The Strait of Hormuz and its impact on global supply chains

00:00:01: I would think that a return to Suez is still going to take awhile, but we've also learned things can change very rapidly.

00:00:09: I wouldn't be surprised if the situation in the Strait gets resolved and fairly soon thereafter... ...we will start looking again at returning to

00:00:17: SueZ.

00:00:26: Hello and welcome to the first in a new series of podcast conversations with Rolf Harbin Janssen, Chief Executive of The German Shipping Group Hapag Lloyd.

00:00:35: My name is Janet Porter And I'm a maritime journalist who has spent many years writing about the container shipping industry.

00:00:41: It's a fascinating business –the backbone of global trade–and i never ran out of stories that cover.

00:00:47: However last few year have been unprecedented In terms of external shocks from Somali piracy and the Covid pandemic, to the invasion of Ukraine, hootier techs on commercial shipping.

00:00:57: And now the Middle East war enclosed it over straight-of-her-mooze.

00:01:00: That has left hundreds of ships and thousands of seafarers trapped in Persian Gulf.

00:01:05: Now, overnight there's been some positive news in the shape of Project Freedom and a US promise escort ships out to the Persian Gulf.

00:01:12: So could I start off by asking you if you know anything more about this than we've heard from the news this morning?

00:01:18: And how optimistic it might be that perhaps the crisis could come into an end?

00:01:24: In fairness, we also have only read it on the news today.

00:01:27: I think what is good, people continue to look for ways... ...to get the ships out of the Gulf.

00:01:32: But as we have seen also with previous announcements one typically has to wait twenty-four forty eight seventy two hours before.. ..we will see how it really unfolds.

00:01:41: but let's be clear that you know We welcome every initiative thats being taken That might help us to get our ships Out Of The Gulf.

00:01:49: How does a company like Happock Lloyd deal with so many external crises and prepare for the unexpected?

00:01:54: I mean, since every morning you must switch on the radio to hear what the latest is.

00:01:58: And then think how to respond...

00:02:00: Well i think we've learned over the last five six years that many unexpected things can happen!

00:02:05: And like you see it here in this case where once we had the events unfolding between

00:02:15: U.S.,

00:02:15: Israel and Iran, I think we established a crisis staff which now meets every day sometimes that's a meeting of two minutes... ...and also all other departments need to work with them are meantime very well coordinated.

00:02:30: If compared how we were struggling initially when COVID broke out in twenty-twenty then We and probably also many others have gotten used to quickly changing environments.

00:02:42: Now the state of Homoos, I'm guessing this might be the worst crisis at all for recent ones that listed but it's effectively been closed two months now.

00:02:51: And during that time much focus has been on tankers and oil exports But there are dozens box ships stranded.

00:02:58: Can you tell me what impact is being on container trades turned from region?

00:03:02: Well, the container trade has been very much impacted of course because quite a few countries are pretty dependent on container traffic and supplies that come out off all kinds of different parts of the world.

00:03:14: When you look today at volumes still moving to those countries then it's less because ships can't go into the Gulf.

00:03:21: The only way is via land bridge either through ports like Kofakan or Fujara or Salala.

00:03:29: But of course, the capacity for all those land bridges is a lot less.

00:03:32: So the impact on that is quite significant.

00:03:34: how much of global trade it exactly impacts?

00:03:37: I think most estimates say its about five or seven percent and offcourse that volume today is down with realistically probably somewhere between sixty-and eighty per cent.

00:03:47: so are there shortages now in some of these Gulf countries because they can't get maybe foodstuffs or pharmaceuticals.

00:03:55: I

00:03:57: mean, so far we have seen very few reports on that to be fair.

00:04:00: So i suspect also That there is a fair bit of stock in most those countries as they know that They are somewhat vulnerable Of course.

00:04:08: and then As I said you know volume Is not down to zero but more like down with sixty to eighty percent, because the rest comes over land bridges.

00:04:16: And I assume that what we move there are of course the goods that have highest priority.

