Red Sea ship diversions unsettle vessel charter, bunker markets

* Shell, MOL, others halt all transits

Sopuruchi Onwuka

Continued Pirate attacks by unyielding Yemeni Houthi rebels on international shipping lines and the deterring airstrikes by the United States and the United Kingdom have made crossing canals and seas in the Middle East a nightmare for the global merchant navy.

According to the American military sources, dry bulk carrier Gibraltar Eagle owned by Connecticut-based Eagle Bulk was struck by an anti-ship ballistic missile in the Gulf of Aden on Monday. The Greek-owned dry bulk carrier Zografia was later hit by a missile in the southern Red Sea on Tuesday.

The security breaches forced energy shipper Shell and three Japanese tanker and bulker owners including MOL, NYK and K-Line to halt all Red Sea transits on Tuesday.

The attacks by the Iran-allied Houthis target a route that accounts for about 15% of the world’s shipping traffic and acts as a vital conduit between Europe and Asia.

According to reports reviewed by The Oracle Today, ocean going vessels From Europe and Asia are now forced to circumnavigate Africa in order to connect to the West. And the longer routes opted by shipping lines come with shakeup in the charter and bunker markets.  

Reports detail how hundreds of large vessels have rerouted around the southern tip of Africa, adding 10-14 days of travel, to avoid drone and missile attacks by the Houthis.

The re-routing of a growing number of ships around Africa to avoid potential attacks in the Red Sea is altering refueling patterns and boosting demand for bunker fuel at far-flung ports, from the Mauritius to South Africa to the Canary Islands.

“Ships are diverting away from the Red Sea and re-routing around the coast of South and West Africa – this increased traffic has created huge congestion in bunkering ports around Africa and placed significant pressure on port infrastructure,” John A. Bassadone, founder and CEO of independent bunker supplier Peninsula, told media sources.

Ships are also expected to top up more at Singapore and Rotterdam, the two busiest bunkering ports and where fuel is competitively priced, as they try to hedge against uncertainty over route changes, traders and analysts said.

Bunker fuel demand has risen at ports including Mauritius’ Port Louis, Gibraltar and ports in the Canary Islands and South Africa, said traders and industry sources, with sales jumping in Cape Town and Durban.

Prices of low-sulphur bunker fuel delivered at Cape Town have jumped 15% to almost $800 per metric ton since mid-November when the attacks started, data from bunker supplier Integr8 Fuels showed.

“We have seen an increase in bunker demand and fixtures in South Africa, particularly for bunker-only vessels lately,” said Philip Wang Balke, a senior bunker trader for Africa at Integr8, adding that supply is tightening as more shipowners and operators buy fuel in advance to ensure sufficient supplies.

Container ships were first to divert away from the Red Sea, and now oil tankers and dry bulk carriers are following suit, diverting bunker demand to West Mediterranean ports at the expense of East Mediterranean, industry sources said.

“We are anticipating increased demand in Las Palmas and Western Mediterranean ports as it’s likely the African ports will exceed capacity,” Peninsula’s Bassadone added.

Singapore and Rotterdam have yet to see a demand surge, though buying is poised to pick up in the next few weeks as ships lift more fuel at competitive prices, traders said.

“If the vessels are prone to higher ton-mileage or uncertainties, they are likely to fill up their tanks in case they ended up at expensive ports, and they can save a bit by buying less due to the extras they bought in Singapore,” said an Asia-based bunkering manager.

Spot premiums for prompt low-sulphur bunker fuel delivered at Singapore rose to $25 to $30 a metric ton above cargo quotes in mid-January, climbing from about $20 in early January, said industry sources.

Container-ship diversions around the Cape of Good Hope now appear likely to last for months. Spot rate gains from diversions will almost certainly extend into the period when 2023 annual trans-Pacific contracts are negotiated, pushing up contract rates.

The Red Sea effect on tanker trades remains uncertain, although a tipping point may be very near. If crude and product tankers divert away from the Red Sea and Suez Canal to the same extent as container ships, tanker spot rates should rise, because longer voyages would soak up tanker capacity.

 “There has already been a sharp decline in container ships approaching the Gulf of Aden, which feeds into the narrow Bab-el-Mandeb Strait, and there are likely to be major declines across other shipping segments as well in the coming weeks,” predicted Omar Nokta, shipping analyst of Jefferies, in a client note on Tuesday.

Ship-position data shows container transits down precipitously, tanker transits down modestly, and dry bulk transits down very little if at all.

Container-ship arrivals in the Gulf of Aden were at their lowest level on record last week, down 90% from the 2023 average, according to Clarksons Securities.

In contrast, bulk carrier arrivals in the Gulf of Aden were in line with the historical average, and tanker arrivals were down 20% versus 2022-2023 levels, according to Nokta, who cited Clarksons data.

According to data from commodity analytics group Kpler, the moving average of tanker transits of the Suez Canal had fallen to 14 per day as this week, the lowest level since May 2022 and down from an average of 22 per day a month ago.

In other words, there are detours on the tanker side, which are positive for rates, but still nothing close to what’s being seen in container shipping.

“So far, most tanker owners remain unwilling to commit to a costly rerouting around the African Cape,” said ship brokerage BRS on Monday.

“Since the events of Friday [the beginning of coalition strikes in Yemen], shipping data implies that only a handful of tankers heading from east to west have definitely changed course away from the Red Sea. Most other tankers in the Middle East scheduled to head west appear to be delaying their passage.

“Accordingly, there remains the potential that widespread rerouting could occur over the coming days. If this were to take place, it would provide a significant injection of ton-miles [demand measured in volume multiplied by distance] into the market,” said BRS, which sees the highest potential rate upside for tankers carrying refined products from east to west.

Spiking insurance costs could ultimately tip the scales for tankers toward the Cape route, said Frode Mørkedal, shipping analyst at Clarksons Securities.

“War risk insurance premiums for ships have skyrocketed,” Mørkedal wrote in a client note on Monday, prior to the attacks on the Gibraltar Eagle and Zografia.

“In the past few weeks, premiums have increased from 0.1% normally to 0.5% of a ship’s hull value. With the escalation of tensions in the Red Sea, we would not be surprised if insurance premiums increase to 1% of the ship’s value.”

Mørkedal cited the example of a 10-year-old LR2 (Long Range 2) product tanker valued at $60 million. The premium is now $300,000, quintuple the usual $60,000. If premiums rose to 1% of hull value, the cost would jump to $600,000. And on top of insurance, the Suez Canal transit fee for an LR2 is around $500,000.

In comparison, the extra fuel cost of taking an LR2 around the Cape at 12 knots would be $250,000. “Shipowners and charterers may find that rerouting around Africa is more cost-effective than incurring the combined costs of Suez Canal transit fees and insurance premiums,” said Mørkedal.

Richard Meade, editor in chief of Lloyd’s List, a publication that covers both shipping and insurance, wrote late Tuesday that Red Sea premiums have now risen to 1% of hull value, that a “tipping point has been reached,” and that further diversions of tankers and bulkers should be announced within the next 24 hours.