Israel-Palestine conflict: The effect on the global shipping industry

The global shipping industry has been dealt another blow with the sudden escalation in the Israel - Hamas conflict over recent weeks, starting with the surprise attack on 7 October 2023 by the Palestinian militant group Hamas against Israel from the Hamas controlled Gaza Strip.

The Gaza Strip and Israel have been in conflict since the Israeli withdrawal from the Gaza Strip in 2005 and Hamas subsequently gaining control of the Gaza Strip after winning Palestinian elections in 2006 and a civil war with Fatah in 2007.

The recent attacks, leading to significant casualties, have further opened the flood-gates to geopolitical instability in the region. World Trade Organization (WTO) chief Ngozi Okonjo-Iweala has, not surprisingly, warned it will have a very significant impact on already weak global trade flows if it widens throughout the region, as it is expected to do.

Escalating violence in the Middle East will likely add to factors already throttling trade growth, including higher interest rates, a Chinese property market under strain and Russia’s war in Ukraine, with the WTO recently halving its projection for global goods trade this year.

The financial risks to trade are still evolving. However, the operational risk of trading in the region is having an immediate impact on war risks insurance. War risk underwriters are calculating their exposure to the Israel - Hamas conflict as premia for vessels trading to the region are set to escalate.

The risks of trading on the Israel coastline have, admittedly, long existed and this was already a designated high-risk area, which required the payment of additional war risk premium. However, given the size and nature of the escalation, the insurance market is predicting a significant increase in rates as a result of the current conflict that are higher than what the (shipping) market would have expected.

The Israeli southern ports of Ashkelon and Ashdod are closest to the conflict and are currently regarded as the highest risk. Ashkelon was hit by a missile attack from Hamas militants on 10 October 2023, with the port being located just over 10 kilometres north from the border with the Gaza Strip.

Following the closure of Ashkelon port and its oil terminal – according to reported AIS data – there are no longer any vessels trading to the port. However, at the time of writing, vessels were continuing to trade in Ashdod, with approximately 20 vessels reportedly within the port area.

Noah Trowbridge, of British maritime risk advisory and security company Dryad Global states “Israeli ports are deemed to be at heightened risk. With continuous rocket barrages expected from Gaza, alongside the potential for a protracted conflict, the damage to port infrastructure becomes increasingly probable.”

Ashdod port has announced that – as at 15 October – port workers continued to work despite the emergency situation: ‘The port’s berths are open as much as needed and we are offering a response to meet all Israel’s needs’.

Germany’s Hapag Lloyd has told Reuters that Ashdod port was, not surprisingly, imposing restrictions on the loading or discharging of dangerous cargo, which includes flammable, explosive or toxic substances.

Of the vessels within Ashdod port, these range from Panamax to Feedermax container ships and bulk carriers from Handysize to Panamax, with the highest valuations reportedly around US$20m. This includes the 41,600-dwt bulk carrier m/v ROJEN which, coincidentally, was also caught at the port of Chornomorsk at the outbreak of the Ukraine conflict, and was one of the first to make its way out under the Black Sea Grain Initiative.

The asset with the highest single insurance value is the floating production, storage and offloading (FPSO) vessel ENERGEAN POWER with Insurance Insider reporting the insured war risk value at around US$1bn, led by insurer Beazley and P&I cover placed with NorthStandard. The FPSO was newly installed at 90 km offshore and it delivered the first gas from the Karish field in the third quarter of 2022. While not in the immediate vicinity of the conflict, it is a potential target given its importance to Israel.

On the cruise operator side, all vessels have reportedly rerouted or suspended calls to Israel reducing the risk accumulation for underwriters significantly.

At the time of writing, local Israel P&I correspondent Harpaz P&I had indicated that the port of Ashdod was under emergency status. The Israeli Navy is currently controlling traffic and requiring pre-notification of any hazardous materials on board. Israel’s largest port Haifa was also continuing to trade normally.

Security has been stepped up at Israeli ports, with the principal threat to shipping being rockets fired from Gaza as well as the existence of hostile forces on the ground within Israel after Hamas militants infiltrated the country. Harpaz identify that, since Gaza has a coastline, direct threats to shipping inside Israeli waters cannot be ruled out.

INTERTANKO, the association which represents the majority of the world’s tanker fleet, said in an advisory to members this week that after the Hamas attacks, it expected tension to rise in the broader Middle East – Gulf, with heightened risks for shipping connected to Israel.

The risk isn’t new, with Israel among countries in the Middle East already considered a high-risk area by the insurance market. But the risk has now ballooned. Since the attacks, additional premia have soared 1000% to around 0.15-0.2% of the value of a vessel – compared with premia of 0.0125% earlier this year.

Trade will need to continue regardless. Nearly all of Israel’s trade is by sea. While it’s a food producer, the country relies on imports for the majority of its grain needs, as well as quantities of fish, beef, nuts and consumer food products.

At the time of writing, Danish container shipping group A.P. Moller Maersk, and others were reportedly continuing to accept container bookings to and from the country. Israel’s leading container shipping carrier Zim announced it was offering its vessels for “national needs”, while continuing to operate and accept bookings to and from Israel, with local ports in Ashdod, Haifa, and Eilat functioning as usual as of 15 October. “The company’s ships will be directed, as a first priority, to transfer cargo from anywhere in the world to Israel according to the requirements and needs of the Ministry of Defense and the government of Israel,” CEO of ZIM, Eli Glickman, announced on Facebook.

The threats, however, are not only physical.  Cyberattacks are also a tangible threat in geopolitical conflicts, significantly altering insurers’ evaluations of risk. TIME reports that hacking groups, including some tied to Russia, are attacking Israeli government and media websites, allying themselves with Hamas. Such attacks could potentially extend to shipping infrastructure within Israel, such as the ports that remain open, or potentially against those trading with Israel – as a means to further destabilise. A surge in state-sponsored cyberattacks will also likely drive cyber insurance premiums higher.

For shipowners, charterers and traders, this situation is likely ‘more of the same’ – with the lessons learned in Ukraine likely influencing how the industry responds to this latest geo-political crisis. The situation remains dynamic, and it’s unclear how the US, EU and others will respond, including through the use of sanctions and other political and economic tools. Instability throughout the region is nevertheless likely to increase and the industry will need to continue to stay on top of developments when managing risk.

This article was initially published in Shipping Finance, October issue.