00:04:21: so

00:04:22: all

00:04:22: in all i don't see a lot of shortages at this point but if situation lasts for couple more months then sure it will also happen.

00:04:31: So can you tell me about the Land Bridges?

00:04:32: This is trucks or are they railroads and sufficient trucks?

00:04:37: I mean, it's mainly trucks and of course there are not sufficient trucks because you know the region and infrastructure is just built for that.

00:04:45: And let us not forget that distances between say Kofa Khan or Fujairah in final destination are pretty long even if one could still feed on something via Jabal Ali.

00:04:55: also The land side capacity isn't enough to cope with the amount of cargo normally gets transported overseas.

00:05:04: Now, you just mentioned Gebel Alley in Dubai.

00:05:06: That's one of the world's biggest container ports as a huge transshipment hub.

00:05:10: Are you now looking ahead and perhaps help me reconfiguring your trade route so that you'll be less dependent on Gebel alley?

00:05:19: Not yet.

00:05:20: I mean, i think we've seen also with other crisis that you know once the situation returns back to normal then Normal patterns typically also reoccur.

00:05:30: so i would still expect at once a situation normalizes and there's reasonable perspective that it will stay stable.

00:05:38: That ports like Javelali but also the ports in Abu Dhabi, Will still be very important because they are simply much more efficient than doing it via say a Kofakan or Fujara which means then lot of goods Still need to be transported over hundreds of kilometers by truck and thats just alot more expensive And overtime.

00:05:58: that counts

00:05:59: I understand.

00:06:01: Now i also understand you had one ship managed to escape but you've still got other ships trapped there.

00:06:07: Could you tell me how the seafarers on those ships are coping?

00:06:10: Have they got provisions, have they got fresh water and access to medical care if they need it?

00:06:16: How are you helping

00:06:17: them?".

00:06:17: We're trying to do whatever we can.

00:06:20: I think that generally having enough provisions or fresh water get supplies from ports like Jebel Ali.

00:06:27: so thats not as big a problem facilities in terms of Starlink and internet access, but that doesn't take away the being stuck on a ship for an extended period is not good.

00:06:45: That's why we work tirelessly day and night to try find ways get them out where.

00:06:52: announcements like they were yesterday on project freedom follow those very closely as will take every opportunity there

00:07:01: are.

00:07:01: Are any of them able to get ashore and fly home?

00:07:03: if there was some, you know family emergency?

00:07:06: are they able to... ...get off the ship.

00:07:08: Yeah in principle that is possible but of course crew changes are difficult also because not-that many seafarers.. ..are very keen to join those ships.

00:07:17: or with the onshore outlook we have at a moment

00:07:19: Can you tell me anything about the ship which did manage to get out?

00:07:23: I mean what we can tell you is that it was coordinated closely with the authorities and then, We felt like they were safe.

00:07:30: And in the end It turned out also to be safe.

00:07:33: Uh...we won't disclose anything else.

00:07:37: Also because whenever there's an opportunity To get something one of ships out will try take it.

00:07:43: Then its not good too much about how we managed them.

00:07:49: What about Ship and seafarers on board.

00:07:51: I mean, how are they when they got out to do with it?

00:07:54: Do you have medical assessments in the ship itself?

00:07:56: what sort of condition was that in?

00:07:58: i mean The ship wasn't in reasonable condition.

00:08:00: i think the main Surprise we had was actually the amount of fouling We had on the ship because the ship has been in water for about thirty degrees For six or eight weeks.

00:08:12: so Then You see there's a lot of stuff That gets attached To the ship but you really don't want to ever touch to the ship and as such it needs quite a lot of cleaning.

00:08:21: We also noticed that once we got her out, the maximum speed she could still achieve was significantly less than normal.

00:08:28: so there is certainly something to keep in mind when looking at other ships because they will have similar challenges.

00:08:36: Summer is approaching with temperatures in the Middle East can be horrifically high Assuming, well let's hope project freedom does work but if it doesn't are you now having to consider maybe putting those ships into some form of layup and getting the crew off because the temperature might be so unpleasant being on board?

