Escalating tensions in the Red Sea have far-reaching implications for global shipping and commodity markets. Risks posed to oil, LNG, metals, and agricultural markets include disruptions, longer shipping times, and increased costs. As the situation evolves, shipping stakeholders need to closely monitor developments in the region and make adjustments to mitigate the impact on global trade and supply chains.
Ewa Manthey, commodities strategist, and Warren Patterson, head of commodities strategy, at ING have analysed the escalating conflicts in the region, examining the repercussions for various cargoes.
First up are their concerns about disruptions to global oil and energy markets. According to ING, approximately 12% of total global seaborne oil trade passes through the Red Sea, making it a critical route for crude oil and refined products. The increase in tension has led to rerouting decisions by some shippers, opting for the longer journey around the Cape of Good Hope.
The report highlights that while the current situation has caused a growing number of tankers to be diverted, oil supply has not yet seen a fundamental impact.
It is important to note that while the current situation is leading to a growing number of tankers being diverted, we are not seeing oil unable to move to destination or oil supply declining,” said Manthey and Patterson. “Initially it may lead to some tightness for refiners as their supply chains adjust to the longer shipping times. We will also need to see if tanker capacity is adequate to deal with longer voyages. For now, the Red Sea attacks do not change our oil balance.”
Hormuz concerns
The Strait of Hormuz is identified by ING as a bigger risk for the oil market, as it represents a crucial chokepoint for global oil flows. “While we believe the risk of this is low, it needs to be monitored, particularly after Iran recently seized an oil tanker in the Gulf of Oman. A little more than 20m bpd of oil flows via the Strait, which is equivalent to around 20% of global consumption.
“Clearly, an escalation which puts Persian Gulf oil flows at risk will be much more of a concern for the oil market and global economy. Ships can avoid the Red Sea by going around the Cape of Good Hope. Unfortunately, aside from some Saudi and UAE flows via pipeline, there are no alternative routes for the bulk of flows from the Persian Gulf. The Strait of Hormuz is the only option.”
Meanwhile, LNG flows through the Red Sea have witnessed an increase, constituting approximately 8% of global LNG trade. The report notes that as US LNG export capacity grows, more LNG is being directed through the Red Sea, particularly towards Asia.
Qatar, the largest supplier of LNG to Europe, sends a significant portion of its LNG through the Red Sea and Suez Canal. ING suggests that if the situation in the Red Sea deteriorates, LNG flows may experience disruptions and longer shipping times. However, the flexibility in trade flows may allow for adjustments, such as rerouting US LNG destined for Asia to Europe and vice versa. “In doing this, these flows will avoid the Red Sea and will not have to take the longer route around South Africa.”
Metal moves
For metals shipped in containers, the conflict in the Red Sea poses an “upside risk”, said ING. Container freights, which constitute roughly half of the shipped tonnage crossing the canal, are significantly affected by rerouting. Major container lines, including MSC, Maersk, Hapag Lloyd, Cosco, ONE, Evergreen, HMM, and ZIM, have diverted vessels around the Cape of Good Hope, leading to increased freight rates and longer delivery times.
ING highlights that these disruptions are particularly impactful for Europe. “Europe relies heavily on aluminium imports with nearby supply constrained.
Several output cuts have taken place in Europe since December 2021, accounting for 2% of the global total.” Additionally, soaring energy costs have squeezed producers’ margins, with the higher shipping costs eventually expected to be passed through to the end-selling price for metals.
And while agricultural flows are deemed less likely to be significantly disrupted, ING notes an increase in US grain volumes taking the longer route via the Suez Canal to Asia. Ongoing restrictions at the Panama Canal have contributed to this shift, and any further avoidance of the Red Sea could lead to even longer voyage times.
Additionally, the several standalone sugar refineries in the Red Sea might “find it more difficult to export containerised refined white sugar due to container ships avoiding the region”.
This could result in tightness in domestic markets within the region and parts of Africa.
“There are also potential indirect impacts from the Red Sea attacks on agri markets. If they persist and lead to increased delays, farmers could see their input costs increasing. This would materialise in the form of higher diesel prices and potentially higher fertiliser prices,” concluded ING.
Source: Baltic Exchange