Rising Risk Premium in the Strait of Hormuz Pressures Textile Trade Supply Chains

The Strait of Hormuz carries about one-third of global LNG and one-fifth of crude oil trade, making its navigability a direct determinant of international shipping fuel costs and insurance premiums. When the UAE announced on August 19 the suspension of all trade and financial ties with Iran, textile exporters had to look beyond regional orders—the risk premium of this waterway is transmitting to global supply chains.

Background

On August 18, the UAE Ministry of Defense detected two ballistic missiles, one landing in its territorial waters, prompting the announcement the next day to suspend trade, commercial, and financial transactions with Iran. Earlier, two oil tankers of the Abu Dhabi National Oil Company had been attacked in the Strait, and several shipping companies reported incidents during transit. This means that logistics costs and safety risks for crude oil, refined products, and chemical raw materials through the strait are rising simultaneously.

Diplomatic efforts had started as early as June, when a memorandum of understanding was signed for a 60-day negotiation period covering issues such as port blockades, oil restrictions, and asset disposal. However, by mid-August, talks had stalled, with Iran stating it would reopen the strait only after its demands were met. This deadlock has led shipping lines to reroute or postpone transits, pushing up freight rates and insurance surcharges in the global shipping market.

Industry Impact

For the textile industry, the most immediate impact is on raw material costs. The Middle East is not only a major crude exporter but also a key supplier of petrochemicals. The upstream PTA and MEG prices for chemical fibers are highly correlated with international oil prices. Disruptions in the strait mean longer transit times and higher freight costs, which will eventually pass through to the polyester chain, raising quotes for polyester filament and staple fiber.

Meanwhile, rising marine insurance premiums are eroding exporters' margins. Shipments destined for the Middle East, Europe, or East Africa that previously passed near the strait may now incur war risk surcharges, typically charged per container and potentially adding hundreds of dollars per box. For textile orders with slim profits, this is a significant burden.

More concerning is the unpredictability of delivery times. Rerouting via the Cape of Good Hope avoids risk but extends voyages by 7-10 days, jeopardizing fast-fashion orders or strict delivery schedules, potentially leading to penalty claims or order cancellations. Textile exporters must reassess long-term contracts with Middle Eastern clients, especially clauses on force majeure and freight cost sharing.

Practical Recommendations

For Sourcing Professionals - Monitor chemical fiber raw material price fluctuations and include price adjustment mechanisms in long-term agreements to avoid losses from sudden cost increases. - For cargo transiting the Strait of Hormuz, purchase war risk or additional coverage in advance, and confirm latest freight rates and surcharges with forwarders. - Consider alternative routes, such as transshipment via Red Sea or Mediterranean ports, but weigh time and cost, and allow extra buffer time.

For Export Enterprises - Negotiate war risk clauses in contracts, specifying the sharing ratio for freight increases, or use FOB terms to transfer some logistics risks. - Establish a risk early-warning mechanism for Middle Eastern markets, regularly assess the safety level of destination ports, and suspend shipments to high-risk areas when necessary. - Optimize inventory management by raising safety stock levels for Middle Eastern orders to cope with potential logistics disruptions.