Lots More on the Seaborne Chaos Around the Strait of Hormuz

11:37Joe Weisenthal:Margo and I, an old professor at New York Maritime College of Maritime Law and Insurance with Jeffrey Weiss, would have always said everything we're going to talk about this semester falls into the category of who pays. Right. Who's responsible to pay? Professor Weiss was famous for that, that who pays phrase, and it comes into play exactly these situations.

11:58Ant:So just on this point, can I ask you to explain very simply, I guess, the ecosystem of insurance and shipping and this idea that, you know, you hear about things like the club insurers, and then you have the reinsurers, and there seem to be all these different layers. There's the insurer for the cargo, there's the insurer for the ship, as you laid out. And then there's this question of who's actually going to pay it because you have, I guess, a chain that exists between the charterers, the ship owners, and buyers of the cargo. Can you just lay that out kind of very simply for us?

12:34Joe Weisenthal:Yeah. And of course, we're freight people, not insurance experts, and all going well without mentioning names and working on connecting. Tracy and I discussed yesterday working on connecting somebody very key at one of the world leading P &I clubs to potentially. Now you've said it in public.

12:53Ant:So the pressure is on.

12:55Joe Weisenthal:Notice I'm not mentioning a gender or a name or anything that gives away anything other than that. So we'll see. Fingers crossed.

13:05Tracy Alloway:Pronouns are they them.

13:06Joe Weisenthal:Exactly.

13:07Tracy Alloway:You've already gendered the ships. Sorry, it's a tangent. I was just reading something about how, you know, it's very, you know, the English doesn't have gendered nouns with the exception of ships. Anyway, sorry, keep going.

13:21Joe Weisenthal:Yeah, exactly. So, yeah, to break it down very simply, right, the ship owner carries protection and indemnity insurance, hull insurance, those policies that cover the ship and its engines and so forth, all of the physical attributes of the vessel and so forth. That's what the ship owner carries on it. Now, in a contract of carriage, whether it's a charter party or a bill of lading, a liner bill of lading, that has a limitation of liability to the cargo owner in that contract of carriage. The U.S. law is covered by the Carriage of Goods by Seas Act, COGSA, which typically carries a$500 per package or per ton limitation of liability.

14:03Joe Weisenthal:So the ship owner is only liable to a certain extent of value of the goods that the shipper is carrying on the ship. Now we flip over to the cargo owner side. And the cargo owner, knowing that the ship owner only has a certain limitation of liability, the cargo owner will go out with the right guidance, will get all risks cargo insurance. And that's to provide them the coverage for the value of the goods that they're carrying on board the ship over and above whatever the ship owner's limitation of liability is. When there's a casualty and a loss as a cargo owner, you want to be able to collect from your all-risk cargo insurance policy and let them fight it out with the ship owner, not be stuck in arbitration in London or in Singapore or New York fighting it out later on.

14:56Joe Weisenthal:And then there's another type of insurance, too, when you're chartering a ship. As a ship has a cargo interest, you get charter's liability insurance is pretty common. And that covers the shipper, the cargo interest from other liability elements. Let's say the ship has a casualty and people are killed or hurt. There's going to be lawsuits filed against everyone involved in the ship. And charter's liability insurance covers the charter, the cargo interest liability as it relates to other damages. Or if the ship is damaged by their stevedores loading the ship or discharging the ship. So other things that can come into play there too.

15:37Joe Weisenthal:So I don't know, try to lay it out as kind of clear as possible, but I know it's convoluted.

15:41Ant:Yeah, there's a lot of moving parts.

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19:06Tracy Alloway:Talk to us about the announcement from Trump that the U.S. could get involved and be some sort of play an insurance role here. What can that do? And is that novel? Is there any precedent for anything like that?

19:19Joe Weisenthal:Yeah, this news just came out. The president will often say things that then need to be implemented by the bureaucrats, right? So the mechanics of it are always complicated. There's precedent for U.S. government agencies providing insurance. The Export-Import Bank, for example, offers trade credit insurance. Let's take that, for example, right? As for protection indemnity, P &I insurance on ships, I'm sure, although I don't have any specific instances, but I'm sure there's been precedent for that in history. So I don't think that that's too much of a stretch for the government to necessarily come in and offer some kind of safety net for ships to be able to get P &I insurance.

