Which regional companies and countries stand to lose in the event that Iran closes the Strait of Hormuz? Ratings agency Standard & Poor's takes a look.
It's a crisis that won't go away. While the region is no stranger to Israelis and Iranians trading insults and threats, Tel Aviv's latest hue and cry over Iran's nuclear ambition refuses to die down.
Recent bombing attacks on Israeli embassies in New Dehli, Tbilisi (Georgia) and Bangkok was blamed on Iran - claims denied by Tehran - have frayed nerves and the Iranian President Mahmoud Ahmadinejad did nothing to soothe them by attending an event that highlighted Iran's "nuclear achievements" on Wednesday.
Meanwhile, the international community continues to pile crippling sanctions on Iran in the hope that it will stop Tehran from pursuing its nuclear ambition.
While Tehran has threatened to close the Strait of Hormuz, most analysts do not expect the Iranian regime to directly confront the U.S. navy might in the region.
"Most military experts suggest that the Iranians lack the military and naval capacity to effectively block shipping through the Strait for a prolonged period," says ratings agency Standard & Poor's. "In this regard, engaging in a risky action with little likelihood of success would be inconsistent with how Iran has behaved in the past, which has been to carefully calibrate the level of brinkmanship without inviting direct confrontation."
Still, the risk of an unforeseen geopolitical event destabilizing the region has risen noticeably. Given that the two parties are nowhere near a diplomatic solution, Iran could initiate a "low level provocation."
"For example, Iranian authorities could slow shipping through the Strait of Hormuz and disrupt the timely supply of oil from the Gulf by imposing tanker inspections, boarding merchant ships, and otherwise obstructing shipping routes in its territorial waters. These provocations would allow Iran to avoid direct confrontation, but could still have a major impact on oil and gas markets and signal a potential threat to neighbouring countries and regional stability."
STRAIT OF HORMUZ
Close to 20% of the world's oil supplies, or 17 million barrels per day passes through the Strait of Hormuz and any disruption would send crude prices soaring to over $150, according to some analysts.
"Our strategy toward threats and sanctions is smart control of the Strait of Hormuz," Major General Mohammad Ali Jafari told Fars News Agency cryptically. "With regard to threats, we have entered a new phase, and now these are our threats that affect the enemy."
Meanwhile, the Gulf states are concocting their own contingency plans in the event of the strait's closure. A Kuwait official told Arabiya TV that it had a "back up" plan in case Iran tries to stop oil exports to the rest of the world.
S&P says a sudden spike in oil prices to $150 at a time of fragile economic recovery and would immediately jeopardize the improvements in both developed and emerging markets.
MOST AFFECTED COMPANIES AND COUNTRIES
But what about the Gulf companies and economies?
Here's a selection of S&P-rated companies and sectors that are vulnerable:
Qatar's LNG players: Qatar's liquefied natural gas (LNG) sector is dependent heavily on the strait. Qatar Petroleum, Ras Laffan Liquefied Natural Gas Co. II and Ras Laffan Liquefied Natural Gas Co. Ltd and Nakilat rely entirely on the passage of their LNG fleets through the Strait to reach export markets worldwide.
"Consequently, a long-term blockage of the Strait could lead to a force majeure event being called by LNG buyers, and the cessation of cash payments," says S&P.
SABIC & QP: The region's largest listed company in terms of market cap Sabic is reliant on the Strait to export petrochemical products.
"In the case of a prolonged closure of the Strait, we believe Gulf-based commodity companies would consider alternative land and air transportation routes, along with other actions such as slowing production or bringing forward the scheduled maintenance of plant and equipment," notes S&P.
S&P also believes Qatar Petroleum is the "most reliant of the oil majors" on the channel for exporting its oil and LNG production.
DP World: DP World, which generates 50% of its earnings from the Jebel Ali, would suffer as the Strait's temporary closure would most likely lead to higher insurance premiums for DP World and, potentially, lower overall traffic utilization.
