Global News Fresh geopolitical stress puts supply chain resilience back in the spotlight

From late 2020 and into early 2022, the issue of resilience in the global container supply chain became an increasingly hot topic. The ripple effects from the pandemic and the week-long blockage of the Suez Canal led to unprecedented bottlenecks, which in turn led to a shortage of container vessel capacity. The natural result of the shortage of vessel capacity was an increase in freight rates far beyond what the industry had even seen before.

As these supply chain problems became ever more visible, it also at the time led to an increase in political debates in different countries as to whether they should set up government-funded shipping lines to ensure the resilience of supply chains to and from their own countries.

The shortage of vessels drove charter rates to new record levels, further underscoring the lack of capacity. It also led to questions as to whether the industry would have learned its lesson once the market normalized and built a more resilient supply chain.

The counterpoint to this voiced by some, including myself, was that the resilience being mentioned during the tight market would under more normal circumstances simply be seen as overcapacity. The problem would then be whether shippers, or governments for that matter, would be willing to pay for such overcapacity in order to increase resilience.

Fast forward to the present situation. Global demand stands to have a growth rate of about zero for 2023 versus a fleet growth just short of 8%. Given that vessels were not full by the end of 2022, this essentially means 8% overcapacity versus the situation in 2022. It is driven by the injection of approximately 2.3 million TEUs of additional capacity. Yes, it is somewhat simplified, but changing the nuances will not change the overall picture.

But let us once again travel back in time to the peak of supply chain bottlenecks and shortage of capacity. The calls for added resilience were driven by two wholly unexpected developments: the pandemic disruptions and the blockage of the Suez Canal. The supply chains clearly did not have the resilience to handle these events within their existing capacity. Does that mean someone prior to the pandemic and the canal blockage would have wanted to pay for added capacity to be able to handle such eventualities?

This is where we consider a real-life example, and the answer appears to be a resounding no. Geopolitical risks Last year there were concerns related to a potential conflict between China and Taiwan and the repercussions this would have on the supply chain if vessels had to divert around Taiwan. Handling this would require significant amounts of additional tonnage. Fortunately, it did not happen, but it remains a risk.

The present conflict between Israel and Hamas has increased the risk of hostilities spreading to impact the Suez Canal. Such an event is clearly not a baseline, just as a China-Taiwan war is not a baseline. However, it is a risk that has been looked at by quite a few different market stakeholders over the past week.

Closing the Suez Canal again would once more lead to massive vessel diversions around Africa. For the backbone Asia-Europe services alone, this would require approximately 1 million TEUs of extra capacity to handle. Fortunately, as outlined above, we presently have more than 2 million TEUs in overcapacity.

The carriers, therefore, can be said to have provided the resilience required to handle even a prolonged blockage of the Suez Canal should it happen now, as well as handle a situation requiring deviating around Taiwan — but not likely at the same time. But then the — essentially rhetorical — question arises: Are the stakeholders who were advocating for higher resilience at the height of the pandemic impact willing to now step up and pay higher freight rates for having this level of resilience in the system?