Spotlight:
"All quiet on the Middle Eastern front:
Re-navigating supply chains during conflict"
Debdut Mukherjee
Military actions breed chaos. The first wave brings along terrible bloodshed, frantic geopolitical recalibration, and the urgent
need to take a side. But when the initial dust settles, fresh dust arises from latent hostilities and spreads far and wide, raising
very pertinent questions on how the status quo will be altered.
Military actions breed chaos. The first wave brings along terrible bloodshed, frantic geopolitical recalibration, and the urgent need to take a side. But when the initial dust settles, fresh dust arises from latent hostilities and spreads far and wide, raising very pertinent questions on how the status quo will be altered.
The raging conflict in the Middle East raises several questions of its own. What began on 7th October 2023 with a surprise attack by Hamas-led Palestinian militants on Southern Israel has snowballed into one of the most significant military conflicts in the long history of a perennially effervescent region. Israel’s strong offensive in Gaza has festered into a conflict with many actors. The Iran-backed Houthi militants operating out of Yemen have played their part through missile attacks on Israel and shipping vessels passing through the Red Sea waters.
The impact on global supply chains is profound, with most major shipping carriers forced to steer clear of the Suez Canal and take the long route around the Cape of Good Hope. Commercial ship transits through the region sank, while delivery times of cargoes travelling between Europe and Asia stretched by at least 10-14 days. Spot shipping routes on some routes jumped up as much as 400% due to the disruptions, throwing a huge spanner into global supply chains.
Understanding the need for an urgent resolution to the crisis requires a deeper understanding of the strategic significance of these waters. Even as European traders successfully discovered a direct shipping route to India and the Spice Islands in the late 15th century, forever changing the balance of global trade, regional powers ranging from the Venetians to the Ottomans to Napoleon dreamt of a direct channel between the Mediterranean and the Red Sea. The British were wary that a canal would diminish their maritime hegemony, and it was eventually a strong French effort that led to the eventual opening of the Suez Canal in 1869. The East and the West were brought closer than ever before.
The significance of the Arabian Peninsula in global trade remains undiminished, putting into context the delicateness of the current situation for all political actors involved. The US and its allies seek to pursue a finely balanced operation against the Houthis without sparking a wider regional conflict. Iran, on the other hand, continues to engage through its proxies and maintains a strong hold on its main calling card – the Strait of Hormuz. Gulf nations will be wary that the conflict does not metastasize beyond the current radius and endanger domestic stability. Greater so for countries like Egypt and Jordan, who face the tall task of surviving within the eye of the storm in the face of widescale domestic macroeconomic troubles.
"Europe hopes fervently that it's crude and gas bills do not spike back up, unwinding recent progress on combating painfully high inflation without deflating manufacturing activity. The rest of the world adjusts to the new status quo."
Looking Back
Some might argue, and correctly so, that this is not a radically new status quo. Disruptions in the Suez Canal have happened in the past, although quantitative metrics measuring the real extent of the resulting disarray might differ given how unequivocally linear the chart and pace of globalisation have been.
In March 2021, the container ship Ever Given ran aground in the Suez Canal, blocking all traffic on the route for six days straight. The blockage held up a reported $9.6bn of cargo a day, while Egypt’s revenues from the Suez Canal took a $14-15mn hit for each day of the blockage. These numbers underline the massive impact any obstruction can have on global trade, but the congruence between this temporary blockage and the current uncertainty is dubious. Add to that the post-pandemic inertia ingrained in supply chains then, and the equivalence fades further.
Before that, there was the closure of the Suez Canal between 1967 and 1975, imposed at the beginning of the Six-Day War between Israel and Arab countries including Egypt. The Canal had earlier been closed to Israeli ships during the 1948 Arab-Israeli War, and then briefly closed completely during the 1956 Suez Crisis. The closure at the beginning of the Six-Day War still came across as unprecedented. Israeli and Egyptian occupations on opposite banks of the canal, backed up by hostilities during the Yom Kippur War of 1973, caused the re-routing of shipping routes around the south coast of Africa. Heightened uncertainty led many observers to believe that this change was permanent, causing a reduction in global trade by over 20% in the intervening period. The symptoms of the crisis were the same: longer delivery times, higher shipping rates, and elevated volatility in international prices of traded commodities. A United Nations study pegged the loss in global trade due to the blockage at $1.7bn, while Egypt took an annual hit of $250mn in toll revenues.