20:02Joe Weisenthal:What may be more complicated is Navy, having U.S. Navy or Coast Guard escorting ships through the Strait of Hormuz. That's not an easy task. That was done, I think, well, it was in the 1980s when we reflagged tankers, put American flags on them to protect them from the Iran-Iraq War. At the time, we had Navy ships escorting ships through the Strait of Hormuz, but that is an expensive proposition. It's not perfect, right? Missiles and attacks can get through. You're putting U.S. Navy ships, you're taking them out of circulation and out of deployment for other purposes, and you're putting them very much in harm's way.

20:40Joe Weisenthal:That approach to the Strait of Hormuz, navigationally speaking, is delicate to say the least, and it can be very exposing.

20:48Ant:What's it like actually sailing through the Strait?

20:52Joe Weisenthal:I have not sailed through the straight Margo has it either right both of us were both of us stayed a lot shore side after I sailed through the Panama Canal on the on a navy tanker which was which really was a fun topic with Tom Keene and Paul Sweeney one morning when it looked like we

21:07Ant:were going to take over Panama the day before sorry Margo well okay actually this reminds me And just setting aside the insurance component, do people want to be moving stuff through the Strait of Hormuz at the moment? I imagine if you're captaining or crewing a ship, I would love to captain a ship, by the way, but you wouldn't want to be in the Strait at the moment, right? There are human considerations beyond just how am I going to get compensation for the cargo or a lost vessel? Obviously, it's a logistical nightmare to get through there. Safety is a concern. Personnel. This morning, a small container vessel, I think it was 1 ,800 TEUs, 20-foot units, was hit with, they're saying, an unknown projectile.

21:54Ant:Hit it above the water line, put the engine room on fire. They just abandoned ship. They pulled the whole crew off and abandoned ship. I mean, you don't even stay there to fight the fire. You just get out of there. So, yeah, people don't want to be there. And if you are on the liquid side, petroleum, crude, you have a harder time avoiding going through that region because of what it is, right? That's the source of a lot of our global oil. But other commodities dry in large part, we can avoid it. So to Anton's comments, the aluminum sector has in large part shifted, deviated from that area for now.

22:36Ant:But in addition, ships are navigating away and it means a longer transit time, which means a more costly voyage. So it's less desirable. It does increase freight rates, but it's safer. Your goods are safer. And when you start adding on these new war risk premiums, if you're going to take them, I'd venture to guess it's still cheaper to take the long way around now.

23:00Tracy Alloway:So it's the kind of thing for certain liquids, there's no choice like it has to flow through there. It sounds like for some of these other things, aluminum otherwise, for now, either there's going to be some long route or it's just that is not going to be a source. If we're talking about aluminum, there would just be less aluminum in the world or some existing source of aluminum will ramp up their production. Right.

23:25Joe Weisenthal:Take Emirates Global Aluminum, for example, Joe, that the United Arab Emirates have the luxury of having ports and the ability to potentially load ships on the Gulf of Oman side outside of the Virgin Gulf. As Margot said, longer route, potentially not ideal. This is not where they typically load. One thing I haven't looked at is Emirates Global Aluminum shifting some of that aluminum loading to ports on the Gulf of Oman. I'm going to take a look at that. But I wanted to say, you know, in Tracy's question about what crews, you know, captains and ships thinking on this too. I'm going to take you back, Tracy, to a way to answer your question.

24:01Joe Weisenthal:Imagine two crazy people came up with a scheme to load a teddy bear in a container and then you're heading to the Persian Gulf. Do you want to risk your life as a ship's crew, like for somebody's teddy bear, you know, stuck in the middle of a 20-foot container? Or are you getting off the ship and saying, yeah, I'm not risking my life for that, right? I was going to say, as a side note, though, to that alternate plan on the Gulf of Oman, I was reading that they're reporting missiles and drones in the Gulf of Oman as well.

24:30Ant:So in addition to the Straits of Hormuz.

24:33Tracy Alloway:I find, by the way, listeners, it's helpful to pull up a map during some of these conversations because, yes, you can see very clearly Oman has the benefit by and large. I don't know exactly where their ports are on its coast. But yes, the Strait of Hormuz is less of an issue for them, whereas for the UAE, they're right in it.

24:52Joe Weisenthal:Yeah, unless the Houthis start up again, right? So the Houthis have been an interesting one. And Margot and I were just talking about this ahead of coming on. The Houthis have put the threat out there that they're going to restart attacks in the Red Sea and off the coast of Yemen and potentially significantly deter traffic from heading to the Suez Canal. but they haven't started any attacks yet. The threat's out there. Already you see container ships, container lines, diverting ships to the Cape of Good Hope to round southern tip of Africa to avoid heading into the Red Sea in case the Houthis do start up with missiles and attacks and boarding ships again.

