Monday, 27 February 2012

EU sanctions against Iran to have serious insurance implications for Indian tonnage.

Western sanctions on Iran meant to target Iranian oil revenues may not be working too well; however, Indian shipowners face a serious connected risk- the loss of insurance coverage for ships that trade with Iran. Reports say that the European Union embargo that comes into effect on the first day of July this year will have the unintended consequence in that Indian ships will have to find replacement insurance coverage if they want to continue to carry Iranian crude.  Worse, these developments are likely to result in a spike in insurance costs. India is a big oil importer of Iranian oil.

As the U.S. and Europe continue to slap financial and trade sanctions on Iran in an attempt to discourage its nuclear programme, European insurers will be unable to provide, after July, cover to the part of the Indian tanker fleet that will carry Iranian oil. Shipping Corporation of India will be the worst affected; it is the largest tanker owner in the country. 

"We are covered by P&I clubs in the EU," Sunil Thapar, director at Shipping Corp of India told Reuters. "These clubs will not be able to give us coverage for vessels to Iran from July. It will be difficult for Indian shipping lines to transport Iranian crude unless alternative arrangements are made."

European and other companies have stopped new deals with Iran, which means that Asian traders will have to use domestic companies to carry oil from that country. The problem is that India does not have a developed maritime insurance industry of any useful size or standing, unlike say, China or Japan, both of which will not face these issues come July 1. India will be forced to seek alternate cover from companies located in Russia or the East- Singapore, Hong Kong, Japan or China. 

Experts say that at least some of these markets will be problematic, as Hong Kong and Singapore are closely linked to the West and Japan will not be able to service Indian firms easily; it takes months for new tonnage to get P&I cover there. Additionally, members of clubs everywhere will be chary of accepting Indian tonnage plying to Iran- it raises risks for all in the club and there will be legitimate fears that 'calls' or premia for each of its members will escalate. Unfortunately, of the three major Iranian crude customers- China, Japan and India- India will be the worst affected; the others are already covered at home and will not have to seek alternate insurance. 

China seems to be the best alternative for Indian firms, especially if the government there seizes the opportunity to promote domestic insurance companies and increase their global footprint. "The China market has some extremely large insurers that may decide it is a good business," Iain Anderson, a Singapore-based lawyer with Ince & Co, told the Economic Times.

Iran is the second biggest oil producer in the OPEC after Saudi Arabia. The sanctions against it have not meant too much to its oil revenues thus far because the reduced volume loss after the sanctions began has been largely offset by the price of oil that has jumped after the rhetoric between Iran and the West escalated. Brent crude is hovering around $121 a barrel today; it was a little over $105 two months ago. Analysts say that the market has factored in the new sanctions into the oil price, but it remains to be seen whether this will spike after July- some experts are predicting a 150 dollar a barrel price benchmark for the latter part of the year. That, if it happens, will be another blow to the Indian economy.

No comments:

Post a comment