"A rise in insurance premiums, in tandem with heightened geopolitical risk, could affect major shipping lines that use DP World's ports," says S&P. This, in turn, could disrupt the flow of traffic through Jebel Ali, with a corresponding effect on DP World's cash flow generation and profitability.
DUBAL, EMAL & ALBA The aluminium sector may find it difficult to secure raw material supplies such as bauxite, which are crucial to avoid plant shutdowns.
"We believe aluminium producers Dubai Aluminium Company (Dubal), Emirates Aluminium Company (EMAL), and Aluminium Bahrain (ALBA) would look to import bauxite through ports outside the Strait and transport it by land, which would increase production costs," says S&P. "It's unlikely these costs could be passed on to customers, leading to a temporary negative impact on profitability."
Sovereign investment holdings such as Bahrain's Mumtalakat, which has a stake in Alba, and Abu Dhabi Mubadala with its interest EMAL will also be affected.
Shipping. Asian tanker operators will find it difficult to find opportunities and alternative routes such as Gulf of Aden and Bab el-Mandab strait would carry higher insurance premiums.
International Energy Majors Shell and Total are the international players most exposed to a disruption in the Strait of Hormuz.
Economic Impact: S&P expects consumer confidence and tourism to take a hit in the event of a strait closure.
"A fall in the number of tourists to the region would likely have a greater effect on Dubai, which is more reliant on tourism than Abu Dhabi and Doha," says S&P. The hospitality businesses of Emaar Properties and Majid Al Futtaim are likely to be meaningfully affected, due to their geographic focus in the Gulf, but the agency does not expect any mass exodus of retailers from the malls.
WHICH COUNTRIES ARE AFFECTED (OR NOT)?
If Abu Dhabi can fast track its oil pipeline that avoids the Strait of Hormuz, the emirate will be able to divert half of its crude exports, which could potentially be large enough to offset short-term losses on its services account.
Saudi Arabia stands to gain from a further spike in oil prices, which would likely be more than sufficient to offset higher costs from diverting part of its oil exports through the East-West pipeline to the Red Sea.
"We believe this pipeline has the capacity to transmit about 4.5 million barrels per day, which is about 60% of Saudi Arabia's average daily oil exports," says S&P. "Given its excess production capacity, which it can deploy at short notice, Saudi Arabia could raise its exports to offset shortages in supply arising elsewhere."
The combined price and volume effect would likely lift the country's oil revenues well beyond the higher transport and logistics costs, as long as shipping volumes in the Strait of Hormuz are not significantly affected.
"We do not expect geopolitical developments to deter Saudi Arabia from pursuing its plans to invest in maintaining current capacity levels and enhancing its downstream capabilities. Conversely, these developments may slow down the country's plans to open up its capital markets to direct foreign investment."
Bahrain may not be as lucky. Already facing domestic unrest, an international escalation in Iran would raise temperatures between the Sunni government and the Shia majority population.
Egypt is a net exporter of oil and a disruption would benefit its exports. "Due to its geographical position, Egyptian petroleum exports are not transported through the Strait of Hormuz," says S&P.
"Therefore, higher oil prices, due to heightened tensions in the Gulf, could be expected to support an improvement in its current account balance. Any improvement in the government balance, however, would likely be offset by increased energy subsidies."
Kuwait and Qatar will benefit from high oil prices but will have trouble getting their crude and gas exports to market.
S&P expects a closure of this trade route to have a significant negative impact on Kuwait's key macroeconomic variables. "The longer the trade route is closed, the more extensive would be the erosion of Kuwait's currently extremely strong fiscal and external net asset positions."
Qatar's contingent liabilities could arise due to government-owned entities requiring support.
Oman's geographical location makes it the least affected country in the region. Its gains from oil trade would offset and exceed the negative impact on other trade, and help it to meet its high budget spending in 2012.
© alifarabia.com 2012
