Middle East Risk Prolongs, Shipping Industry's Cost Burden Mounts

As political instability (geopolitical risk) in the Middle East continues, the domestic shipping industry is facing significantly increased costs, including fuel and insurance premiums. Despite freight rate hikes, it is becoming difficult to generate profits.

Singapore VLSFO prices surged by approximately 50% from $710 per ton on February 27 to $1070 on March 19, hitting a high of $1120.5 on March 13. The share of fuel costs in overall vessel operating expenses has risen to 31.1% recently, up from 18.6% prior to the Middle East crisis.

War risk insurance premiums near the Strait of Hormuz rose from 0.2-0.25% of vessel value before the conflict to 0.75-1% in early March, and have reportedly reached approximately 5% recently.

The Shanghai Containerized Freight Index (SCFI) increased by about 30% from 1319 to 1710.35 before the Middle East incident. However, the surge in costs has outpaced freight rate increases, weakening the profitability structure of shipping companies.

The shipping industry faces a structure where cost increases cannot be immediately passed on to freight rates due to a high proportion of long-term contracts. While fuel surcharges exist as a mechanism to recover costs, shipping companies are encountering difficulties in actual implementation during negotiations with shippers.

The Strait of Hormuz has no alternative routes, meaning operational disruptions and decreased cargo volume do not directly translate into improved profits through freight rate increases. Analyses suggesting the shipping industry is benefiting from higher Middle East route rates are not entirely accurate, as the rise in indicative rates rarely leads to actual contract signings.