Rerouting to Avoid the Suez Canal - Base oil Impact
As reported by the major news outlets, Maersk, Hapag-Lloyd, MSC, CMA CGM and other shipping lines and oil transporters have suspended services through the Red Sea due to attacks on commercial shipping by Iran-backed Houthi militants in Yemen. The attacks are reportedly targeting East-West trade moving products through the Suez Canal. To make the journey west, a significant volume of shipping traffic is now re-routing its vessels thousands of miles around the southern tip of Africa. The detour adds 1 to 3 weeks, or more of additional sea time to make the journey from east to west, and adds significantly more cost. In fact, some speculate the re-routing could result in a doubling of shipping freight rates.
While the re-routing of ships will certainly send ripples through global trade, and may affect availability of Group III base oil from the Persian Gulf to the US, the overall impact on base oil supply is not expected to be significant or long lasting. This is in part due to the current overhang in global supply, and the ability of South Korea and North American producers to make up for any Red Sea related supply disruptions.
Temporary disruption in base oil supply could, however, arise as producers, shipowners, and base oil buyers work through negotiations to determine who will shoulder the additional cost burdens associated with insurance on vessels and cargos and the costs of alternate (longer) routes which may be taken in order to avoid the Red Sea. Adding to this, it is believed that Europe can face a relatively larger incremental ‘hit’ in terms of shipment cost and voyage time.
According to some base oil buyers, shipowners are already trying to put the full potential cost and responsibility on those using their services – such as – “agree to pay any amount for whatever may happen or route the vessel may decide to take.” At the same time, buyers note that in light of the current overhang in base oil supply, sellers are not in a strong bargaining position.
But, if there is one thing we have learned over the past few years, expect the unexpected and be prepared.