00:08:54: I think we would never rule anything out.

00:08:56: You know in these cases We also see this summer coming... ...we're probably still cautiously optimistic that over next four or six weeks.. ..we'll see some opportunities to get the ships out.

00:09:06: If that will not happen then of course other options and indeed you were right.

00:09:13: In worst case, you would have to lay up the ships like it was in the Suez Canal when I was in nineteen seventy-four or sixty seven?

00:09:22: I don't recall exactly.

00:09:24: I suspect that Pirate & Golf is not best place for laying a ship if had two.

00:09:28: but obviously before this started you were shipping thousands of containers into the region probably presumably been offloaded all over the place.

00:09:38: How many containers do you now have stranded in other ports?

00:09:41: And who is so responsible for the cost of getting them to their final destination, Is that you as your customers, the

00:09:48: insurers?".

00:09:49: I think there's different ways to handle it and we altogether had about fifteen thousand shipments between forty-thousand TUs of cargo stuck.

00:09:59: I know that some of our peers then decided to declare end-of-or-age, which in essence means you hand over the responsibility.

00:10:06: To the customer.

00:10:07: we decided to work with all customers and try to find ways to either return a cargo or tried to find alternative ways together to final destination?

00:10:16: Or In some cases bring it somewhere else than our teams have worked tirelessly Over the last weeks to try and get there organized And i was very pleased to see last week.

00:10:25: I think we have now for close to ninety-five percent of the cargo that got stuck.

00:10:31: We know where we need to bring it and we found routings for them, most of which means they're also being

00:10:37: moved.".

00:10:38: Of course this cost a lot of money in the initial costs was borne by us but offcourse... ...we also think within dialogue with customers is fair.

00:10:48: everybody takes his share of these costs, so that means a part of it also gets charged to customers.

00:10:55: for example stuff related to storage or on-forwarding or additional moves need to be made.

00:11:01: I would say that under whole i think customers have very much welcomed their approach and we are pleased with the way they handled this.

00:11:10: but there has been an incredible amount work over long period time by quite large number people.

00:11:16: I assume there's still cargo on the ships that are stuck in the Persian Gulf.

00:11:21: And does this include refrigerated cargos or perishables?

00:11:26: Can you keep those in good condition, is it just a matter of them having to be dumped at the

00:11:30: end?

00:11:31: It depends off course little bit on the goods they have on their... Yes!

00:11:34: There was some refrigerated cargo on theirs luckily not too much because most had been discharged before things started.

00:11:44: But what we'll try to do is, will try keep it as good as we can.

00:11:47: It's very clear that some of the perishable cargo... As I said, there are no longer goods after six or eight weeks.

00:11:55: Having said this, a vast majority of the goods on board ships have normal cargo and should still be in good condition.

00:12:05: One thing you wanted me ask was about looking at maritime fleet in general?

00:12:10: Because of the disruption to oil flows, are there sufficient bunker supplies?

00:12:14: Can you get your ships fueled and is it an oil LNG.

00:12:19: Are you able to get what you need for other ships in the

00:12:21: fleet?".

00:12:22: So far that has not been a problem... Of course!

00:12:25: It's a problem because they're so much more expensive.

00:12:27: I mean today we pay about fifty-sixty million dollars per week more for bunkers than we did prior through the crisis but supply so far has not been an issue.

00:12:39: I know there have been a number of reports on especially kerosene, yeah?

00:12:43: But that's likely going to be the fuel that is supposed to be scarce earlier or the earliest... ...I think when you look at bunker fuel which in essence it's lowest grade product being made out of oil.. ..it will take some time before that becomes scarce and then in addition We, of course have the benefit as liner companies that we typically bunker in their bigger bunker ports and that's where supply will be available at least for the foreseeable future.

00:13:15: The only thing we do it a moment to ensure that we don't run out of fuel is if you typically take in little bit more bunker than would normally so that they are a bit more safe to stock on board.

