Hormuz Shipping Nearly Halts as Two Tankers Hit Mines, War Risk at 8%

The Analysis

Eight per cent. Not eight per cent of the freight bill, not eight per cent of the cargo value. Eight per cent of the hull, charged by underwriters for the privilege of putting a tanker into the Strait of Hormuz and bringing it out again. The number that applies when the water is calm is 0.15 per cent. Put 0.15 and 8 side by side and you have the whole story in two figures. One of them is insurance. The other one is a war tax, and it lands on every barrel that leaves the Gulf.

The sequence is short. Two tankers struck mines in the Strait of Hormuz on 7 and 8 November, the second of them after Iran's Revolutionary Guard warned that ships co-operating with US forces would hit mines. Daily transits through the strait fell from about 130 vessels before the conflict to roughly 20. Crude moving through the passage sits at 35 to 50 per cent of pre-war levels. War-risk cover has spiked to as much as 8 per cent of hull value against a normal 0.15. Very large crude carrier rates ran to WS1200. Persian Gulf to Asia freight touched $37 a barrel, more than five times the pre-war figure. American strategic reserves are down to 298 million barrels, the lowest since 1983.

That is the list everyone printed. I want to take the list apart, because a rate sheet is not a story, it is an arithmetic problem, and the arithmetic says something the headlines skipped. When the financial cost of a passage jumps more than fifty-fold inside a few days, the passage does not simply get more expensive. It gets re-ranked. Cargo that used to justify the voyage no longer does, and the first casualty is not the volume on the news reel, it is the marginal cargo nobody photographs.

Let us do what an underwriter does, which is to price one hull and one transit, because that is where the 8 per cent stops being a headline and becomes a cheque.

Say a very large crude carrier is valued at 100 million dollars, a round figure I am choosing so the arithmetic stays visible. War-risk cover at 8 per cent of hull value on a single transit is eight million dollars. That is not an annual premium. That is the cost of one trip through one strait. Now set it against what the trip earns. A VLCC carries roughly two million barrels. At the Persian Gulf to Asia figure of 37 dollars a barrel, the freight on that voyage is on the order of 74 million dollars. So the war-risk line is roughly a tenth of the gross freight, incurred before the ship has burned a single tonne of fuel. When the same cover costs 0.15 per cent, that line is 150,000 dollars, which is a rounding error inside a fuel bill. That is the size of the change. Two numbers, same ship, same strait, and the difference decides whether a marginal cargo sails or stays ashore.

This is why the transit count fell to 20 and the crude flow fell to between 35 and 50 per cent of pre-war, and it is important to see that those two facts are the same fact. The number of ships fell because the price of moving a ship rose, and the price of moving a ship rose because the risk is no longer an accident risk you can pool. When a strait is mined, the loss event stops being random. Someone has declared an intent, and underwriters respond to declared intent the way a market responds to anything declared: they re-price the whole book, not just the ships at risk.

Here is the part that costs money and does not show up in the wire copy. The 8 per cent is not billed equally across the chain, and who actually pays turns on the contract, not on the news. Start with the owner. Hull war-risk sit with the owner as the assured, on top of the ordinary hull and machinery cover, and most marine policies cut out war and terrorism risk unless a separate war-risk extension is bought. That extension is what jumped. Then the charterer. Under a standard war-risk clause in a time charter, once a vessel is ordered into an area designated as a war-risk zone, the additional premium is on the charterer, and the owner can refuse the order until the premium is arranged.

On a voyage charter the question is who is exposed for the extra days if the ship cannot load, wait or leave. Then the cargo interest. Your cargo may be sitting on that hull, and the war-risk cover that responds to physical loss of the cargo is a different policy again, priced off a different number. Three parties, three policies, three prices, and the headline gives you one.

The timing layer is where I would argue the real money hides. Freight is quoted before the ship sails and the surcharge is levied at booking, so most shippers believe the number is locked the moment they fix the cargo. It is not, if the war-risk clause moves. Under the common time-charter and voyage-charter war-risk language, the ship can go from a low-risk area to a designated high-risk area mid-voyage, and the additional premium for the newly designated part of the route is recoverable from the party that ordered the ship there, subject to the clause. Read that sentence again, because it is the one clause nobody reads until the invoice arrives. You can fix a voyage today at today's premium and still receive a demand for the difference if the strait is re-designated while your cargo is on the water.

