By MAE ANDERSON, AP Business Writer
NEW YORK (AP) — The Iran war has effectively halted oil tanker movement in the key Strait of Hormuz. But it’s also disrupting the wider global supply chain beyond oil, affecting everything from pharmaceuticals from India, semiconductors from Asia and oil-derived products like fertilizers that come from the Middle East.
Cargo ships are stuck in the Gulf or making a much longer detour around the southern tip of Africa. Planes carrying air cargo out of the Middle East are grounded. And the longer the war drags on, the more likely that there will be shortages and price increases on a wide range of goods.
“This is really causing some major impacts within the global supply chain,” said Patrick Penfield, professor of supply chain practice at Syracuse University. “As this conflict keeps progressing, you’ll start to see some shortages, you’ll see some major price increases.”
Stalled at sea
Clarksons Research, which tracks shipping data, estimates that about 3,200 ships, or about 4% of global ship tonnage, are idle inside the Persian Gulf, but that includes about 1,231 that likely only operate within the Gulf. About 500 ships, or 1% of global tonnage, are currently “waiting” outside the Gulf in ports off the coast of the United Arab Emirates and Oman, according to the firm.
While those may seem like small percentages, they have a domino effect that will lead to congestion elsewhere, said Michael Goldman, general manager North America of CARU Containers.
“The supply chain is kind of like a long train with many cars and each car represents, let’s say, a port in the world. Well, if one car gets derailed, it can very often have a domino effect to many other cars behind it or in front of it,” he said. “So although we only have a small number of ports affected by this military action, it can really have a big effect on the total supply chain.”
On Tuesday, President Donald Trump pitched a plan aimed at getting oil and trade moving again through the Strait.
Trump said on social media he ordered the U.S. International Development Finance Corp. to provide political risk insurance for tankers carrying oil and other goods through the Persian Gulf “at a very reasonable price.”
Political risk insurance is a type of coverage intended to protect firms against financial losses caused by unstable political conditions, government actions, or violence. Marine insurers had been canceling or raising rates for insurance in the region.
He said that, if necessary, the U.S. Navy would escort oil tankers through the Strait of Hormuz. The Navy has at least eight destroyers and three, smaller, littoral combat ships in the region. These ships have previously been used to escort merchant shipping in the region and in the Red Sea.
Computer chips, pharmaceuticals and other goods face delays
A wide range of products are shipped through the Mideast region. Along with about 20% of the worlds oil that comes from the region, products made with natural gas such as petrochemical feedstock — used to make plastic and rubber — and nitrogen fertilizer come from the Middle East. Pharmaceuticals exported from India and semiconductors and batteries exported from Asia to the rest of the world are all shipped through the region and could face delays.
Limited routes, higher costs
In addition to constraints on the Strait of Hormuz, the instability has put a damper on transit in the Red Sea and the Suez Canal, which had just begun to see more transit after years of instability due to Houthi attacks on ships in the region. Shipping company Maersk had resumed transit in the Suez Canal and Red Sea but said Sunday it was rerouting that traffic around the Cape of Good Hope in Africa, a move other companies have been making to avoid the volatile region.
That journey adds 10 to 14 days to the trip and about $1 million extra in fuel per ship, Syracuse’ Penfield estimates.
With higher fuel prices, longer routes and higher risk in the region, shippers have begun adding fuel and “war risk” or “emergency conflict” surcharges to what they’re charging clients, leading to higher costs all around, he said.
Air cargo under pressure
Air cargo has also been constrained. Closed airspace and airports in countries including UAE, Qatar, Bahrain, Kuwait, Iraq, and Iran have stranded tens of thousands of people – and cargo.
Each of the three major Middle Eastern airlines — Emirates, Qatar Airways and Etihad Airways — operate fleets of cargo aircraft, and the airlines also transport goods in the belly of their passenger planes.
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The amount of goods that travels through the air typically accounts for less than 1% of all freight moving globally, but the products that do travel by air tend to be perishable or high-value goods like pharmaceuticals, electronics and produce that together account for about 35% of the world trade value, Boeing estimated in its World Air Cargo Forecast.
The longer these airports in the Middle East remain closed the greater the potential disruption to the economy if these sensitive shipments don’t arrive or have to be rerouted around the conflict. Even before the war in Iran began over the weekend, air freight and airlines were already contending with closed airspace over Ukraine and Russia.
Flights through these Middle Eastern airport hubs are a key route for passengers and cargo from India. Henry Harteveldt, an airline industry analyst with Atmosphere Research Group, said it’s going to be hard to get to India now, and passengers may have to switch to different routes that fly west across Asia. Airlines may have to resort to longer flights, and in some case even add fuel stops on some routes.
“Remember, there’s a lot of pharmaceutical products that are made in India and then exported to different countries around the world. If that’s disrupted, that has a huge, huge, huge impact,” Harteveldt said.
Air cargo costs are expected to rise due to reduced capacity, increased demand, and surcharges.
Maersk said in an operational update Tuesday that it expects air freight rates to rise due to capacity constraints.
“Airlines are also introducing or reviewing the possibility of introducing war risk surcharges on shipments routed through or near the impacted regions,” Maersk said in a statement. “There may also be added costs linked to jet fuel which in turn can push up costs.”
An industry that ‘runs on disruption’
Despite the supply chain upheaval, however, Michael Goldman, general manager North America of CARU Containers, said the industry will adjust. Over the past few years it has faced other major disruptions like COVID supply shortages and other recent Mideast conflicts and has become more nimble.
“The specific situation that’s happening is pretty unprecedented, so it’s very unique from that perspective,” he said. “(But) for the last few years the industry just kind of runs on disruption. So in terms of our industry having disruption, that is nothing new. That’s more of the same.”
Josh Funk in Omaha, Nebraska and Fatima Hussein and Konstantin Toropin in Washington contributed to this report.
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