00:13:26: What about LNG?

00:13:27: Are you burning LNG your ships?

00:13:31: Some of our ships, but there we also make the trade-off between what's the cost of low solver fuel and what is the cost for LNG.

00:13:39: That means that a number of ships running actively on LNG at the moment are only a few.

00:13:45: So you've got dual fuelships.

00:13:46: can you switch back and forth easily?

00:13:49: Yes it actually quite easy.

00:13:51: no its not just a flip over switch But it's not something that cannot be done.

00:13:58: I think within an hour or two, one can change from one fuel type to another.

00:14:04: You just mentioned about prices going up on the fuel but overall Can you say how this crisis is affecting your costs?

00:14:12: Not just in fuel.

00:14:13: maybe charter cost insurance premiums lost revenue?

00:14:17: Well i think for us there are probably four main impacts On the revenue side as you said rightfully we miss out fifteen twenty thousand to use a week.

00:14:28: that's a lot yeah if you take into account an average revenue for dead type of cargo off probably a thousand dollars at u all inclusive.

00:14:36: i mean thats fifteen two twenty million revenue that we are missing.

00:14:40: so that some problem uh... i think.

00:14:42: then we have of course the fuel which if you look at it today is probably between three and four hundred dollars a ton more expensive than it was before as we bunker over hundred thousand tons of weak.

00:14:55: that gets you easily to the fifty million that I mentioned before.

00:14:59: insurance premiums are up although admittedly, mainly for the ships that are in or near the war zone.

00:15:06: And then we've had also a fair bit of additional storage costs because of the boxes that were talked about earlier that got stock left right and center I would say especially on March and April.

00:15:16: it cost us over a million dollars per day which is not small sum of money if you add up.

00:15:23: Contrary to what was seen previously.

00:15:27: The special thing about the crisis in the state of Hormuz is that whilst it's a very isolated event and as such, the impact on the overall network has not so big.

00:15:37: The impact on overall cost is huge because you know... ...the higher fuel price especially impacts us everywhere.

00:15:44: And of course the fuel prices does not only impact our fuel costs but also affects our feeder cost.

00:15:50: It impacts the rail cost, it impacts the trucking cost.

00:15:54: So That's why this crisis is a little bit special and very different to, for example what we saw in COVID or around Suez.

00:16:05: On the other side obviously you have imposed surcharges on your customers.

00:16:09: I presume freight rates must've gone up.

00:16:10: how has that balanced out the rising costs?

00:16:13: And however your customer responded.

00:16:16: I mean customers are never happy, you know when costs go up.

00:16:19: I think most people understand though that the fuel prices have gone up.

00:16:23: i mean if you go to the petrol station You also have to pay more and it's a little bit the same here.

00:16:29: So I think as far as fuel is concerned Most People Have Understood That Those Costs Have Gone Up In Many Cases.

00:16:36: We Also See That That'S Being regulated through our marine fuel recovery mechanism, although that has normally a delay over couple of months.

00:16:46: We tried to pull it forward simply because we can't sustain additional cash outflow for fifty or sixty million dollars per month.

00:16:54: When it's around other costs, you typically have more debate and one should also not forget that when it's about those contractual arrangements That's only for the cargo.

00:17:02: That goes on long-term contracts which is roughly fifty percent of our business.

00:17:06: The rest is dependent on spot rates.

00:17:08: And we have seen that spot rates had been sort of flatish maybe a little bit up but Not necessarily enough to recover the additional fuel cost that we incur.

00:17:18: so So all in all I think it's not easy for us to recover that additional cost, and at the moment we're still not recovering all of this.

00:17:26: There is also something to do with season between Chinese New Year and before we go into summer, typically the slack season where rates are anyway under pressure.

00:17:36: so... That combination of slack seasons significantly higher especially fuel costs around the globe!

00:17:43: This isn't a great combination in this modern time

00:17:47: But you'll be approaching the higher season now, and just to finish with a trans-specific contracting season.

