such, passing vessels are limited to two narrow lanes, one in the north of the strait along the Iranian coast and one in the south along Oman. Towards the end of June the UN’s International Maritime Organization began implementing an organized evacuation plan aimed at orchestrating vessel exits out of the Persian Gulf along the southern route.
Iran vying for long term control
The UN’s Convention on the Law of the Sea (UNCLOS) considers the Strait of Hormuz an international strait, and therefore requires neighboring countries to allow vessels to pass unimpeded. Iran however never ratified the UNCLOS, and argues that under international law it has the right to control traffic under some circumstances (though probably not for neutral merchant vessels).
Authorized route being promoted by Iran’s Persian Gulf Authority. Source: Persian Gulf Authority
In any case, Iran has advised all vessels in the region to transit only via the northern lane and in coordination with the Strait Authority it has set up. Periodic Iranian attacks on vessels using other lanes, as well as on neighboring countries, probably aimed at forcing traffic through its channel – followed by US retaliations – have further limited the speed of traffic recovery through multiple stops and starts. The IMO officially paused its evacuation effort just days after it started, in response to Iranian threats.
Nonetheless, traffic through the Strait overall has increased compared to before the ceasefire, but has fluctuated and is still well below pre-war levels.
Impact on freight markets
Freight operations
Operationally, the strait’s closure did not disrupt the overall container market, but did significantly impede container traffic in and out of the Gulf states.
The renewed traffic comprises mostly tankers, though some container vessels have exited the Gulf since the ceasefire began while very few have entered. For now, shippers trying to get containers into (or out of) the Gulf states continue to rely on alternative, still accessible ports in the UAE, Oman and Saudi Arabia and then, sometimes very lengthy, road transport.
Shipments via these alternatives have faced long delays and steep pricetags, and the fact that volumes haven’t dropped on these lanes show that for Gulf container traffic there has not been much of a recovery yet. Even once the situation is more stable, container carriers are likely to activate mostly feeder services instead of long haul port calls to the Gulf until confidence returns to the lane.
Freight rates
Though the broader container market was spared operational disruptions, the Strait of Hormuz closure did have a significant impact on the overall market by way of rising fuel costs.
Emergency Fuel Surcharges led to transpacific container rates climbing $1,000/FEU and 50% over the first two months of the war. Sharp Bunker Adjustment Factor hikes set for July 1st, as well as Q3 manufacturer price increases, are probably key factors to the early surge of peak season demand for both transpacific and Asia – Europe lanes, which have pushed container rates up by $3,000 – $4,000/FEU on these trades since the end of May.
Oil prices have already eased back to pre-war levels, with the speed of the crude rebound is taking many experts by surprise and even leading to concerns of oversupply. Bunker fuel prices have eased significantly as well, but still remain about 30% higher than pre-war levels. Refined petroleum products are likely to take a little longer to normalize, as they depend on a crude recovery first, but oil market behavior makes it likely that bunker prices are on their way back to normal.
Join 70,000+ Supply Chain Experts Who Never Miss an Issue!
Start your week with the industry insights others miss.
The bottom line
That oil prices are stabilizing even before Strait of Hormuz traffic has returned to normal is a good sign that freight rates – once peak season demand subsides – will also face downward pressure from normalizing bunker prices, and could return closer to pre-war levels before the end of the year.
A recovery to normal container flows (and freight rates) for the Gulf states will likely take much longer, and there are reports that countries in the region are planning on investing in better infrastructure for those alternative routes as they look to the future.
The post Ocean Freight Impacts: Hormuz Status Update and Analysis appeared first on Freightos.