Can global supply chains recover from the Iran war? — Counting the Cost

[0:13] Hey there, I'm Scott McLean. This is Counting the Cost on Al Jazeera. [0:17] We're looking at the global economic impact of the conflict in the Middle East. [0:20] The U.S. and Iran may have agreed to a ceasefire for now, [0:24] but the world's supply chains will continue to feel the effects. [0:28] It'll take a while for shipping traffic to pick up through the Strait of Hormuz, [0:31] a choke point of oil, gas, and a host of critical raw materials. [0:36] Shipments had virtually stopped for petrochemicals from the Gulf [0:39] to make plastic, PVC, and synthetic rubber. [0:42] Manufacturers in Asia and America, as a result, have had to cut production. [0:47] Iranian attacks on gas plants and smelters have disrupted aluminum and helium supplies. [0:53] Many sectors are affected, from automaking to healthcare, [0:56] even the production of advanced electronics. [0:59] So how will our supply chains recover? [1:01] And can they become more resilient to global shocks? [1:10] Well, global markets are reacting with cautious optimism [1:13] to a two-week ceasefire between the U.S. and Iran. [1:16] The conflict had disrupted global supply chains for more than a month. [1:21] Raw materials from the Gulf haven't been able to reach the rest of the world. [1:24] Iran's effective shutdown of the Strait of Hormuz has not only blocked critical transit of oil and gas, [1:30] but also the flow of almost all shipping that carries important commodities. [1:34] This chart shows the dramatic drop in shipments in one month. [1:38] The majority are tankers, shown there in green. [1:41] The rest represent containers, machines, and dry bulk like coal, iron ore, or grain. [1:47] This accounts for almost 40% of all shipping. [1:51] The Gulf produces around 8% of global aluminum supply. [1:54] 30% of that goes to Europe and 20% to the U.S. [1:57] The region has some of the world's largest aluminum smelters. [2:02] Around one-third of the world's helium is sourced from Qatar's Ras Lafan hub. [2:06] The gas is crucial for the aerospace and semiconductor industries, [2:10] as well as magnetic resonance imaging, or MRI. [2:14] Helium is a byproduct from Qatar's liquefied natural gas production. [2:18] The Middle East supplies half of the world's sulfur transported by sea. [2:22] It is widely used in fertilizers and industrial processes. [2:27] And roughly half of the world's traded urea, another component in fertilizer, [2:31] is exported from the Gulf via the Strait of Hormuz. [2:35] Supply disruptions would reduce agricultural output and, of course, push up food prices. [2:41] We'll bring in our panel to discuss all of this in a moment, [2:43] but first this report by Imogen Kimber. [2:45] Two aluminum plants in the Gulf hit by Iranian airstrikes. [2:51] Emirati's global aluminum in the UAE, it says it may take a year to repair the damage, [2:57] and the world's largest single-site smelter, Aluminium Bahrain. [3:01] It's reduced production by 19%. [3:04] The hits took place on a Saturday. [3:07] By Monday, global aluminum prices had reached a four-year high. [3:11] Aluminium prices had already doubled since the U.S.-Israel-Iran war began in February. [3:17] That's because 9% of the world's aluminum is produced in the Gulf. [3:20] And with the Straits of Hormuz restricted, the aluminum supply chain was restricted too. [3:25] But it's not just aluminum that's affected. [3:28] All roads now lead to higher prices and slower growth. [3:34] We have a significant impact from oil, from gas, [3:39] and from the interruption of supply chains from fertilizers to helium. [3:45] Qatar usually makes about a third of global helium. [3:48] It's a by-product of natural gas processing. [3:52] But production was on hold since Qatari liquefied natural gas production hub Ras LaFan was damaged. [3:58] One vital use of helium is MRI scanners. [4:01] But 20% of the world's helium is used in semiconductors. [4:05] They're needed for almost all modern electronic devices. [4:09] Major chip makers in Taiwan, South Korea, and China are the most heavily impacted so far. [4:15] Sulfur is a key component of batteries. [4:18] It's a by-product of refining oil and gas. [4:21] And so 45% of global supplies comes from the Gulf. [4:26] Since the regional war, there's a reduction in production and a surge in price. [4:31] And plastic, the core component being oil. [4:35] This American plastic food packing company owner says when he sees there's a conflict in the Middle East, [4:40] he expects a rise in costs. [4:42] Friday night, when I heard the news that we were bombing Iran, I knew on Monday morning we were going to be getting letters from the petrochemical companies raising the price of plastic. [4:55] And sure enough, Monday morning, the first increase letter came in. [5:00] But he says that this price increase goes beyond what he's seen before, and it will take months after the conflict ends to stabilize. [5:06] Since plastics are used in virtually everything these days, consumers can expect the prices on