Geopolitical events in 2024 unsettled supply chains. How did imports and exports weather the storm? Peter Taberner reports. This article first appeared in ESM’s January/February 2025 edition.
The grocery sector is continuing to face supply chain headwinds, and any miscalculation or misstep by parties in the Middle East could impact an already fragile energy supply.
Serious global situations that have had knock-on effects on supply chains, such as the Houthis’ militant organisation attacking vessels in the Red Sea, disrupting global trade, and the rapid rise in energy prices caused by the Russian invasion of Ukraine.
Some supply chain analysts note how importers and exporters manage to keep goods flowing, however – even against a backdrop of heightened tensions in parts of the world, although this reliance can come at a cost.
Increased Costs
“The global supply chain tends to work on a ‘just in time’ basis,” says Marco Forgione, the director general of the Chartered Institute of Export & International Trade (CIOE&IT), reflecting on the impact if there was a full-scale regional war in the Middle East.
“Any delay will affect every link in the chain, leading to delays and backlog. This disruption has the potential to displace and cause further problems in planning and scheduling for importers, exporters and consumers, globally.
“We are already seeing increased costs in shipping due to the ongoing crisis in the Red Sea. This has caused the demand for the air freight market to soar, with double-digit growth in volumes in 2024, as businesses look at alternative routes to ship their products. This is an unwanted headache for traders the world over, and undue stress on an already brittle system.
“Inventory management is the numberone issue for businesses globally, and the need to move towards anti-fragile supply chains is further highlighted by the ongoing crisis in the Middle East. Where there is instability and uncertainty, the impacts are either price increases, shrinkflation, or you’re going to see availability issues.”
Effects Of Disruption
However, other experts are far less convinced of a supply chain battering from certain events in 2024. Andrew Opie, the director of food and sustainability at the British Retail Consortium (BRC), does not believe that the Middle East crisis has had any significant impact on the grocery sector in the UK thus far.
“The conflict has had only a small direct impact on supply chains,” Opie remarks. “In UK supermarkets, less than 10% of all food is sourced from outside the UK and Europe, so even disruption to the Red Sea and added journey times for imports hasn’t had a major impact.
“The bigger potential impact is indirect, through the impact on oil prices and the energy market – although, to date, that impact has also been limited.
In the UK, food price inflation has dropped markedly since last year, showing the Middle East has had little impact, to date, on prices.”
Cost Of Shipping
Data compiled by Xeneta, an ocean freight market analytics platform, has revealed just how the crisis in the Middle East has affected the cost of shipping goods to other parts of the world.
The pre-Red Sea baseline figure on 1 December 2023 showed that the spot rate of shipping from the Far East to Northern Europe was $1,512 (€1,401) per 40-foot equivalent unit (FEU) container.
At the market peak rate on 15 July 2024, the cost had spiralled to an eye-watering $8,584 (€7,957) per FEU, before stabilising at $3,756 (€3,481) per FEU on 9 October – two days after the one-year anniversary of Hamas beginning its attack on Israel.
The diversions around the Cape of Good Hope caused global 20-foot equivalent unit mile demand to increase by 17.2%, year on year, last year. Overall, the global fleet growth is expected to be 4.5% in 2025.
Despite this being less than half the growth recorded last year, the increase in capacity is forecast to help ease the impact of longer sailing distances around Africa.
“With no sign of a political resolution to the conflict in the Red Sea and major carriers such as Hapag-Lloyd confirming ships will continue to divert around Africa, in 2025, shippers should expect further disruption in the year ahead,” says Emily Stausbøll, Xeneta’s senior shipping analyst.
“This puts the market in a very precarious position because any further disruptions will send spot rates spiralling once again, if shipping capacity is still being absorbed by the Red Sea diversions.”
Knock-On Effects
The European grocery sector is not thought to have felt that much of an effect from the US port strikes on its east coast, causing the first shutdown of the ports in 50 years.
The BRC noted that only a fraction of the food consumed is imported through those ports, particularly as containers, rather than bulk carriers, were affected, and the strike was resolved quickly. There are fears that supply chains, potentially, could be hit further by a significant rise in oil prices if there is a miscalculation and conflict in the Middle East escalates again.
This would have the capacity to create inflationary conditions. If Iran were to become involved in direct conflict in a war against Israel, then it would be inevitable that this would destabilise oil supply on a worldwide scale, creating a problematic knock-on effect for the grocery sector.
Energy is a key component of food prices, as was witnessed after the Russian invasion of Ukraine, as the rise in energy prices that pushed up food costs dramatically was keenly felt by consumers all over Europe.
“Many products found on European shelves could be at risk of price rises if the conflict escalates, pushing up the cost of energy [...] a knock-on effect on supply chains and transportation of goods,” adds the CIOE&IT’s Forgione.
“What people need to understand is that energy is an input to everything. It escalates its impact through global supply chains, product pricing, availability. “It’s not an insignificant issue, globally. The current situation is unprecedented because of the cumulation of different events.
“You’ve got what’s happening in the Red Sea, issues sourcing Russian energy, war on mainland Europe, the global economy where it is.
“It’s difficult to draw assessment or definitive view on where this goes, but the constant is that uncertainty equals volatility, which equals price instability.”
Potential Escalations
Energy analyst Wood Mackenzie noted in research published last October, that the potential for a further escalation of conflicts in the Middle East means that oil prices could see an increase of up to $100 (€92) – or even $125 (€115) – per barrel, depending on how events unfold.
If oil prices were to rise to $125 per barrel, they would eclipse the peak of $122 (€133) per barrel in June 2022 – months after the Russian tanks spilt into Ukraine.
According to World Bank figures, in December last year, the average price of a barrel of crude oil was $73.80 (€70.14). Wood Mackenzie also viewed that the potential closure of the Strait of Hormuz, which is a crucial route for oil exports, could cause huge disruption to global oil trade.
In that eventuality, Saudi Arabia could reroute up to five million barrels a day through its east-west pipeline to the Red Sea, and the UAE has a 1.5-million-barrelper-day pipeline bypassing the strait – in effect, a large portion of oil exports would be trapped.
Also, if Israel targets the oil in infrastructure in Iran, which it did not do in its retaliatory overnight attack on 26 October last year, there is significant risk, especially if it targets Kharg Island, a premium oil export facility for Iran.
This could disrupt a massive 90% of the oil exports of Iran, which currently produces 3.2 million barrels a day, the analysts concluded.
Lessons Learned?
Of course, there have been lessons learned in recent times over supply chain disruptions, such as those due to the Covid-19 pandemic, and ways that have been discovered that can improve such a situation.
“All supermarkets have reviewed and improved their sourcing policies in the light of recent global events and the impact of climate change,” adds the BRC’s Opie.
“Their policies are nimbler and more adept to cope with incidents, and they aim to source even closer to the UK. Currently, three quarters of UK supermarket food is sourced in the UK, but retailers are pushing [the] government to prioritise food security and increase sustainable food production in the UK.”
However, the Chartered Institute of Export & International Trade’s Forgione argues that there are longer-term solutions that can be implemented to minimise the damage caused by supply chain disruption, but they require coordinated global attention.
“First, the digitalisation of supply chains, updating old paper-based systems, helps logistics companies, port authorities and hauliers [to] have greater visibility and reduce friction in the supply chain,” he says.
“Secondly, investing in the expansion of physical trade routes in other parts of the world [...] will reduce the reliance on the route through the Red Sea. It is clear that all nations have to shift away from highly fragile supply chains and sourcing patterns, to build resilient, anti-fragile systems.”
All information in this article is accurate at the time of writing.
