Global supply chain risks stemming from the recent Middle East crisis

The global risk outlook for 2024 has placed country and geopolitical risks at the top. The war between Israel and Hamas which began in early October 2023 has reignited a regional conflict and continued into the new year. Heightened geopolitical risks in the region have prompted rating agencies such as Fitch to deteriorate the sovereign sector outlook in the Middle East. While economic and supply disruptions are anticipated to be lesser than with the Russia-Ukraine conflict, manufacturing and automotive sectors are seeing several operational disruptions.

Employee and Supply Chain Risks

The manufacturing sector is affected by many aspects of the conflict: Impact on ports, on operations, on assets and on employee security. Companies have seen shutdowns in local operations and delays in exports to the major trading partners such as the US, China and other countries. Several employee and family displacements have also been reported, making it the most disheartening risk.

Container rates are expected to increase. We anticipate this as a short/mid-term risk in the first half of the year unless the war continues to drag on.

According to a Bloomberg article, Israel is one of the few places outside East Asia where Advanced Chip Production is done. These include design and production facilities of Intel, big presence of Nvidia, wafer production of Tower Semiconductor, and some of Apple’s silicon design. Intel has secured a $3.2 billion grant from Israel to expand its chip manufacturing plant in Kiryat Gat, where the Fab 28 facility produces 7nm chips and employs 11,700 workers. Intel has also pledged that it will secure $16.5bn worth of goods and services from Israeli suppliers over the next decade. We anticipate production delays, supply chain disruption, capex delays and trade reduction, in the regional semiconductor sector.

Compounding factors

The Red Sea attack has resulted in tensions for sea freight, with an impact on traffic, a major route from Asia to Europe through the Suez Canal. Houthi rebels in Yemen have significantly stepped up a campaign of attacks against commercial vessels in the Bab-el-Mandeb strait between the Arabian Peninsula and the Horn of Africa since late November. This has caused leading shippers such as Maersk and Germany’s Hapag-Lloyd to pause shipping. Considering that nearly 30% of global container trade is transiting through the Suez Canal, the Red Sea shipping crisis can have a major impact on supply chains.

Following the Russia-Ukraine conflict, the EU switched to LNG and is relying on shipments from the US and Qatar. Cargo shipments from Qatar to Europe or the US to Asia both have seen increased lead times and costs for averting the Red Sea route. The potential for high oil prices exists, which can have a negative (for manufacturing costs) or positive (for oil producing companies and countries) impact. In the short term, we have observed moderate increases in crude oil pricing. If the war were to continue for a longer period or if demand surges suddenly (e.g. a sharper winter in the EU), we can anticipate price surges.

Operational Impacts are four-fold: (i) Sharp decline in traffic, impacts on lead-time up to 10 additional days (ii) Higher transport cost for goods coming from Asia to the European market (nearly five-fold increase anticipated), with re-routing of cargoes around Africa (iii) Trickle-down impact on turnarounds at other ports such as Antwerp, Hamburg and Rotterdam and (iv) Potential hikes in insurance costs

In addition, the historic drought in the Panama Canal is also slowing down traffic from Asia to the East Coast of the United States.

Ripple Effect

The outlook for the short-mid-term impact is moderate whether for oil pricing or container rates. However, the ripple effect of these disruptions can impact several sectors in the economy, from chemicals to fresh produce, automobiles, and electronics. Same applies to automotive spare parts components or semi-finished products from Europe used in North American industries; any delays or shortages are eventually impacting the safety stocking levels with a multiplier effect. Indeed, the shortage of one small component (like a microchip) can impact the ability for a manufacturer to sell a complete finished product (like a truck in the OEM Market).

It is worth mentioning the hikes in container rates and supply chain pressures are considerably lower than what we have seen in 2021, when demands surged. The current environment of high interest rates and lower demand is curbing supply chain pressures to some extent. We are seeing the effects of a certain level of elasticity and resilience in the supply chain, with inventory and alternative sourcing; however, the longer this disruption lasts, the more untenable this situation becomes!

How does Vertaeon assess these major events?

As we note above and as this example illustrates, there are multiple facets to any geopolitical event; whether it is a country conflict or a rebel attack. Our ongoing assessments are always holistic and include all correlated or connected risks from site impacts to commodity prices, trade patterns, global capacities, and costs. These lead to changes in supplier risks, site risks and financial risks.

Managing today’s supply chain goes beyond optimizing immediate operational objectives. It is increasingly about managing and minimizing risks relative to existing or emerging disruptions. Being able to anticipate the upcoming escalations or shortages and better understanding the market dynamics or interactions is the key to maintaining a competitive edge.

Authors: Rekha Menon-Varma, David Chouvelon, Vertaeon LLC

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