Now the point I think the trade press missed entirely, and it is the sharpest edge in this whole week. War-risk cover is usually written on a per-voyage or a seven-day-window basis, and that structure creates a gap for the ships that are already at sea. Think about a tanker that sailed from a Gulf loading port three days before the mines went in. It is in international water on a perfectly ordinary transit, it has a valid policy issued against the old price, and then the zone is re-designated behind it. That ship did nothing wrong and ordered nothing new, yet its exposure has just changed.

The question every contract should already answer is this. Is the additional premium triggered by the voyage as originally ordered, or by the vessel's actual position on each day. If it is the latter, a ship in the middle of the strait on the day of re-designation can be asked to settle the increased premium for the balance of the transit, and if the charterer refuses, the classic remedy is that the vessel can deviate to a safe port and wait, which turns a premium dispute into a delivery delay you will never recover.

I would put this in the bucket of "cheap to check, expensive to discover." Pull one charter party, find the war-risk clause, and answer three questions in writing. Which areas are designated war-risk zones under this contract, and who declares them. Is the additional premium triggered per voyage order or by daily position. And if the additional premium is demanded mid-transit, who bears the cost of the extra days if the ship stops to wait for instructions. If those three answers are not in the file, the 8 per cent is not your worst number. Your worst number is the number an arbitrator decides later.

Let me put a small worked example on the table, assumptions stated, because a figure without assumptions is a rumour. Suppose you are moving a 600,000-barrel cargo from the Persian Gulf to Asia, and suppose the war-risk additional premium lands on your side of the contract at 8 per cent of the hull share attributable to your cargo, which I will put at a modest 2 million dollars. That is 160,000 dollars of premium on this one cargo. If instead your contract puts the trigger on the voyage order and your voyage order predates the re-designation, your exposure on the same cargo is the old 0.15 per cent number, about 3,000 dollars. Same cargo, same ship, same waterway, same week, and the difference between understanding your clause and not understanding it is roughly 157,000 dollars on a single lift. Scale that to a programme of twenty cargoes a month and the gap is not an argument about insurance. It is a trading result.

Here is the counterfactual, because a one-sided story is a sales pitch. Mines get swept. The warning recedes. The strait reopens and the daily transit count climbs back toward 130, and the war-risk premium collapses the way it spiked, because premium is a price for risk, and when the risk is gone the price goes with it. If that happens on the same speed it appeared, the ships that paid 8 per cent last week will feel foolish this week, and the temptation will be to conclude the whole episode was noise. I do not think it was noise, for one structural reason. The re-rating of cargo does not reverse as fast as the premium.

When a strait gets expensive, some cargo finds a different home. Asian refiners run less Gulf crude and pull more barrels from the Atlantic basin, the way the flow data to 35 and 50 per cent of pre-war already shows. Reserves get drawn down to 298 million barrels, the lowest since 1983, which is exactly the drawn-down, low-buffer condition in which a small supply shock moves a great deal of price. Even if the premium snaps back to 0.15, an Atlantic basin refinery that has retooled its slate and signed a term contract does not snap back on the same timetable.

There is one more layer under all this, and it is the layer a refinery planner sees and a shipbroker does not. Crash the transit count from 130 to 20 and you have not just raised the price of a passage, you have lengthened the delivery window and widened its variance. A refinery that schedules crude arrivals against a two-week buffer can absorb a predictable two-day slip. It cannot absorb a slip that is sometimes two days and sometimes twelve, and that is what a mined strait produces, because a transit is not cancelled in an orderly way, it is held, re-routed, or turned back. Variance, not the average, is what forces a plant to hold more inventory and to pay for the privilege. Nobody puts variance on the front page, because variance is not a number, it is a distribution, and it is the most expensive thing in this story.