00:17:52: So where are we able get high prices on the TransPak even though that's not directly impacted by the state of Homoose?

00:17:59: This is global market isn't it so were will have to get high price annual contracts rates.

00:18:05: I mean, a lot of that was already concluded before the crisis really hit.

00:18:09: So in the end we will through those contracts be able to recover our higher fuel costs.

00:18:15: so i think it is positive.

00:18:17: if you look at the rates excluding fuel they were sort-of flatish year on year.

00:18:23: also because the Transpacific and in general the trades are out US have not been the ones carrying global growth over last two years.

00:18:34: crises and I'm thinking particularly of COVID pandemic, shipping lines actually benefited in the end.

00:18:40: Would you say this is different?

00:18:41: Will he say that long-term results will not be beneficial?

00:18:45: If i would have to bet right now then I don't think there's a long term effects.

00:18:49: if it'll be very beneficial simply because you had relatively isolated incident which impacts five to seven percent of global flow but you have a cost effect that actually impacts one hundred percent of what happens around the globe.

00:19:03: so.

00:19:04: The cost affecting this case is much more extreme than it was in the past when u also saw some effects.

00:19:10: i mean if you take over there initially fuel prices plummeted because they were very low demand and then we saw very high demand across the globe which drove really prices up to very high levels, that had also a much broader impact, because it impacted all the traffic into the Mediterranean and to Europe North Continent.

00:19:33: And there's significant chunk of the traffic going through US as well.

00:19:36: so they covered more cargo than in this case.

00:19:39: That is why I think at this time it will potentially be different.

00:19:43: Now we mentioned project freedom earlier.

00:19:45: We don't really know how its gonna play out but Iran has talked about charging tolls.

00:19:51: Would you prepare to pay toll if that was any way for your ships?

00:19:56: For now, it's illegal to pay those tolls when you look at all kinds of sanctions that are in there.

00:20:00: I also believe they would be fundamentally wrong... ...to start charging tolls for passing somewhere through international water.

00:20:08: so i sincerely hope the debt is not going to be the outcome When we see them in the Suez Canal or the Panama Canal.. ..I have some sympathy because this was what people did gigantic infrastructural works in order to facilitate a more efficient shipping industry.

00:20:27: That is not the case in the Strait of Hormuz, nor are there other smaller passages.

00:20:33: so it would be totally wrong even discuss tools for something like

00:20:37: that.".

00:20:38: Now if the Straight of Homoose is open or when three opens how long will take do you think A to get ships out?

00:20:45: because presumably has some sort of coordinated effort?

00:20:48: and before market centers will return to a new normal?

00:20:52: I think that people would be able get the ships out fairly quickly.

00:20:57: If the Strait of Hormones were open today, then my guesstimate is that the vast majority are within week.

00:21:06: The more challenging question is how long it'll take for things than returned to normal because a lot of services have been suspended.

00:21:14: A lot of ships had been deployed in other trades around the globe, so that would all be put back I think before we'd have normal flow again out-of-the-golf.

00:21:26: That will probably take best case two months more realistically between three to four months.

00:21:34: Keep in mind for example stuff from Asia.

00:21:38: First, the ship needs to go to Asia.

00:21:40: Then the goods need to be booked and then we need to sail all the way into the Gulf.

00:21:45: so doing that within three months is already a stretch.

00:21:52: Has this crisis made you have look at your whole network?

00:21:55: Perhaps try to reduce exposure both in other choke points or bottlenecks and diversify spread of risk?

00:22:03: really

00:22:04: Well, I think this crisis actually shown that our network is pretty resilient because the impact on The rest of the Network has been very limited and That's where?

00:22:14: I think the setup that we've chosen with a hub-and-spoke network in Gemini together With moscow proven to be again.

00:22:20: A pretty robust structure.

00:22:23: i don't Think We would Be able To change much to Our Network to be Honest Because as long if we want to serve the Countries In the upper Gulf one Has to go Through the Strait.

