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Supply chain
What the Strait of Hormuz crisis shows executives about supply chains
The crisis has exposed weaknesses that many companies still share. From chokepoints to sourcing strategies, here are takeaways for executives. Â
Few waterways matter more to global trade than the Strait of Hormuz. It is the world’s most important energy chokepoint and a critical artery for international shipping. But it has effectively been closed off since Iran declared it off limits to commercial traffic. The United States subsequently blockaded the Strait as well. That standoff continues. Â
The disruption raises several strategic questions: which trade routes can still be trusted, which suppliers have become liabilities, and where the next bottleneck could emerge. These questions were explored during a Peterson Institute for International Economics Trade Winds discussion on the long-term implications of the Strait’s closure.Â
Trade has proved resilient, yet some critical commodities have been hit hard, said panelist Simon J Evenett, Professor of Geopolitics and Strategy at IMD. The closure triggered a sharp, if temporary, spike in fertilizer prices. But, he added, “We haven’t seen a broad-based reduction in global trade this year at all.”
Still, the conclusion is difficult to escape: the premium on business continuity planning and execution has soared, a return to “normal” is no longer assured, and the trade-off between cost minimization and adaptability has become even greater.
On a normal day before the conflict erupted, there were around 100, 120, 130 passages a day. Now these are single digits, meaning the passages in the Strait of Hormuz dropped more than- Dorota Lost-Siemińska
90%.
Rethinking the value chain
Since Iran closed the Strait, maritime traffic has collapsed, hundreds of ships – and thousands of seafarers – have been stranded, and attacks on commercial vessels have occurred with increasing regularity.
Dorota Lost-Siemińska, Director of Legal Affairs and External Relations at the International Maritime Organization, said in the Trade Winds discussion, “On a normal day before the conflict erupted, there were around 100, 120, 130 passages a day. Now these are single digits, meaning the passages in the Strait of Hormuz dropped more than 90%.”
The repercussions are being keenly felt. “This whole conflict is reshaping the global shipping industry across every financial and operational dimension. So, it’s also container prices, the trust in shipping quotes, the insurance availability: simply the basic economics of moving goods,” added Lost-SiemiĹ„ska.
The latest crisis is unlikely to be the last, and executives should plan accordingly.
The new trade routes
As a result, ships are now rerouting via the Cape of Good Hope on Africa’s southern tip. The diversion typically lengthens voyages between Asia and Europe by at least two weeks, adding millions of dollars in additional fuel costs.
Getting trade moving again will be a slow process, added Lost-SiemiĹ„ska. “o be back to normal, if at all possible, will take months in the very optimistic scenario… to get the trade flowing in the Persian Gulf and through the Strait of Hormuz.”
The latest crisis is unlikely to be the last, and executives should plan accordingly. They should also expect different policy responses: governments should think less about trade barriers and more about keeping goods moving, said Evenett.
“There will be more attention given to continuity of supply,” he told the Trade Winds audience. “Countries can’t produce everything themselves. They are dependent on cross-border supply, so why not think about how to stabilize that supply, not just get tariffs down?”
Evenett also said governments will pay much closer attention to whether supply chains depend on vulnerable trade routes, in turn putting pressure on businesses to rethink where they source goods.
“Geopolitics reshuffles which geographies are seen as more or less problematic,” he added. “Geographies where they have to go through choke points will get a black mark against them whereas other places that we did not source much from in the past may come into focus.”
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Preparing for what comes next
Businesses are already responding: Evenett said he expected companies to redesign trade routes rather than simply wait for the crisis to pass.
“We’ll see the development of new overland options for transporting goods, or overland transporting to new ports,” he said. “I suspect we will see a shift toward moving some shipping away from the Strait of Hormuz. The size of the fee will be the key factor.”
Evenett added that after years of relatively subdued orders, shipping companies have placed significant orders for new vessels, suggesting that “someone has confidence in global trade growing in the future.” Yet because they can take up to three years to build, the current disruption could continue to ripple through the industry for some time, kicking off the search for fresh trade routes.
Some of those new routes may emerge in unexpected places: the Arctic is now being considered as a potential shipping route between Europe and Asia, as melting sea ice creates an alternative trade corridor.
But Evenett said expectations should remain grounded.
“These are very early days for that sea lane to open up,” he said. “It’s pretty clear there is an opening, but how big an opening it is and whether it will become a major alternative, we will see. One or two ships getting through the Arctic doesn’t make it a trade route.”
The Strait of Hormuz closure is only the latest in a succession of shocks that have tested supply chains: piracy in the Gulf of Aden, the COVID-19 pandemic, the Suez Canal blockage, and Houthi attacks in the Red Sea, as well as climate-related disruption.
None brought global trade to a halt, though. “Trade is like water,” said Cecilia Malmström, Non-resident Senior Fellow at the Peterson Institute for International Economics. “It always finds new routes.”
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