The Straits of Hormuz (or “SOH” as we refer to it) remains a constant source of enquiries for the BDM team.
On the one hand, we have trading companies and charterers who have ships on charter trapped within the Arabian Gulf. They are desperate to find a way for those ships to trade and earn freight which is the only way that those charterers can pay the daily hire on those ships. Many of these vessels are on long term charters which means that “frustration” arguments are not available. In most cases, the ships are sitting idle and not earning freight yet hire continues to accrue. The losses already extend to millions of dollars and, potentially, we could see failures in the charter chains due to bankruptcies if the SOH remain closed. We also anticipate a wave of unpaid hire claims in the wake of this crisis, assuming it ever ends.
There are also shippers who need to move cargoes out of the Arabian Gulf but who cannot use the SOH. There is now a move to develop land bridges. The most obvious example is the Saudi’s increase of crude going to Yanbu via its pipeline to be shipped from the Red Sea coast and out via the Bab al Mandeb. Other essential goods are however being trucked to ports in Oman or elsewhere to enable them to be shipped out.
We also need to consider goods going to the Gulf States. Traditionally those goods have gone in via container routes but those are now obstructed. We have seen an increase in air freight but that is becoming problematic as the aviation industry faces a crisis due to shortages of jet fuel. Some of this fuel can be supplied locally but jet fuel much like petroleum products is subject to the global market. The cost of air freighting goods into the Gulf States is thus increasing and land bridges are only a temporary solution.
Add to this the inherent risks of an escalation from an increasingly angry Iran. The US blockade of Iranian ports might not be having much impact now but if things continue as they are then by August the Iranians may lash out at those closest to them to seek to redress the balance. Against this, a lengthy blockade and closure of the SOH is increasing the risks of a recession which will have a huge impact on shipping.
Against this background, we are seeking to advise our clients on the best way to navigate the crisis. Those who can trade within the Arabian Gulf are doing so but the risks are still present. That said, there is at least some insurance cover for intra AG trade. There are challenges for clients in terms of manning vessels that could be stuck in the AG for many months. There are supply and maintenance challenges. There are hull fouling issues. There are also legal issues that arise from potential frustration/ termination of charters which could put the burden of losses back on to owners and pave the way for future litigation. These problems continue to escalate.
Nick Burgess
Partner
James Ingham
Managing Associate