00:22:33: there is simply no other way and the land bridges that have currently been established are a lacking capacity and b i just wait to expensive so.

00:22:44: I think that in this particular case this will not result in a significantly different network.

00:22:50: it underlines though, having something which has a bit more happen spoke is definitely more resilient than something where you only go point-to-point.

00:23:01: What do you see as the long-term consequences of this crisis?

00:23:04: It sounds to me, it's if you think they may not be anything too long term.

00:23:07: but has it changed anything assuming that does get resolved fairly soon.

00:23:12: Has it change any thing in a way?

00:23:14: run your business around network and is going have an impact on recruitment of seafarers because I've had pretty rough time recently isn't there?

00:23:23: Well i think last point mentioned probably most relevant one I think the seafarers, if you see what they've all had to endure over the last five or six years.

00:23:33: That's really not funny and of course that doesn't make people more excited about their job.

00:23:39: so we need to continue doing whatever is in our ability to also emphasize positive things around life as a seafarer.

00:23:49: So far for the past few years We have still been able to attract seafarers then that's also going to be the case in the future, but I think it just underlines what a crucial role they play in the industry and we need do whatever we can make life as good possible for them.

00:24:09: As far as other points you made around does there change something if we run our business?

00:24:14: i don't think it changes all that much also because the reason that I mentioned before which is that, i think our network has actually proven to be quite resilient and we've been able to isolate.

00:24:25: The impact of this specific crisis quiet well without too much difficulty in with also being able to continue to serve customers even those that had their cargo stock.

00:24:38: because what happened here?

00:24:39: so if anything In this case, I think it reinforces our business model.

00:24:44: so we're not going to change a whole lot.

00:24:47: We

00:25:00: looked at returning to Suez in the beginning of the year, together with our Germany partner Emersk.

00:25:04: I think we did a couple of sailings where we went through also because we had close protection that point-in time That was no longer available after and then decided go again around the Cape.

00:25:15: If you look situation as see it today It's certainly not more stable than few months ago so unfortunately i would think they returned to SueZ is still going take awhile.

00:25:27: But we've also learned that things can change very, very rapidly.

00:25:31: I would not be surprised if the situation in this trade gets resolved and fairly soon thereafter will start looking again at returning to Suez.

00:25:41: but all of it for now is a bit up-in-the-air.

00:25:44: when the whole crisis around almost started everybody thought there was going to matter days or weeks.

00:25:50: meantime were in it for couple months.

00:25:52: As we said before in this podcast, even if it gets resolved fast will take us several months.

00:26:01: Realistically only after that then start looking at returning to Suez.

00:26:06: so I don't think you are going see that before the peak season of twenty-twenty six.

00:26:16: after the peak season, so that we get back to a fully normal network by the beginning of twenty-twenty seven.

00:26:23: But whether there is feasible or not and that's unfortunate little bit too early to tell but if you ask me I would probably at the moment be my best guess

00:26:33: We're also now hearing that Somali piracy has major resurgence.

00:26:36: Now i don't think it affects containerships quite so much but nevertheless Is this something else?

00:26:41: That your thinking about monitoring.

00:26:43: I mean, we're trying to monitor all these factors.

00:26:46: In the end it will never be entirely quiet right now.

00:26:50: i think priority one is the straight of almost because yes We sail around Africa but at least although supply chains are intact and stable At a moment as soon as almost is resolved i'm sure that our attention folk Will get back to Suez But this is just said a few minutes ago.

00:27:07: if we return to sue us?

00:27:12: Also because we need to prevent the ports in the Met and North Europe from collapsing.

00:27:19: Because all of a sudden, there are two or three ships arriving every week rather than just one.

00:27:26: And final question if you go back through Suez – would be prepared to have armed guards on your ships?

00:27:32: We wouldn't talk about specific measures that we'd take but rest assured it's possible for us.

00:27:40: that is needed in order to maximise the safety for

00:27:44: our crews.

00:27:45: You're welcome!