Middle East conflict threatens supply chains and shipping

Companies need to double down on political risk in their supply chains as conflict in the Middle East threatens to disrupt trade and shipping, experts told Commercial Risk.

Israel is an important supplier of specialist goods and services to Western companies in chemicals, pharmaceutical, energy and technology, according to Jim Wetekamp, CEO of Riskonnect, an integrated risk management solutions provider. Disruption to the supply of these specialist products and services could have a “surprise knock-on effect” for supply chains, he said.

Speaking to Commercial Risk, Wetekamp said uncertainty around a wider conflict in the Middle East is potentially a bigger problem than the current local impact of the war.

“There is a difference between the reality of the impact of the conflict on the supply chain and the potential for the risk expanding, and that is where it gets difficult. Is your biggest risk that Israel is in conflict, or that it expands or goes on indefinitely? It’s probably the latter. That is the hardest thing to judge – what mitigating controls and what expense to put on the risk that it moves beyond a localised impact,” he said.

Companies will need to check supply chains for exposure to Israel, but also the wider region, should the conflict spill over to neighbouring countries, according to Wetekamp. They should also consider various supply chain risk scenarios from the conflict, such as civil unrest and protests, the impact on international travel, and cyberattacks, for example.

“Geopolitical risk is on the minds of chief executives at major industrials, and they are trying to get better prepared for geopolitical volatility. We had Russia-Ukraine last year, now Israel. What is next? A lot of organisations are upping their investments across the board to better identify these risks and their impact, and put these assessments into strategic decision making,” said Wetekamp.

“Job number one is about really understanding your supply chain, mapping it at multiple tiers, down to the individual part or component level, tracking and staying aware of geopolitical risk in the regions you are dependent upon, and identifying alternative sources of supply. It also pays to ask tier one and tier two vendors to do the same,” he said.

Impacts from geopolitical risks on supply chains can be direct, such as supply route blockages, damage to supplier facilities, and cargo vehicle attacks, according to Olivia Coleman, principal consultant at Verisk Maplecroft. But supply chain risks may also “manifest indirectly” as trade sanctions or increased regulatory scrutiny, which can increase the burden for sourcing companies.

“Given recent conflicts, understanding the exposure of supply chains to geopolitical risks, ranging from conflict and interstate tensions to regime instability, is an integral component of developing resilient sourcing strategies,” Coleman told Commercial Risk.

According to Verisk Maplecroft, the Israel-Gaza conflict threatens to reverse the recent shift towards greater stability and reduction in armed conflict in the Middle East. “There are several bilateral fissures that could open up over the next 12 months. These include the pairings of Israel-Iran and Iran-US, both of which are considered more than 80% likely to engage in a militarised dispute in the next year,” it said.

The outbreak of hostilities in Gaza also threatens to exacerbate the risks of civil unrest in Egypt and Turkey. The latter has already seen several large-scale protests related to the Israel-Palestine conflict in its major cities, including in both Ankara and Istanbul.

The Israel-Gaza conflict may also impact shipping routes and ports in the Eastern Mediterranean. The Israeli port and oil terminal at Ashkelon is closed due to its proximity to Gaza, although the larger ports at Haifa and Ashdod are operating normally.

The threat of disruption to shipping in the wider region is likely to rise as the war between Israel and Hamas intensifies, according to Torbjorn Soltvedt, principal analyst for the Middle East & North Africa at Verisk Maplecroft.

“Although Iran is seeking to avoid a direct military confrontation with Israel and the US, the aim will be to push up against US and Israeli red lines without crossing them. As part of this, efforts to target international shipping – especially US and Israeli-linked vessels – are likely to redouble,” he said.

The threat to international shipping looks most acute in the Gulf of Aden, Bab al-Mandab Strait and Red Sea, according to Soltvedt. Houthis rebels in Yemen have the capability to target ships with missiles and drones in these areas, yet attacks carried out by Houthis carry a lower risk of triggering a direct US or Israeli military response, he said.

As a vital link between the Indian Ocean and the Mediterranean Sea, disruption to shipping through the Bab al-Mandab Strait is not just a concern for oil markets, explained Soltvedt. The strait is a potential chokepoint for agricultural supply chains, with more than 50 million tonnes of agricultural products passing through every year. Shipping more broadly also faces the threat of higher costs if growing security concerns compel shipping companies to reroute, he said.

Shipping in and out of Israel faces a ten-fold jump in war risk premiums since the outbreak of the war, according to Reuters. Israel is included in the London market’s Joint War Committee’s listed high risk areas for hull war, piracy, terrorism and related perils. Vessels entering the zone must inform insurers and are subject to an additional war risk premium.

“Insurance premiums for ships calling at Israel’s ports have risen since the 7 October attack and will remain elevated so long as hostilities in the Gaza Strip continue,” according to Kinnear.