Zaid M. Belbagi
The onset of the holiday period has put supply chain disruption under the spotlight. A spate of attacks threatening the Suez Canal and a simultaneous drought affecting the Panama Canal will affect the availability of consumer goods this Christmas, highlighting the risks to supplies in today’s interconnected and codependent world.
The network of people and processes involved in the production and distribution of commodities is typically and increasingly distributed globally. The countries of origin, processing and consumer markets are often thousands of miles apart, connected by shipping lanes that are far too often at the mercy of war, conflicts and adverse weather.
Current circumstances are highlighting this. Following the ruptures of the COVID-19 pandemic, an already-disjointed global system has been put under increasing pressure.
The conflict in Ukraine has shown how severely the global supply chain network can be impacted by geopolitics. Russia and Ukraine account for a third of global wheat supply. Before the war, for example, 40 percent of wheat supply for the World Food Programme came from Ukraine alone. With the outbreak of the Russia-Ukraine conflict in 2022 and the resultant Western sanctions on trade with Moscow, wheat and grain supplies have suffered significant disruption. The conflict has had far-flung consequences, as the resulting surge in prices has crippled the Egyptian economy, for example. The short supply of edible oils, iron ore and corn that Ukraine exports, alongside Russian oil, petroleum products, gold and semi-finished iron, highlights how political disruption can negatively impact related industries globally.
Though relatively less disruptive to global supply chain networks, the conflict between Hamas and Israel in Gaza, now in its 10th week, has created an environment of political and economic uncertainty in the Middle East. The impact on energy markets has been noticeable.
In the first week of the conflict, Israel temporarily paused operations at its offshore Tamar gas field, which is an essential source of natural gas supplies to Egypt, Jordan and Europe. Operations were resumed in November, but this episode showed how insecurity in Gaza and the Eastern Mediterranean can cause disquiet in the international energy market.
Though supply chains have remained largely unaffected, the recent seizure of an Israeli cargo ship in the Red Sea by Houthi militants illustrated how the security implications of the war in Gaza also extend to the region’s territorial waters, particularly the Red Sea and Suez Canal, which is one of the world’s busiest shipping routes. In circumstances where rerouted ships from Panama already face five to six days of delays, shipping costs and insurance premiums have skyrocketed as the industry has faced the dual shocks of violent risk to vessels and drought on major international waterways. If shoppers in Organisation for Economic Co-operation and Development countries will have to forgo their new iPhones and iPads this Christmas, they may also have to go without their favored carbonated beverages. The ongoing conflict in Sudan between the country’s army and the Rapid Support Forces militia is affecting the production of gum Arabic.
Sudan is the world’s largest producer, accounting for about 70 percent of global supply. Used as a thickening agent, it is also a key component of fizzy drinks that is equally critical to PepsiCo and Coca-Cola. The product is reportedly Sudan’s biggest source of foreign revenue. However, as clashes between the warring sides continue, the production and distribution of the gum is becoming increasingly insecure, risking further supply chain disruptions for international manufacturers, as well as an economic downturn in Sudan. Amid the growing vulnerability of international supply chains, the International Monetary Fund’s October 2023 World Economic Outlook cautioned against the weaponization of basic commodities and called for the de-risking of the most vital products. The war in Ukraine has underlined how supply chain disruptions are particularly challenging for low-income and resource-poor countries that are dependent on imports. Though reshoring or onshoring, whereby operations and manufacturing are relocated in order to reduce the potential for disruption, is to be welcomed, it is unhelpful in circumstances where large countries bound by large populations and the growing adverse effect of climate change are reliant upon the import of foodstuffs.
The current conflicts have yet to significantly affect the market for minerals such as copper, lithium or the rare earth elements that are essential to the green transition. Similarly, the trade in electronics, arms and semiconductors produced by Israel, though slowing, is yet to have an impact. However, as other conflicts have shown, should Israel persist with its military action, it will cause major destabilization.
