Rising Costs of Supply Chain Diversification
Bloomberg: "Korea Faces Difficulties in Supply Chain Diversification"
Global maritime freight rates have risen due to the Yemeni Houthi rebels' attacks on ships in the Red Sea, causing shipments of crude oil from the United States to Asia to plummet by more than 30% last month. While the need to diversify energy supply chains is growing in preparation for prolonged Middle East conflicts, the increase in freight rates is driving demand to procure crude oil and gas from closer sources.
According to market research firm Kepler on the 4th (local time), U.S. oil flowing into Asia averaged 878,600 barrels per day in January this year, down 37.2% from 1.4 million barrels in the previous month. Compared to 1.8 million barrels in November last year, it is nearly halved.
The Houthis, supported by Iran, have been attacking ships passing through the Red Sea, a maritime route connecting Europe and Asia, since November last year, leading to a general rise in global maritime freight rates. Shipping companies are avoiding passing through the Suez Canal connected to the Red Sea. The number of oil tankers passing through the Suez Canal in January this year decreased by 23% compared to November last year. During the same period, liquefied petroleum gas (LPG) carriers dropped by 65%, and liquefied natural gas (LNG) vessels plummeted by 73%, showing an even larger decline. Instead, ships are detouring around the farther Cape of Good Hope in Africa, causing freight rates to rise. The freight rate for Suezmax-class oil tankers traveling from the Middle East to Northern Europe surged about 50% since mid-December. The cost of transporting oil from the U.S. to Asia also soared by more than $2 per barrel during the first three weeks of January.
Bloomberg News diagnosed that countries with high import dependence like India and South Korea are finding it increasingly difficult to diversify their oil supply chains. In South Korea's case, the U.S. accounted for 19.8% of total crude oil imports in 2022, second only to the Middle East at 67.4%. Bloomberg pointed out that the limited flexibility to respond to rapidly changing market dynamics will eventually erode refiners' margins.
Giovanni Staunovo, a commodities analyst at UBS Group AG, said, "Diversification is still possible, but prices will be higher," adding, "Margins for refiners will shrink before the cost is passed on to the end consumer."
Currently, the oil market is divided between the Atlantic-centered markets such as the U.S. and Europe, and the Gulf, Indian Ocean, and East Asia-centered markets. Some European refiners did not purchase Iraqi crude oil last month, instead buying North Sea and South American Guyana crude. In Asia, demand for crude oil from Abu Dhabi, United Arab Emirates (UAE), surged, causing spot crude prices to spike in mid-last month. This trend of disruption was also confirmed in the petroleum products market. In the Asian market, concerns over difficulties in procuring European naphtha pushed naphtha prices to a two-year high last week.
Adi Imsirovic, director at consulting firm Surrey Clean Energy, analyzed, "Geopolitics is not good for trade," adding, "It is a difficult time for refiners, especially Asian refiners who require greater flexibility."
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