Suez Canal Shipping

[Saluki]

After the Houthi attacks in the Red Sea, some of the larger carries like Maersk announced they would sail around Africa and avoid the Suez canal.  One of the reports I saw stated that insurance, at the time, on cargo ships had gone from 1% of cargo to 2% for non-israeli ships.  Some people saw this as a move by Maersk, which had overbought containerships during the pandemic, to try to artificially raise rates by conjuring up a reason to avoid the Suez. 

 

After the US and others announced they were sending patrol ships, thing appeared to go back to normal, but now Maersk says they are avoiding the Suez again after the latest attack and the fact that Iran is sending what they call a destroyer (but is more likely  what other people would consider a Frigate or possibly even a Corvette). 

 

https://www.cnbc.com/2024/01/02/oil-prices-rise-as-iranian-warship-enters-red-sea-.html

 

What I find interesting is that 1% -> 2% insurance isn't a huge deal, but now that the west and the houthis and now Iran are sending ships to the region, maybe insurance companies can argue that it's a war zone and deny insurance claims altogether.  Then that would dry up shipping even faster than the piracy issue.  Talk about the law of unintended consequences: you send warships to make ships feel safe, but your warships are responded to by more warships and now the shippers want to avoid it because they will eat the loss if the insurers use your warships as an excuse.  

 

Anyway, thought this might deserve it's own post.  Moving around Africa to Europe adds from 2 weeks to 21 days depending on the speed of the ship and since about 1/4 of ocean freight goes through this canal, it should have a big effect on shipping rates.  Anyone want to chime in?

[Xerxes]

I ll just add that Panama Canal also has some issues related to lack of fresh water that is usually used to lift the ships in the docks. 
 

So these uncorrelated issues are just compounding on each other. 

[Saluki]

45 minutes ago, Xerxes said:

I ll just add that Panama Canal also has some issues related to lack of fresh water that is usually used to lift the ships in the docks. 
 

So these uncorrelated issues are just compounding on each other. 

 

Yes, for reasons I don't completely understand, the Panama Canal uses fresh water from a nearby lake to operate the system and drought and climate change have depleted the water coming in. 

 

https://ctmirror.org/2023/08/27/the-panama-canal-is-running-out-of-water/

 

I've seen that they are allowing fewer ships through and charging higher rates.  One beneficiary (besides shipping companies that benefit from higher charter rates if they have to sail around south america, appears to be the Canadian Pacific Railway.  According to the article, they own half the railway that can be used to ship goods overland if you can't use the canal.  Haven't looked at Railways, but it seems to be a good business for Berkshire.  They were terrible until they consolidated and the regulations changed which allowed the RRs to charge higher rates. BRK timed it perfectly. 

[ValueArb]

If they remade "The Graduate" in 2020 Mr. McGuire's one word of advice to Benjamin Braddock should have been "Shipping"?

[SharperDingaan]

The only way this works, is if old Panamax tankers are used (small). It really means that Panama water restrictions, have made the markets for sea-borne ME crude much more restricted, and why the Saudi's reduced prices on February deliveries to Asian buyers. It also highlights why hostilities in the Red Sea are useful, as the expected risk premium hedges the price cuts. 

 

SD

 

 

[Saluki]

https://www.reuters.com/world/us-uk-forces-shoot-down-houthi-missile-drone-attack-red-sea-us-military-2024-01-10/

 

Largest attack yet.  21 drones shot down, but no ships damaged.  

[Saluki]

Israel-Hamas war live updates: Houthi targets in Yemen struck by US and UK (cnn.com)

 

US/UK strike Houthis in Yemen.  They are threatening to retaliate.  

[Saluki]

 

Recent update on the business side of the Red Sea attacks. 

[Saluki]

https://www.reuters.com/world/middle-east/eu-naval-mission-greek-flagged-ship-sounion-fire-since-august-23-after-houthi-2024-08-26/

 

Greek oil tanker in Suez on fire after houthi strike. 

[cubsfan]

We'll see if the world wants to react and let the Houthi shut down the gulf.

[Dinar]

11 hours ago, cubsfan said:

We'll see if the world wants to react and let the Houthi shut down the gulf.

Houthis are not the problem, Iran is, or more precisely the current government of Iran.  They are pulling strings behind the curtain.

[Saluki]

https://seekingalpha.com/article/4719982-international-seaways-tanker-market-updates-seasonal-upside-ahead-podcast-transcript 

 

Interview with CEO and CFO of International Seaways. Not one that I own. They have both Crude Tankers and Product Tankers. 

 

Thesis is unchanged: Very low order book, which is not enough to replace ships as they are retired.  New output from OPEC countries is killing oil prices, but should be good for crude and product tankers because they have to get it to market somehow and these tankers are already in a tight market. 

[Saluki]

 

This is a scenario that I did not foresee.  It's pretty common for clean tankers to switch to dirty at the end of their useful life, but it's usually one way because the costs to switch back to clean are so high. 

 

https://gcaptain.com/trafigura-to-convert-more-supertankers-if-oil-market-woes-linger/

 

It appears that only trading houses, like Trafigura, that own their own fleets are willing to accept the costs to switch because of down time, prep costs and risk of contamination.  But if you can switch from carrying people in a taxi to a school bus, that will drive down the costs that taxis can charge.

 

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/shipping/071224-dirty-to-clean-switch-caps-high-lr2-tanker-freight-rates-as-supply-widens#:~:text=Moving clean products on VLCCs,helps minimize the cleanup costs.