Strait Talk From CSCOs

The closure of the Strait of Hormuz, and its uncertain future, has sent shockwaves through the global economy, effectively cutting off 20 million barrels of oil per day, and all the biproducts that go with it. 

During the first week in April, Gartner gathered CSCOs from across various industries and regions to discuss how they are responding to the current impact of the war in the Middle East on their supply chains. 

Many supply chain leaders are using their COVID-19 playbooks to navigate the disruption, but are legacy strategies enough for a fundamentally altered geopolitical landscape? The prevailing view is that the ongoing war is not merely a temporary disruption. The physical choke point will remain a vulnerability to global raw material supply for years to come. CSCOs say that major themes are emerging.

The initial shock of the conflict has not been a lack of physical goods, but the overall cost. With Middle Eastern airspace initially restricted and the Strait of Hormuz paralyzed, 21% of global air freight capacity vanished overnight. 

The financial fallout was, and may continue to be, significant. Businesses operating in the region have experienced air freight rate spikes of up to 400%, driven by massive war and fuel surcharges, while ocean transport costs rocketed by 200%. Overland routes continue to expand, but they will accommodate only a fraction of the raw materials that can flow through the Strait.

While the immediate pain is felt in cost, a more insidious threat is creeping down the pipeline: raw material shortages. The chemical and plastics industries, which are fundamentally reliant on oil, are already seeing force majeure declarations. Yet, the risk extends far beyond simple plastic packaging. 

The high-tech sector, heavily dependent on petrochemical derivatives like photoresists and resins for semiconductor manufacturing, is facing constraints. Furthermore, energy restrictions threaten critical tech hubs. Taiwan's semiconductor industry relies heavily on liquefied natural gas (LNG), with current inventory buffers standing at a dangerously low 30 days. If the conflict and closure of the Strait drag on, supply chain leaders predict shortages starting in mid-May to June.

No one is feeling confident in predicting when a permanent halt in hostilities will occur, but many agreed that the knock-on shortages will have a long tail when the shooting stops. Cost is currently the main pain point, but we are entering the emerging-constraint phase, which will unfold in the coming weeks.  

Once the Strait is fully opened, shortages and increased costs won’t disappear. They will continue to persist for 18 months or longer. Food will be particularly hard hit.  

Recovery will not be measured in weeks, but in years, as fuel and material markets painstakingly recalibrate, rebuild, and reorganize. But this is not without precedent. We need only look at the Russian invasion of Ukraine. 

Supply chain leaders are facing the brutal reality of multiple sustained conflicts and all the disruption they bring. As simple as this sounds, CSCOs who recognize, and continue to prepare for, this will fare better than most.

Wade L McDaniel
VP Distinguished Advisor
Gartner Supply Chain
Wade.Mcdaniel@gartner.com