Global supply chains once again under threat

Global supply chains once again under threat

Global supply chains once again under threat
A Houthi fighter stands on the Galaxy Leader cargo ship in the Red Sea in this photo released Nov. 20, 2023. (Reuters)
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The troubles at the Bab Al-Mandeb, a narrow sea lane connecting the Gulf of Aden to the Red Sea, started in earnest mid-December when Houthi rockets attacked ships in the area. The strait is a chokepoint for global trade because passing it is a prerequisite to gain access to the Suez Canal.

The canal accounts for 30 percent of all container traffic and is also vital to oil and liquefied natural gas ships bound for Europe.

Supply chain managers were justifiably on tenterhooks when the hostilities started. The US, the UK, Canada, and others were quick to assemble a task force to defend free transit through the Bab Al-Mandeb.

Developments since December have, if anything, highlighted just how dependent global trade is on narrow sea lanes and canals, such as the Suez Canal, the Bab Al-Mandeb, the Straits of Hormuz, the Singapore Straits, and the Panama Canal.

Up to 90 percent of container ships bound for the Suez Canal got diverted around the Horn of Africa adding roughly nine to 10 days on their journey to Europe.

Cornelia Meyer

While the Bab Al-Mandeb tensions influenced the oil price only intermittently when there were major Houthi attacks toward the end of the last year, the European benchmark Brent was up significantly due to recent developments. Only to lose again on early Monday trade.

The attacks were mainly concentrated on container ships and not on bulk, or oil and gas carriers.

However, things escalated when the attacks did not stop despite the UN Security Council admonishing the Houthis to stop their attacks in the Red Sea. As of Friday, the US and the UK flew missions bombing Houthi installations aiming to secure the safety of travel routes. They issued warnings to shippers to stay clear of the troubled area. The world is holding its collective breath fearing further escalation.

Up to 90 percent of container ships bound for the Suez Canal got diverted around the Horn of Africa adding roughly nine to 10 days on their journey to Europe and six plus days if they were destined for the US East Coast.

Needless to say, this unsettled supply chain significantly added to transportation costs once we accounted for fuel, extended journey time, insurance, and other costs. At the same time factories across the continent struggle with new delivery schedules for parts, so much so that Tesla needs to close a plant in Germany for two and a half weeks awaiting supplies required for their manufacturing process. This is but one, albeit a very high-profile, example.

The escalations made the operators of oil and gas tankers more vigilant again. BP and others had temporarily halted tanker traffic through the Suez Canal in December and have been watching developments ever since.

The recent escalation of activities led to Qatar no longer allowing LNG carriers to cross the Bab Al-Mandeb and the Suez Canal. In the short term, there were no immediate effects on gas prices in Europe, as European storage facilities are filled. However, if the situation continues, Europe can expect higher gas prices, because LNG is a big substitute for Russian pipeline gas, which Europe is no longer willing to purchase due to the Ukraine conflict.

According to Bloomberg, Trafigura counted oil/gas tanker traffic through the Red Sea to have declined by 15-20 percent since the beginning of the year. Since the latest round of hostilities, many tanker operators advised their captains to avoid the Red Sea area for the time being. (Qatar accounts for around 13 percent of gas supplies to Europe, according to Bloomberg and so is its largest supplier.)

Commodity prices will fluctuate according to the geopolitical circumstances. Supply chain managers will be able to deal with geopolitically induced vagaries.

However, the question remains what effect do these developments have on prices for the end user, and how these higher price levels will influence the decisions of central banks when it comes to lowering interest rates?

A further conundrum will be how the global manufacturing sector intends to adjust to seamlessly never-ending threats to global supply chains, be they COVID-19-induced or a result of trade policies or geopolitics. The question that beggars a reply is: where globalization is headed. The disruption in the Bab Al-Mandeb is an important input to answer that question.

  • Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.
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