Stormy Seas of Conflict: Escalating Geopolitical Tensions in West Asia

The tensions in West Asia due to the Iran-Israel war have been creating a formidable array of challenges for the global supply chain industry, and in particular, maritime trade.

The escalating tensions have heightened the risk of conflict in the Strait of Hormuz, a critically important chokepoint for a substantial portion of the world’s oil trade. This has triggered a surge in insurance premiums and shipping costs, adding a significant burden to the already strained global supply chain.

The implications of the situation are far-reaching and threaten to disrupt the smooth flow of goods and services worldwide. Key shipping routes that connect East and West, such as the Suez Canal and the Red Sea, are now under the watchful eyes of regional powers, amplifying delays, disruptions, and security breaches by the day.

Reflecting a domino effect, the prolonged disruption of trade in West Asia could lead to shortages of essential commodities, driving up prices and exacerbating inflationary pressures. Considering that the roots of this conflict between Iran and Israel run deep, the path forward is fraught with uncertainty. Plus, the broader geopolitical dynamics of the region, including the involvement of regional and international powers, further complicate the search for a peaceful resolution.

“This is likely to be a jolt to the development of the INSTC route as well which was being developed as an alternative to trade with Central Asian countries and Russia. With the active involvement of Israel in the conflict, the IMEEC linking India, UAE, Saudi Arabia, Jordan, Israel, and the European Union is also likely to be delayed,” said Mr Khalid Khan (Immediate Past Vice President, the Federation of Indian Export Organisations and Director, Geco Trading Corporation Pvt Ltd.).

As the world watches with bated breath, the unfolding drama in West Asia serves as a sobering reminder of the fragility of the global supply chains.

The escalating tensions between Iran and Israel have cast a dark shadow over vital maritime routes, stirring profound concerns over potential disruptions in key chokepoints. The Red Sea, a critical waterway for global trade has been rendered impassable due to the persistent threat posed by Houthi activity.

Moreover, the recent seizure of vessels in the vicinity of the strategic Strait of Hormuz has further aggravated the situation, heightening fears of severe supply chain disruptions.

Mr Peter Sand (Chief Analyst, Xeneta) mentions, “Capturing of the MSC Aries does not appear to be the start of sustained and indiscriminate attacks against ships in the region, but it would be unwise to predict the trajectory of such a politically volatile situation and risks to supply chains must be considered.”

Shipping lines, confronted with these challenges, have been forced to modify their routes. Mostly, circumnavigating across the Cape of Good Hope – a steer that brings along time and cost overruns. Mr Sunil Vaswani (Executive Director, Container Shipping Lines India) shares, “To put this in perspective, a consortium of 9 ships for instance, that earlier offered a service between India & Europe with a round trip of 63 days, today has to operate 12 ships, with a round trip of 87 days over the Cape of Good Hope i.e. an increase of 24 days on the round trip.”

Not only does this prolonged journey drive up operational expenses, but also maritime risks. And this is evident from the recent attacks on cargo ships traversing the region. As a result, insurance premiums have skyrocketed, exacerbating the financial burden on shipping companies.

“During the end of 2023, the War Risk Premium was just about 0.05% of the insured value of the ship. However, post the Red Sea Crisis, the premium now ranges between 0.75% and 1% of the insured value of the vessel. This means, for a ship valued at USD 100 million, the war risk premium could be anywhere between USD 750,000 and USD 100,000 million, for a single voyage through the Red Sea,” adds Vaswani.

The Container Price Sentiment Index (xCPSI), is a tool formulated by Container XChange to provide readings of the market’s anticipation of container price developments. The xCPSI readings surged to record levels earlier this year, particularly during the 3rd to 5th weeks of January, as anticipation of container prices peaked due to geopolitical disruptions that began in October 2023. This trend continued with another spike following the Baltimore bridge collapse in late March.

“The recent escalation of tensions in the Iran-Israel conflict has once again led to a sharp increase in container price expectations in recent weeks. These readings illustrate that disruptions in the geopolitical landscape have a significant impact on short-term container price expectations. We also see, from our year-to-date analysis that the container prices since the beginning of this year have reached new highs as compared to the prices in the year 2023,” mentions Mr Christian Roeloffs (Co-Founder and CEO, Container xChange).

Picture this: When more than 90% of the global trade flows are heavily reliant on maritime transportation, a delay in deliveries and/or increased costs of transportation would obviously have ripple effects on industries and economies worldwide.

In the interconnected tapestry of the global supply chain – a delicate web on which global trade operates – the effects and ramifications of the West Asian conflict extend far beyond the immediate region. Manufacturers, retailers, and countless industries that rely on the timely arrival of raw materials, components, and even finished goods, brace themselves for the impending challenges.

For instance, the automotive industry that operates on the just-in-time inventory model faces severe risks due to the conflict. Even though this system of managing inventory has been highly fine-tuned over the years, disruptions to the supply chain can wreak havoc on it.

Delays in the delivery of critical components, such as semiconductors, wiring harnesses, and other electronic parts, can lead to production stoppages. Ultimately, it is the entire automotive value chain that bears the brunt of these disruptions. Challenges translate to lost production, missed deadlines, contractual penalties, and missed sales targets.

The Strait of Hormuz is a crucial junction in the world’s oil trade, and any disruption has a direct impact on fuel availability and prices. Oil prices, already sensitive to geopolitical tensions, could experience sharp fluctuations as market participants grapple with the prospect of supply disruptions.

Such volatility not only affects the cost of fuel for transportation but also filters through to electricity prices, impacting businesses and consumers alike.

“With over a third of the world’s seaborne crude oil transiting through this narrow passage, any disruption could trigger a supply shock with far-reaching consequences. Ship owners are being compelled to engage costly risk mitigation measures,” shares Mr Satish Lakkaraju (Global Head – Air Freight & Pharma, WIZ).

“If the situation escalates to the extent that the Straits of Hormuz are closed then air cargo demand would come under further pressure but more importantly the price of oil would rise dramatically,” added Mr Glyn Hughes (Director General, The International Air Cargo Association (TIACA)).

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