Follow that through and the 298 million barrels stops being a detached statistic. A strategic reserve is a variance buffer by design. You draw it down when supply timing is uncertain, not when supply is merely expensive. The reserve falling to its lowest since 1983 while a chokepoint is being mined tells you that the world has been paying to smooth the variance, and that the buffer it uses to do so is thinner than it has been in four decades. Every additional day of uncertainty at the strait now lands on a smaller cushion than it would have hit a year ago, which is exactly the condition under which a small physical event produces a large price move.

That asymmetry is the thing to trade on, so let me be concrete about where the money actually is. There are three ways out of a Gulf loading problem, and each carries a cost you can write down.

The first is the physical detour around the Cape of Good Hope. It does not avoid the war-risk premium on the loading leg, but it changes the discharge timing, and on a crude voyage running long you are paying for days of vessel time at rates that are themselves at WS1200. You price it by the extra steaming days times the daily hire plus fuel, and you compare that against the war-risk line. Sometimes the detour is cheaper than the premium; usually it is not, because a VLCC is slow and the Cape is long.

The second is the bypass route that keeps the molecules in the pipeline instead of on the water. The genuinely clever move is not to sail the cargo at all but to source it where it already is, and chase the barrels that never enter the strait. That shifts cost from premium to feedstock spread, and it is a procurement decision, not a shipping one.

The third is to stay. If your cargo is high-value and time-critical and the alternative misses a delivery window, paying 8 per cent may still beat missing the window, and the arithmetic will tell you which. Run the premium against the penalty clause on the delay. Whichever is smaller is the answer, and it is an answer you should have computed before the crisis, not during it.

One more trap, and then the actions. Everyone reads the same news, so the moment the strait tightens, everyone moves to the same detour, and the Cape route, the Atlantic basin barrels and the alternative discharge ports all fill at once. Your alternative is only an alternative while it is still underused. A detour that half the market discovers in the same week is not a hedge, it is a queue. This is the pattern in every chokepoint event I have seen. The people who move first save money. The people who move when the news is loud pay the crowd price.

So what does an importer or exporter actually do with a strait that is being mined and an insurance market that has re-priced the whole waterway. You do the unglamorous things, and you do them now, while the premium is high and the attention is on you, because the checks are cheap today and the disputes are expensive later.

Pull every charter party and every freight contract that touches a designated war-risk zone and confirm in writing which party bears the additional war-risk premium, whether the trigger is the voyage order or the daily position, and what happens to the freight if the vessel has to stop and wait for instructions mid-transit. Do this before the next fixture, not after the next invoice.

Set a premium trigger line for your book. I would use the number where the additional premium crosses roughly one per cent of hull value on a transit, because that is the level at which the per-voyage cost stops being absorbable inside the freight and starts to move the economics of a marginal cargo. When the trigger is crossed, walk the three alternatives, the Cape detour, the pipeline and Atlantic basin barrels, and price all three the same day. Do not wait for the strait to be re-designated to start pricing the way out.

Re-cut your margin on any cargo whose economics assumed a 0.15 per cent premium. If you contracted freight on the old number and the new number is eight, then either you eat the difference or you pass it, and you need to choose deliberately rather than discover it in a variance report. The barrel that sailed at 37 dollars freight is not the barrel you budgeted at pre-war rates, and the difference is roughly five times, not five per cent.

Get an alternative discharge and an alternative source registered before you need them. An account you have never used is an account you cannot move to in a hurry, and the value of a second port is that it exists on the day the first one closes, not the day you discover you never set it up.

Write the war-risk allocation into contracts going forward. Specify who declares a zone, who pays the premium, how a mid-voyage re-designation is handled, and how the waiting cost is split. This is the clause that has been quietly expensive all week, and it is the one everyone will wish they had read.

Do those things and an 8 per cent premium becomes a number you priced on purpose rather than a tax someone handed you. Skip them and you will learn the difference between a headline and a clause the expensive way, at anchorage, with your cargo on a hull you do not control, waiting for an instruction that nobody wants to be the one to give. Show me the number, not the feeling, and this week the number is 8 per cent of a hull, charged voyage by voyage, on the one passage that decides what the world pays for crude.

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— By Vivian Zhao