Title

Red Sea disruptions and the Israel-Hamas conflict: The spillover on supply chains

Section
Research updates
Summary

The situation so far

Armed actions and potential further attacks by the Houthi militant group have led major container shipping companies to temporarily halt transits through strategic waterways such as the Strait of Bab al-Mandab, the Suez Canal, and the Red Sea.

Contrary to public statements by the Houthi militant group, the attacks are not exclusively targeted towards vessels with Israeli affiliations. Missile attacks from Yemen have led to the sinking of the Rubymar fertiliser vessel, resulting in three fatalities aboard the True Confidence bulk carrier, transporting Chinese steel. Additionally, a Mediterranean Shipping Co. SA (MSC) container ship, MSC Sky II, was attacked and left ablaze.

An analysis by S&P Global Market Intelligence suggests that it is unlikely the Houthis will reduce their attacks. This is supported by a policy announcement made on March 4, 2024, stipulating that vessels passing through Yemeni territorial waters must acquire permits from Yemen's Maritime Affairs Authority under Houthi control.
 

How does this affect supply chains?

The container shipping industry continues to redirect most vessels around the Cape of Good Hope. In the 12 months leading up to September 30, 2023, 74% of container ships traversed the Suez Canal (as opposed to opting for the Cape of Good Hope route). This dropped to 21% during the seven days leading up to February 29, 2024. Shipping companies using the Suez Canal in February 2024 include MSC and CMA CGM SA.

The container lines are increasingly reconciled to an extended disruption to shipping. Ocean Network Express Holdings Ltd. has emphasised the need for a reassessment of supply chains and inventory management considering ongoing disruptions.

The slower shipping pace necessitates increased capacity for the same volume of shipments. Assuming a 10-day longer voyage, this could potentially require an additional 7.1% capacity from the global fleet.

The Red Sea disruptions are prompting a reassessment of inventory strategies. The potential need for additional inventories to offset longer shipping times, particularly ahead of the peak shipping season, arises after many industries have scaled back inventory holdings due to decreased consumer demand. Increased inventory can be costly, so businesses need to balance this with the risk of not being able to meet demand due to shipping disruptions.
 

The Global Manufacturing Purchasing Managers' Index (PMI) for supplier delivery times is an indicator used to gauge the speed at which manufacturers receive raw materials and components from their suppliers after an order is placed. Lower indices indicate slower deliveries1. 

In February 2024, UK manufacturers faced their slowest supplier delivery times since July 2022; the S&P Global Purchasing Managers’ IndexTM dropped from 51.3 in December 2023 and 43.1 in January 2024 to 40.6 in February 2024. A recent industry survey showing that 55% of British exporters encountered disruptions from the Red Sea.

In contrast, France witnessed a slight reduction of delays from January to February and Germany saw an even more significant reduction in delays. In Japan and India, delays persisted at previous levels. US manufacturers experienced a significant uptick in deliveries compared to the end of 2023.

Figure 1: Global Manufacturing PMI for supplier delivery times (lower indices indicate slower deliveries), Source: S&P Global

1 A high PMI value for supplier delivery times indicates that deliveries are happening quickly, which can be interpreted as efficient supply chain management and potentially high demand for goods. Conversely, a low PMI value suggests that delivery times are lengthening, which could indicate supply chain bottlenecks, increased demand, or other logistical challenges.

At the onset, military clashes between Israel and Hamas created a surge in commodity markets, driven by fears of disruptions in oil supply from the Middle East.

  • Uncertainty over ongoing efforts to broker a Saudi-Israel deal, which would involve Saudi Arabia raising oil outputs, added to market concerns
  • Increased demand for safe-haven assets: crude oil prices rose by around 4%, and gold reached its highest level since September
  • Raised commodities prices: Copper prices rose to a one-week high. Concerns about the conflict spreading buoyed wheat and sugar prices.
  • U.S. natural gas futures were at an eight-month high, fuelled by the conflict and other bullish factors
  • Metals prices fall to varying degrees
  • Iron ore drops sharply to four-month low
  • Zinc reaches lowest price since July 2020
  • Gas prices slump to 44-month low
  • Oil rises for second month running
  • Transport costs at lowest since last September
  • Wholesale rise in chemical prices
  • Rubber climbs to 21-month high
  • Increase in polypropylene resumes

In February, the S&P Global Market Intelligence Material Price Index declined by 1.5%, marking its first monthly decrease since June 2023. This decline was primarily driven by a significant drop in natural gas prices in North America, attributed to a re-evaluation of demand levels following an unusually warm winter. Metals prices, particularly iron ore and zinc, also fell due to reduced Chinese demand, linked to challenges in the country's construction sector and the Lunar New Year holiday.

Conversely, oil prices reached a four-month high. Chemicals prices rose across the board, and rubber reached a 21-month high.

The latest Price & Supply Monitor observed decreases in seven out of the twelve monitored commodities. Despite this initial downward trend, there are indications that prices could rebound in March, largely driven by rising freight costs resulting from the Red Sea crisis increasing manufacturers’ prices. Additionally, supply shortages for certain commodities – notably rubber, polypropylene, and polyethylene – are beginning to increase, further propelling price rises in this segment.

Figure 2: Price Pressures, % changes, Source: S&P Global

Figure 3: Supply shortages, index value > 1.0 = shortages above long-run trend, Source: S&P Global

Numerous commodity prices have been in decline recently, but it would be imprudent to assume that the situation has resolved itself, given the ongoing adjustments to the latest geopolitical crisis. Some commodities are experiencing an upward trajectory, and the complete price ramifications of shipping and logistical disruptions have yet to be realised. 

Should the conflict escalate, it could exacerbate inflationary pressures, underscoring the importance of executives closely monitoring the situation and addressing any identified risks to their supply chains and customer shipments.


    Sources

    • S&P Global
    • Reuters
    • Refinitiv Eikon
    • Statista
    • Beroe