There is an inherent weakness in international supply chains that pass through two bottlenecks in a region prone to civil war and pirate attacks – the Suez Canal for 30% of global ocean container traffic, and the Strait of Hormuz for tankers carrying 20% of the world’s petroleum products. Right now, that couldn’t be more clear.
Update from BBC News: Speaking at the White House for the first time since attacking Iran, president Donald Trump said the U.S. is continuing to carry out “large-scale combat operations.” More than 1,250 targets have already been struck
Update from the Guardian: Strait of Hormuz closed, Iran’s Revolutionary Guards says.
Iran’s Revolutionary Guards commander has said that the strait of Hormuz is closed and Iran will set any ship trying to pass on fire, Iranian state media is reporting.
It is Tehran’s most explicit warning since announcing it was closing the route on Saturday in a move that could choke a fifth of global oil flows and send prices rocketing.
“The strait (of Hormuz) is closed. If anyone tries to pass, the heroes of the Revolutionary Guards and the regular navy will set those ships ablaze,” Ebrahim Jabari, a senior adviser to the Guards commander-in-chief, said in remarks carried by state media.
Over the weekend and into March 2, the number of countries being attacked by Iran expanded rapidly to include Lebanon, the United Arab Emirates, Qatar and Saudi Arabia, which shut its biggest refinery after drone strikes caused a fire there, reports the Guardian. In the first strike to reach U.S. allies in Europe, a drone hit Britain’s Akrotiri airbase in Cyprus overnight on March 1/2.
While the U.S. and allies mull putting boots on the ground, presaging a protracted war between Israel and its long-time foe, there will likely be long-term effects on supply chain strategy.
Here is what the experts are currently saying.
“The U.S./Israeli attack on Iran dramatically increases the security risk to ships operating in the Persian Gulf and adjacent waters,” said chief safety & security officer at BIMCO, Jakob Larsen. “Ships with business connections to U.S. or Israeli interests are more likely to be targeted, but other ships may also be targeted deliberately or in error.”
As of noon ET on March 2, at least four merchant ships at sea, at anchorages and in port have already been attacked, and one seafarer has been killed.
The Strait of Hormuz is not “effectively closed” and marine traffic continues to flow although reduced in numbers. The U.S. has officially discouraged navigation in the conflict area until further notice and there are reports of verbal threats from the IRGC about closing the Strait, but there is currently no official notification from Iran regarding an intend to close the Strait.
The Iranian naval forces have capabilities designed to disrupt shipping in and out of the Persian Gulf. BIMCO’s assessment is that, in the short term, Iran will be able to coerce commercial shipping to decide against entering the conflict area. However, within few days, U.S. air and naval superiority will likely establish a level of security which will enable commercial shipping to resume transportation in and out of the Persian Gulf and adjacent waters, Larsen said.
In the Red Sea, the Houthis are allies of Iran and may well decide to ramp up attacks against commercial shipping in the Red Sea and Gulf of Aden, Larsen added. “Following the previous Houthi campaigns against commercial shipping, maritime traffic through the Red Sea is far from pre-conflict levels. The current outbreak of hostilities… will most likely cause some shipowners to reroute south of Cape of Good Hope. Others will still decide to go through in dialogue with their insurers and following a ship- and voyage-specific assessment of associated security risks.”
Simon Geale, EVP at Proxima, a procurement and supply chain consultancy owned by Bain & Company, said: “The speed and scope of escalation in the Middle East will have taken many businesses by surprise and has highlighted just how unstable the region can become in as little as 48 hours. What will concern companies is that we may just be at the start of a prolonged conflict and there may be much more to come in terms of the impact on global supply chains.”
Geale said the primary impact on supply chains will come from the effective closure of the Strait of Hormuz. An interruption to 20% of the world’s seaborne oil and most of the LNG from the region is “too large to be replaced or rebalanced without some economic effect on businesses and consumers” said Geale. “Clearly, fuel bills will go up, but also prices in sectors where energy is key to production, like food, will rise if resolutions are not quickly found. Hopes for that quick resolution are already fading as shipping companies pause or turn back ships, insurance policies are cancelled, and with price hikes of 50% happening over the weekend.”
“Other factors that will impact global supply chains include the effective closure of huge swathes of airspace in the Middle East,” Geale warned. “Airports such as those in Dubai handle both huge numbers of passengers but also cargo, and it is currently unclear when those airports will re-open – and given the challenges of combating drone attacks, it is quite possible the closure could last for a substantial period.
“For businesses, there is a need to enact contingency plans immediately and begin working through the implications of this conflict lasting weeks or months, rather than days,” Geale advised.
