India and Pakistan tensions to spike shipping, insurance costs, delay commodity trade

Military hostilities between India and Pakistan could push up freight costs for several commodities due to delays in berthing at ports, reluctance of crew and ships to move in the region, and higher insurance premiums, market participants, insurance brokers, and analysts in Oslo, Singapore, and Mumbai said May 9.

Maritime insurance providers have already elevated their assessment of threat to merchant ships in the Eastern Arabian Sea to 'moderate' from the usual 'low', said an Oslo-based maritime executive. Commercial ships are prone to collateral damage due to the current conflict, misunderstandings, accidents and technical or human failure, he said.

The security departments of several major shipping companies have asked the commercial charterers to provide details on all their ships scheduled to call at Karachi and Indian ports over the next few weeks.

"This is a totally altered scenario where the lives of our crew are of paramount importance," said a source with an owner of clean tankers. "None of our ships will be calling at Karachi port for the rest of the month," the source added. A substantial part of the crew on the global merchant shipping fleet is from India.

India is a major exporter of refined oil products, shipping out up to 1.5 million b/d, and imports more than 4.5 million b/d of crude. It also imports coal and is one of the world's largest importers of pulses and vegetable oils. Pakistan regularly imports crude and refined products from the Persian Gulf.

Unless there is a major de-escalation in South Asia, the ports will be closed for the night, and loading and unloading of cargoes will take place only during the day, sources said. Major ports such as Sikka, Kandla and Mudra were closed overnight, they said. This will delay the movement of cargoes and the schedule of ships, reducing supply and pushing up freight.

Platts, part of S&P Global Commodity Insights, assessed May 9 all the key Persian Gulf to North Asia and Singapore Long Range II, or LR2, routes w5 higher day-on-day. The VLCC Persian Gulf-West Coast India route was assessed w0.25 higher at w68.75.

Drastic change

Things have changed drastically in the last two days, and quotes of brokers for Additional War Risk Premium, or AWRP, have moved up significantly, said a maritime insurance executive. During the IMDEX Asia International Maritime Security Conference earlier this week, experts had cautioned that an escalation in conflict in South Asia will push up the cost of war risk insurance coverage.

Due to the serious concerns over the safety of both the ships and their crew, a major concern among the charterers at the moment is that the Arabian Sea does not become another geopolitical theater to be avoided, as has been the case with the Red Sea.

"For the AWRP to arise, owners and their crew first have to agree to call on ports in India and Pakistan," said a tankers' broker in Singapore. The Arabian Sea is already regarded as a High Risk Area, or HRA by insurance providers but over the years the AWRP has been nominal as a percentage of the value of the hull and machinery of the ship, which for older VLCCs works out to be around $40,000-$50,000 for a seven-day transit but now may inch up gradually by 15%-25%, sources said.

International shipping that is passing in the vicinity with no loading or unloading scheduled in India and Pakistan is highly unlikely to be attacked, but may take a longer route due to the risk perception and add to the cost of bunkers, according to internal assessments of several owners. Nevertheless, international voyages in the region will become longer and costlier because ships will avoid the war zone by staying at least 200 nautical miles away from the Indian waters.

Currently, most ships go from near India's Cochin, which, in the event of a war, they would avoid and instead move from west of Minicoy Island, near Lakshadweep, and Galle, bypassing parts of the Indian Ocean, heading towards Ras al Hadd, the entrance point of the Gulf of Oman.

Charterers and end receivers of cargoes are already reeling under high insurance charges due to the prevailing AWRP for moving commodities through the Red Sea and the Persian Gulf, which are also designated as High Risk Areas. Voyages are longer and costlier due to the very limited use of the Red Sea and Suez Canal, and their substitution with the Cape of Good Hope, adding to inflation. Higher tariffs and counter tariffs by the US and China, along with carbon emissions charges imposed by the European Union, have not helped matters either.