How Red Sea crisis shows vulnerability of global supply chains

Wednesday, 31 July 2024

After months of attacks on ships in the Red Sea, recent US and UK led attacks on Houthi targets have showed how important the protection of a main trade route is to countries around the world. Around 90% of traded goods globally are carried by sea. 12% of trade goes through the Suez Canal, the Southern entrance to which is affected by the ongoing Houthi attacks.

The original military response being called Operation Prosperity Guardian is no accident. The countries involved in the official announcement of the strikes on Yemen include major exporters like Germany, South Korea and Denmark (home of affected shipping line Maersk), as well as Australia and Canada, are all an indicator of the global effects this disruption has caused.

From RTÉ Radio 1's Today With Claire Byrne, Chris Long, Director of Intelligence at Neptune Port To Port Group on the Houthi attacks on Red Sea commercial shipping

As a result, large shipping companies have rerouted their vessels away from the Red Sea. Going around Africa adds one of two weeks of extra shipping time and around $1 million in cost to a journey between Asia and Europe, but alternatives are limited.

The Northern Sea route, spanning the north coast of Russia, is 40% shorter than the alternative via the Suez Canal for connecting Asia to Europe. However, it is unusable because of sanctions due to the Ukraine war. Ice conditions make it navigational for only five months a year and there is potential harm to the fragile Arctic ecosystem. The rail connection between China and Europe is also affected by sanctions on Russia.

Targeting trade is a frequent move in international disagreements and conflicts. Countries like Russia, Iran, Syria, or North Korea are the targets of many sanctions. A trade war between the US and China has seen bilateral tariffs increases. Direct attacks on ships are reminiscent of pirates and privateers that historically made the seas unsafe. The Suez Canal was closed because of war from 1967 till 1975. In recent decades, we have grown used to peaceful seas and predictable conditions that enable modern supply chains to run in a just-in-time fashion.

From RTÉ Radio 1's News At One, John Stawpert, Senior Manager for Trade with the International Chamber of Shipping, on the Houthi attacks on shipping in the Red Sea

Ships continue to use the Suez Canal and the Red Sea is not closed to shipping, though the volume of containers fell drastically from 500,000 per day in November 2023 to 200,000 per day in December 2023. In response, oil prices have risen. Container prices have increased sharply and are now higher than at any point since 2022. And there are impacts on supply chains, with companies like Danone and Electrolux voicing their concerns. Many Irish companies are apprehensive, ranking supply chain or distribution failure the third biggest risk behind cyber-attacks and business interruption.

Most affected are companies that operate just-in-time supply chains and rely on shipments arriving on time rather than weeks late because of rerouting. One example are car makers, with Volvo in Belgium and Tesla in Germany both announcing they had to stop their production. Companies who change their stock frequently, like fashion retailer Next, are also concerned.

This might resemble the extensive supply chain disruptions in the wake of the Covid-19 pandemic, but the situation is not as grave. Demand is not nearly as high as it was back then. Indeed, there has been over-capacity on many shipping routes over the past year. This can now serve as a buffer when vessels spend more time on longer routes. However, it is likely to take some time for shipping schedule and ordering behaviour of retailers and manufacturers to adjust.

From RTÉ News, how Irish businesses have altered their supply chains due to Ukraine war and Covid

While an immediate supply chain crisis of epic proportions is unlikely, the current situation demonstrates how vulnerable our global freight system is. With limited military power, the Houthis can cause significant disruption. Physical transport infrastructure can be difficult to protect because of its size and the need for many people and vehicles to pass through. In addition, the shipping industry is a prime target for cyberattacks. Nagoya Port in Japan had to stop all loading and unloading for three days in July 2023 due to a ransomware attack.

Weaponising supply chains is increasingly an aspect of economic statecraft. The various impacts of Russia's war in Ukraine have shown just how interconnected global networks are with effects being felt on energy prices and food availability. Any future conflict around Taiwan could be disastrous for the global economy because of the area’s pivotal role in many important supply chains.

With limited military power, the Houthis can cause significant disruption.

More immediate concerns are around two other major choke points of maritime transport, the Panama Canal, and the Strait of Hormuz. The Panama Canal connects the Atlantic with the Pacific and this series of locks is crucial in moving freight from Asia to the US east coast. For months, an intense drought has lowered water levels in the Panama Canal so much that capacity is severely constrained, resulting in Maersk shifting to a rail land-bridge solution for some of its cargo. Prior to the current Red Sea crisis, some ships were taking the long way around the world and going through the Suez Canal instead.

Another crucial maritime choke point is the Strait of Hormuz. About a fifth of global oil and gas is transported through the narrow shipping lane between Oman and Iran, which has been the site of previous tensions. A wider regional conflict could lead to a situation like that in the Red Sea now and jeopardise this important connection.

Dr Sarah Schiffling is an Assistant Professor in Supply Chain Management & Social Responsibility and the Deputy Director of the HUMLOG Institute at the Hanken School of Economics, Finland. Dr. Nikolaos Valantasis Kanellos is a Lecturer in Logistics and Programme Coordinator of the MSc Logistics and Supply Chain Management course in the School of Business Technology, Retail, and Supply Chain at TU Dublin.