25:28Joe Weisenthal:But as of at least 15 minutes ago before we get started this podcast, it's out there as a threat, but the Houthis haven't done anything yet. The threat in and of itself already causes reactions, though. Right.

25:42Ant:Yeah, I remember. I think the big port in Oman is Salalah. And I only know this because I visited there once. But like, it's pretty close to Yemen. Right. Like, I don't think there have been any direct attacks, but certainly relatively close. This reminds me, though, have you seen any early signs of people doing maybe insurance arbitrage where, you know, like certain flags or certain jurisdictions or entities are willing to run the Hormuz in a way that I guess Western companies just aren't at the moment? Or is it too soon for that and too uncertain?

26:18Joe Weisenthal:Yeah, I think too soon for that, Tracy. Not Hormuz, right? We did see on the Hormuz situation of the Persian Gulf, haven't seen that happening. There's some ships moving through, so it may be happening, maybe with some of the very few ships that are moving through. But it may be a good anecdote to kind of bring up here was when we were dealing with a year or plus or so ago, when the Houthis were really, really ramping up their attacks. there was a lot of chatter about the fact that the Chinese had essentially a Chinese EZPass toll transponder to get past the Houthis. So we're seeing talk at that time of working with Chinese ship operators and Chinese ship owners that were more competitive because they could still send their ships through the Red Sea and into the Suez Canal, whereas more Western-operated vessels that could be tied to countries that were unfriendly to the Houthis had a really target on them, right?

27:18Joe Weisenthal:So we're seeing some of that arbitrage a bit when the Houthis were in full swing.

27:36Ant:Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies. Chances are there isn't an ETF that fits your exact criteria. But on public, you just type in a prompt and their AI screens thousands of stocks and build a one-of-a-kind index.

28:17Ant:You can even backtest it against the S &P 500. Then you can invest in a few clicks. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market.

28:37Joe Weisenthal:SEC Registered Advisor. Crypto services by zero hash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Deadlines move, plans change, and sometimes opportunities pop up out of nowhere. When you need branded gear fast, 4imprint is ready to deliver. 4imprint offers hundreds of promotional products in their 24-hour category. Everything from custom apparel, bags, and drinkware to writing tools, trade show staples, and high-tech gear. At 4imprint, they're focused on getting the details right, printing your logo with precision, packing your order with care, and shipping it out fast.

29:16Joe Weisenthal:And it's backed by their 360-degree guarantee. That's 4imprint's promise your order will show up right on time, just the way you planned it. That's what it means to be 4imprint certain. So, if you're prepping for a last-minute event or jumping on a big opportunity, you don't have to settle or scramble. With 4imprint, fast, reliable service and peace of mind are built right in. Check out their full 24-hour selection at 4imprint.com. 4imprint, for certain. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology

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30:16Tracy Alloway:One of the impressions that I get when we have incidents such as this is that there's a certain non-linearity or that things really compound over time, that one day disruption is one thing, A two day disruption is another thing. But by the time it gets to 10 days or two weeks or a month, then it really is it gets exponential. Like talk about talk to us about the risks and how they compound the longer the war goes on or the longer the disruptions are in this particular part of the world.

30:48Ant:Well, is that the risk to.

30:50Tracy Alloway:Yeah, yeah. Global supply chain is the risk of global supply chains for all of this stuff, the longer this goes on.

30:57Ant:Well, I think we reflect back. We've lived it very recently in a non-war situation in just what we saw during the aftermath of COVID when shipping just, and I think we actually spoke then about this, shipping just grew out of control. and we saw all the subsequent delays. And that was really just because of system overuse, congestion, and ultimately a bit of failure because our system just wasn't big enough for as much as we were trying to ship during that period. That was when we had container ships and cargo ships stacked off the port of LA. We had clients with steel coming in where they said, you could be on anchor for four to six weeks waiting for your birth.

31:49Ant:What do you want to do? Then you start to have to look at the bottom line of your dollars and cents. And that's what we're going to see again. Like anything, it just continues to back up, right? So we have cargo on vessels that aren't getting where they need to be. If it does, it's at a significantly increased cost. Going forward, if you want to book your freight, the baseline, the starting cost is going to be that much higher because of risk, because of increased sailing distances that you have to go. And once you start using up your assets for longer periods of time, supply and demand, now capacity starts to shrink.

32:35Ant:So it really becomes quite the domino effect. And the longer it goes, the more out of whack our system gets, the prices go up. And that's where we can talk about the short term is the price of commodities. And that's where our jumping off point is as we talk about oil and we're talking about aluminum and fertilizers and cements and all these raw materials or semi-finished goods. But down the line, we all start to feel it as we did in post-COVID because that effect does start to trickle into our retail as well.