The new Status Quo
Global trade has grown multi-fold since the pandemic due to the gradual easing of supply chain bottlenecks and the growth of new markets and production centres. Consumption and investment levels have soared, while groans about protectionism have eased. Global supply chains are more interconnected than before.
As previous shocks have shown, globalisation is more crucial than ever to avoid economic stagnation. The presence of alternative routes or transportation mediums has helped cushion the shock of the current crisis compared to the previous disruptions.
However, the disruption will translate to higher cost pressures. The alternative shipping route around the Cape of Good Hope instead of the Suez Canal adds an estimated 10% to shipping costs. Longer delivery times might lead to supply-demand mismatches for certain commodities and higher prices. Airfreight has expectedly seen a sudden surge in volumes as shippers across the world find alternatives to cut down delivery times and avoid order cancellations. Higher volumes have however led to a huge jump in airfreight rates too, with short-term rates rocketing more than 30% in recent weeks.
Any impact on crude supplies out of the region will step up global oil prices, amplifying global price pressures. Both the Eurozone and the United States are expected to not raise interest rates any higher to rein in inflation. Widespread cost pressures due to higher import prices and shortage of crucial production inputs might lead to a re-think.
But as history shows, there’s opportunity in chaos. When ships were forced to trudge along the Cape route in the aftermath of the Six Days War, shippers were forced to adjust to the longer routes and introduce larger vessels. While vessel size might not be a pressing concern with the steady rise of Ultra Large Container Vessels over the past few decades, carbon emissions should be a pressing concern. Sailing along the Cape Route instead of the Suez Route would generate about 30-35 per cent more carbon emissions, while increased ocean-to-air conversion as discussed above will also play a role. For an industry that contributes about three per cent to global emissions, this is an opportunity to conceptualise a cleaner future of transportation.
A similar opportunity lies for the region that has suddenly been thrown into the global spotlight – Africa. The continent is heavily dependent upon seaborne imports for most critical commodities and yet is responsible for just six per cent of global maritime trade. Some of the largest ports along the route, like Durban and Cape Town, are among the worst-performing ports globally. Other ports are either ill-equipped to deal with the increased congestion due to poor infrastructural facilities. There is a strong case for African countries to invest in their coastal facilities.
There is also a strong case for the establishment of new nearshoring opportunities in Africa. Nearshoring in the supply chain refers to outsourcing business processes or services to neighbouring countries or regions in a bid to make the supply chain shorter and less prone to vulnerabilities. A long-term disruption to shipping through the Suez Route stretches several routes by several thousand nautical miles, which creates opportunities to establish new production or inventory centres on the route to shorten the overall supply chain. This, in turn, can go a long way to boosting self-sufficiency in a region burdened with political and economic instability.
Wrapping up, it is important to clarify that much of the above introspection depends ultimately on how long a disruption the region is facing. An immediate resolution is unlikely given the range and complexity of the geopolitical situation. For the shipping industry, a prolonged period of stability would be imperative to consider a return to the Suez Route. Till that happens, the Cape Route and increased airfreight will gradually absorb the entire capacity as trade volumes revert to normal levels. There are unavoidable short-term risks to cost inflation, energy prices and supply of essentials. Every dark cloud has a silver lining, however, and as outlined above, there are several pathways to chart a new face of globalisation when the world inevitably emerges from this crisis.
References
Chen, L.S. and Evers, M.M., ‘“Wars without Gun Smoke’: Global Supply Chains, Power Transitions, and Economic Statecraft.” International Security 2023; 48 (2): p. 164–204 (accessed 21 February 2024)
“Red Sea Update: ‘New normal’ mode activated”, Scan Global Logistics , 13 February 2024,
‘How is the Red Sea crisis affecting African countries?’, Ventures Africa , 16 February 2024,