Global Supply Chains face more threats

Maritime supply chains are headline news again. In the last decade, international shipping has been disrupted by piracy; the Suez Canal has been blocked by a grounded container ship; ports on the West Coast of the USA have been overwhelmed by imports of containers; ships have been forced to divert due to low water levels in the Panama Canal and now shipping is under attack from drones launched by Houthi rebels in Yemen. In this article, John Manners-Bell looks at the recent disruption in the context of the previous events and makes recommendations for manufacturers and governments.

Not so unbreakable supply chains

Since the advent of containerization in the 1950s, international shipping has facilitated the off-shoring of manufacturing from Western economies to cheap labour markets in Asia. For years, the trend towards globalization was unchallenged (at least in economic terms) due to the step change in manufacturing costs and the apparently unbreakable logistics networks which made the distance between supplier and customer seemingly irrelevant. However, a combination of evolving geopolitics and the effects of climate change are exposing many of the vulnerabilities of the shipping industry and the supply chains it underpins.

Rebels harass international shipping in Red Sea

After initial fears of region-wide conflict following the tragic events which unfolded in Israel and Gaza in the latter part of 2023, it seemed that hostilities would remain contained to the eastern Mediterranean. However, this has proved not to be the case. The involvement of the Iran-backed  Houthi rebels – an ethnic group fighting for control of Yemen – has threatened one of the world’s busiest shipping lanes: traffic transiting the Red Sea en route to and from the Suez Canal. Using allegedly Iranian-made drones, multiple attacks have been made on ships in the vicinity of the narrow Bab El Mandab straits. This has led to many shipping lines, including container carriers such as Maersk, MSC and Hapag Lloyd, suspending services via the Suez Canal, choosing instead a longer route around the Cape of Good Hope. Subsequently, the US and other allies have deployed naval assets to the region in order to protect commercial shipping from attack by the drones and acts of piracy.

The recent attacks are as a result of the conflation of two conflicts. In 2015, a Saudi-backed coalition of countries intervened in a civil war which had been raging since 2011, worried that the country risked becoming an Iranian satellite should the Houthi minority take power. The launch of attacks on international shipping, apparently as a response to the war in Israel/Gaza is not only disrupting flows of goods from Asia to Europe but it also threatens to impact on Saudi Arabia’s plans for development of the Jeddah Islamic Port and ‘Oxagon’, a major new port serving the new city of Neom, close to the Gulf of Aqaba. For this reason, the Saudi authorities will be keen to neutralize the threat as quickly as possible.

The fall out in the short term is less critical than it could have been, given that all the holiday season’s products should already be in retailers’ warehouses or stores. However, if the problems continue into the New Year, the effects could be more significant especially for the finances of the Suez Canal and, as mentioned, Saudi’s long term plans for the region.

Panama Canal’s water levels cause congestion

At the same time as the problems affecting the Suez Canal, flows of goods through the world’s other major conduit for global trade, the Panama Canal, are also being constrained. In this case, the issue is environmental rather than political, with months of drought reducing water levels to the point where numbers of ships transiting the canal and their draught have had to be limited. This has meant that ships are being delayed by days or even weeks unless they are willing to pay substantial premiums to jump the queues in competitive auctions.  In November, a Japanese company, Eneos Group, paid a surcharge of $4m over and above transit fees of $400,000. Others have chosen to steam via the Straits of Magellan or even from Asia to the USA through the Suez Canal (up until the current problems) adding up to 10 days to three weeks to the journey depending on the speed of the vessel.

Some US exports to Asia, such as grains, nuts and dried fruits, have already been hard hit. US shippers have been forced to look at moving goods to the West Coast ports by rail rather than ship them direct from Gulf or East Coast Ports via the Panama Canal. Exporters from Latin American countries on the Pacific Ocean will also face problems moving fresh produce the other direction to the European market.

There are no short term solutions to the problem. Authorities are looking at building a new reservoir to supply the canal; rationing water use by businesses and consumers and recycling the many millions of gallons of water used each year flushed into the Pacific Ocean.  Without such investment the canal will be at the mercy of increasingly extreme weather patterns.

Maritime supply chain choke points

Whilst the Suez Canal and Panama Canal are the two most obvious chokepoints for global flows of goods, there are a number of others which require monitoring.

• The Strait of Hormuz. With Iran to the north and the UAE/Oman to the south, whenever relations between Iran and the West worsen there are inevitable concerns over whether Iran will attempt to close this passage to Dubai and the other ports on the Gulf of Arabia. In the past, Iran has intercepted and boarded ships such as the British flagged Stena Impero in 2019. However, closing the straits would not only risk retaliation from the Gulf States and their Western allies in the region, but also prevent goods reaching Iran’s own largest port, Bandar Abbas.

• The Strait of Malacca. 80% of China’s exports pass through this stretch of water which reaches between Indonesia and Malaysia. In the opposite direction, the strait is the main route for energy exports from the Middle East to China and Japan. If this route was blocked or blockaded (for example by the US navy in the event of a Chinese invasion of Taiwan), other so-called archipelagic alternatives are either navigationally more difficult or involve much longer transit distances.

• Ports. The growth in size of container vessels has led to a consolidation of traffic on a small number of gateway ports in North America and Europe. This also consolidates risk, as seen during the Covid crisis when consumer demand led to West Coast ports of the USA becoming overwhelmed by imports. As critical nexus points in the supply chain, ports are vulnerable to cyber-attack, industrial action, terrorist action or even just bad weather.

Fragility exposed once again

Recent events have shown – once again – the fragility of global supply chains. As detailed above, in many cases there are ‘work rounds’, presently being employed by shipping lines involved in container, bulk and tanker trades. However, these are costly both in terms of money and time, the burden of which will be borne by manufacturers, retailers and ultimately consumers.

• Western governments need to understand that ensuring the integrity of maritime supply chains through the projection of naval power is of strategic importance. This requires budgetary commitment at a time when public finances are under pressure.

• Infrastructure such as the Suez and Panama Canals need continuous investment, especially as ships are getting increasingly bigger, a contributing factor behind the blocking of the Suez Canal by the containership, the Ever Given, in March 2021. As these infrastructure assets are located in emerging markets, the resources may not exist to develop capacity and capabilities at a rate commensurate with market demands.

• Manufacturers are recognizing that extended supply chains present an existential risk to their businesses. This is behind the near-shoring strategies being employed by many US companies and the boom in demand for land based cross-border Mexican logistics services.

• Shipping lines need to recognize that, whilst vessel capacity makes for efficiencies of scale and cost reduction on a per container basis, the limited number of ports at which they can call consolidates risk and makes supply chains more vulnerable to disruption.

Two relevant books by John Manners-Bell

The Death of Globalization, Sea Pen Books, 2023

Supply Chain Risk Management, Kogan Page, 2023