Fresh strikes on Houthi-controlled areas in Yemen may further lift freight rates

The latest US- and UK-led strikes on Houthi-controlled areas in Yemen have led to concerns that the ongoing conflict in the Middle East may escalate, putting the commercial shipping network in the region under greater risk and likely further pushing up freight rates, sources said.

US and UK forces conducted strikes on eight Houthi targets in Iran-backed Houthi-controlled areas of Yemen, the US Central Command said late Jan. 22.

"These strikes are intended to degrade Houthi capability to continue their reckless and unlawful attacks on US and UK ships as well as international commercial shipping in the Red Sea, Bab Al-Mandab Strait and the Gulf of Aden," CENTCOM said, adding that these strikes were separate from the multinational freedom of navigation actions performed under Operation Prosperity Guardian.

The latest incident followed US- and UK-led strikes on Yemen's Houthi rebels in the evening of Jan. 11, which was followed by the US' designation of the Houthis as a global terrorist group Jan. 17.

Additional costs

The attacks are likely to result in more ships avoiding the Red Sea route, which would lengthen the duration of voyages, tighten the supply of ships and lift the additional war risk premia, or AWRP, and freight rates, market participants said.

The LR2 tankers that carry up to 90,000 mt of refined oil products currently command premiums as high as $1 million for a voyage on the Persian Gulf-Europe routes via the Cape of Good Hope, over the earlier more common transit via the Suez Canal, maritime sources said.

LR2s -- which are much smaller than Suezmaxes -- were paying more than half a million dollars for a seven-day transit from the Red Sea region, said a North Asia-based chartering executive with a global commodities trading company.

Since the ship has to ballast back on the same route, if it picks up a cargo again in the Red Sea, the actual AWRP will be double this amount, the executive said.

LR2s have risen over 25% in the last four trading days on the Persian Gulf-UKC routes to $5.65 million Jan. 22, basis Suez routing, according to Platts data from S&P Global Commodity Insights. This implies that they have to cough up close to $6.4 million-$6.65 million for voyages via the Cape.

A Suezmax Jan. 17 paid AWRP of $150,000 for Red Sea transit on a Ceyhan-to-South Asia voyage, up more than four times from $33,000 a week earlier, a tanker broker said. In this case, the AWRP was on the owner's account and was factored in the freight itself but in most cases it is significantly higher than this amount and paid separately by the charterer, the broker said.

More diversion

One major fallout of the Bimco & Intertanko advisories just over 10 days ago is that now many tankers are actually using the Cape option for cargo deliveries into Europe, freight market participants said. Earlier, the option to use the Cape route was there in the charter party agreements but was scarcely used.

Dozens of tankers have already been diverted since US and UK forces launched counter strikes against the Houthi rebels in Yemen late last week.

"Some of the fixtures are now only being done basis the Cape option, with no Suez option available at all," a senior executive at a major oil tanker company said.

Due to these attacks and also because it had increased transit fees effective Jan. 1, the Suez Canal is losing business and offering rebates, but there very only a few takers due to the security risks involved, shipping sources said.