Instability in the Middle East threatens global logistics sector

The situation in the Middle East has worsened. There are now threats both to sea and air freight transport across most of the region. It also appears that types of cargo beyond just container cargoes are threatened.

Although most attention has been given to the missile attack on Iran on Saturday the first incident occurred several hours earlier. The MSC Aries, a 14,300 TEU vessel flagged in Madeira, was attacked by a group of Iranian troops landing by helicopter on board the vessel 50 nautical miles northeast of Fujairah in the United Arab Emirates. The MSC Aries appears to have been exiting the Gulf after a call at Dubai, following calls at Saudi and other ports in the region.

There are several aspects of this event. Firstly, the vessel was leaving the port of Dubai when it was assaulted, suggesting that the logistics infrastructure of the UAE but also the wider Gulf region is vulnerable to attack. Additionally, the MSC Aries seems to have been singled out due to its various links with Israel. Media reports are highlighting the fact that the vessel is owned by Zodiac Group, part of the business interests of Israeli businessman Eyal Ofer. However, as previously suggested by Ti, the Aponte family also has links with Israel and the Houthi rebels in Yemen targeted its ships in an attack last week.

A further problem is that these attacks on shipping cannot have helped the sentiment of airlines operating in the UAE, although the wider conflict between Israel and Iran is the specific reason why Lufthansa, AirFrance/KLM, and EasyJet have cancelled a number of services to Israel, Lebanon, and Teheran. The UAE authorities and the Gulf-based airlines, however, have been quick to assert that air operations are secure.

Short and Medium-Term outlook

It seems too early to describe the conflict between Israel and Iran as a war. It would appear that the attack by Iran on Israel was deliberately limited to avoid what military theorists call ‘escalation’. However, this strategy may not work and the political stability of the Middle East may deteriorate even more. The effects of this on the logistics sector would be quite significant but it might be a mistake to exaggerate them.

  • Impact on pricing. Before the most recent attacks, there were signs that container shipping rates were softening over the past six weeks. Although, as ever, there are a number of variables at work, including an improving global economy, the underlying story is one of increasing numbers of new container vessels entering the market, ensuring that even with the impact of routing through around the Cape of Good Hope there was enough capacity available. Fundamentally this dynamic will not change, however, if there is further disruption to the ports in the UAE and elsewhere in the Gulf this may push short-term rates higher. Certainly, the threat to Dubai is serious. Even a modest disruption of a container terminal complex of this size will cause disruption to the wider system of container logistics. Whilst it is unlikely to be as severe as the dysfunction seen in 2021-2022, it will still inflict problems for the wider container sector.
  • Cargo volumes passing through the Suez Canal may fall further. Not all cargoes have ceased using the canal, with volumes in terms of the numbers of ships passing through the canal down by around a half. Energy cargoes, for example, still use the canal and these may be now vulnerable to disruption. On the other hand, it is now clear that the Houthis are not rogue operators but instruments of Iran. This suggests that if Iran is brought to terms the Houthi problem may become manageable.
  • UAE and other ports in the Gulf are under threat. Iranian attacks in the Strait of Hormuz are not new however it is unusual for the Iranians to directly assault a cargo vessel. The response to this is highly unpredictable with the various naval forces in the area quite likely to take forceful action against Iran.
  • Oil cargoes may be affected by Friday’s action if the situation continues to escalate. Although Iran has a powerful incentive to sustain the oil trade from the Gulf, it may lose control of the situation and there may be a return to the ‘Tanker Wars’ of the 1980’s. The impact of this would certainly be an increase in oil prices.
  • Airfreight is an important trade in the Gulf and the Gulf is important to airfreight. Two of the Gulf-based airlines are the largest conventional airfreight carriers in the world. If their hub operations are disrupted it will inevitably have a deleterious impact on the airfreight supply side.
  • India is threatened by any disturbances in this region. The Houthis have already made missile attacks in waters neighboring India. The MSC Aires was en route to an Indian port when she was attacked. The trade from Dubai is important to India’s growing international trade and Iran is an important supplier of hydro-carbons to India.

This crisis is highly unpredictable. On the one hand, the two sides could work to limit the crisis as this is in both their interests. However, Israel and indeed, the US, may feel obliged to escalate. In particular an attack on the Iranian ally Hezbollah in southern Lebanon may be a possibility. The issue for the logistics markets is that shipping and possibly airfreight have been sucked into this conflict. The response may be that the logistics sector will have to create short-term alternatives that isolate the Middle-East, indeed by creating the ‘Cape route’ this has already begun to happen. The price may be high in the short run.

Author: Thomas Cullen

Source: Ti Insight

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