33:15Tracy Alloway:You know, this has the potential to be a disruption on the scale of COVID or like we talking about that ballpark if this goes on long enough?

33:25Ant:I think that's the wild card. How long does it go on for?

33:28Joe Weisenthal:Yeah, there's going to be winners and losers, right? In addition to the losers, also always winners too, right? Going back to the Houthi mess, no one was more excited than ship fuel suppliers down in southern Africa, right? With all the ships moving through the area that needed to refuel in South African ports rather than in ports in the Red Sea and so forth. So supply chains shift and eventually start to set in. Is this going to your question, Joe, right? Is this going to be at the scale of what we saw with COVID? Boy, I hope not. I mean, COVID hit every part of the world, every port in the world had problems and so forth.

34:10Joe Weisenthal:So I think it would take quite a bit for it to get to that stage. But already, as I mentioned earlier, with the price of diesel fuel in the U.S. jumping, that's already going to start hitting. transport of local goods going from distribution centers to the local public supermarket here in Florida. So it's trickling down already. We're going to start seeing it. So Margo and I are bracing for the fuel surcharges coming up.

34:35Ant:Yeah. This also reminds me, I think even before recent events, we were starting to see freight rates pick up a little bit in the U.S. And some people were talking about a potential turn in the cycle. I imagine higher oil prices will, you know, eat into some of the industry's profits. But before this week's events, did it feel like we were starting to see a little bit of a turn?

35:02Joe Weisenthal:Yeah, we just previously working on 2026 barge contracts, particularly for northbound goods, like steel, metals that are part of our typical business. Margot was on the front lines on that, and we didn't see much in the way of significant increases right what do i think for okay yeah no no routine increases it was nothing terrible yeah it seems like it's a lot on the uh yeah the trucking the freight yeah truck freight has been yeah where things are more volatile

35:33Ant:trucking is so so reactive to the market much more liquid market right with thousands of

35:38Joe Weisenthal:small carriers and owner operators and so forth. And then rail freight is the exact opposite of the truck freight market from liquidity to monopolies. Let's not call them monopolies, actually.

35:51Tracy Alloway:But we know in trucks that you have a down period and then thousands and thousands of owner operators will come out of the market and go out of business. And so supply swings down and up in trucking in a way that would be unimaginable in something like rail. Exactly. reasons. Yeah. Yeah.

36:10Ant:So I know we've we've said multiple times now that the wild card is really the length and how long this goes on for it. But are there any, I guess, proactive steps that you're taking in your own business to prepare for further disruption?

36:24Joe Weisenthal:Good question.

36:26Ant:Because where we fit into the into the supply chain is that our clients are the traders. So we're managing their supply chain. What protective actions or course correctors they have in mind really will relate to their trading book, which is going to probably be sourcing in alternate locations as needed if you can't get your commodity out of the Middle East or an affected region. When we dial into domestic logistics here, North American logistics, we will see everything continue to flow. And we don't expect as much a disruption of capacity. The disruption will be prices, but we'll still be moving, moving things.

37:16Ant:And we will still see truck rail barge. And, you know, ocean freight will be more of the swing item here on what are the lanes where the freight is moving. Joe, did you ever hear about the story of the ships that were stuck in, I think, the Suez Canal for like years and years and years during the Six Day War. No. So the crews that were stuck on the ships like started their own postal service and like built their own little society. But it's a very interesting story. I certainly hope nothing like that happens this time around.

37:51Tracy Alloway:Lots More is produced by Dashiell Bennett, Kerman Rodriguez, and Kale Brooks.

37:55Ant:Please rate, review, and subscribe to Odd Lots and Lots More on your favorite podcast platforms.

38:00Tracy Alloway:And for even more beyond lots more, go to Bloomberg.com slash OddLots and chat with fellow listeners in our Discord, discord.gg slash OddLots.

38:09Ant:And don't forget that Bloomberg subscribers can listen to all of our podcasts absolutely ad-free. All you have to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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38:54Joe Weisenthal:Janice Torres here.

38:55Ant:And I'm Austin Hankwitz. We host the podcast Mind the Business Small Business Success Stories produced by Ruby Studio in partnership with Intuit QuickBooks. We're back for season four to talk to some incredible small business owners.

39:07Joe Weisenthal:The big thing about working at tech is that it's ever evolving, ever changing. Everyone's a rookie. That's how fast the industry is changing. So what I'm really excited about is to be part of that change. So listen on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.

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