almost everything to be affected for a while. [5:16] Imogen Kimba, Al Jazeera for counting the cost. [5:19] All right, let's dive deeper into this with our panel of guests. [5:22] Joining us now from Oxford is Ian Golden. [5:24] He's a professor of globalization and development at the University of Oxford. [5:28] In Peterborough, also in the U.K., is Ben Farrell. [5:30] He's the CEO of the Chartered Institute of Procurement and Supply. [5:34] And in Geneva is Adrian Monk. [5:37] He's the editor of the Seven Things newsletter and a senior advisor on AI and technology to the United Nations. [5:42] Thank you all so much for being on the show. [5:44] Adrian, we'll start with you. [5:45] We're talking about fertilizer, aluminum, helium, plastics, oil and gas. [5:49] All of these things have been hugely affected by this war. [5:52] Do you think that the United States understood the economic impact that this would have before they decided to go to war in the first place? [6:00] It's hard to believe that they wouldn't have had a very comprehensive briefing on all of the impacts of this kind of action. [6:09] But what's clear is that they didn't pay much attention to the impacts on some of the other countries. [6:17] You know, if you're South Korean chip manufacturers sourcing most of your helium from Qatar, then, you know, you're going to be very badly affected by this. [6:27] And this is the kind of downstream action that an event like the attack on Iran precipitated. [6:34] And, yeah, I don't think if they did take it into consideration that it played any part in their decision-making process. [6:40] And we're seeing the consequences of that globally. [6:44] Ian, I wonder if there's a way for us to quantify how much more expensive daily life is going to be for people. [6:49] I mean, how much of these price increases are going to be absorbed by manufacturers or industry, and how much of this is ultimately going to be paid for by the end consumer? [6:59] I think we've already seen that gas prices have gone up in many countries by 30, 50 percent. [7:08] There have been strikes in some countries of farmers who can't get diesel fuel. [7:13] We're seeing food prices. And, of course, interest rates aren't coming down. [7:16] So the costs of home loans, the costs of living have gone up, I think, significantly. [7:23] The big question is, how sticky is this? How long is this going to carry on for? [7:27] And, of course, the coming weeks will provide some of the answers to that. [7:31] Ben, I want to ask you about something that it's hard to think of, you know, something that doesn't have plastic in it. [7:39] It's obviously such a big part of our lives these days. [7:42] How much do you think this is going to push up the prices of plastics? [7:50] Again, it's really very difficult to know. [7:53] But what people generally describe as a petrochemical cascade, you can see appearing in the plastics market in the sense of not just the cost of them, [8:04] but the paucity of availability of some of the plastics. [8:07] I was just looking at the World Food Programme's perspective on the impact of this. [8:14] And their view was that 45 million people could, as a consequence, not just of the plastic, but the fertiliser restrictions, be impacted. [8:24] So 45 million people experience acute hunger. [8:27] It was really about yield. [8:28] And, you know, that's just one example of where the plastics, as a result of this, are being impacted. [8:36] I think it's, to be honest, it's very, very difficult to know precisely what the impact would be. [8:42] I think we're seeing a 15% and 20% increase to date. [8:46] Wow. [8:46] Okay. [8:47] Adrian, a lot of people wouldn't necessarily make the connection between a war happening in the Middle East and the global semiconductor industry. [8:55] But, of course, helium is a byproduct of the natural gas production process, and it is used in the manufacturing of semiconductor chips, [9:05] which, of course, are vital to our lives and in many pieces of technology, from laptops to cell phones, electric cars, you name it. [9:13] Can you just describe the scale of the problem facing the global chip industry? [9:19] I mean, there was an oversupply in the industry of helium before we went into this crisis. [9:24] But you're talking about taking out something like 30% of the world's helium with the Hormuz Strait shut and with the attack on Ras La Farn, [9:32] which processes so much of Qatar's resources. [9:37] And then if you think about the other impact, you have LNG. [9:41] You know, Taiwan, which is the huge global hub of chip manufacturing, gets its LNG mostly from the Gulf. [9:48] It has 11 days of LNG reserves, and it's very energy-intensive producing these chips. [9:54] So Taiwan is in a very precarious position. [9:57] It's going to have to pay a lot more money to keep itself supplied. [10:00] So you have things like bromine, which come from Jordan and Israel, where those things are replaceable, [10:08] but, you know, they're flame retardants used in computer chipboard manufacturing. [10:13] There's a huge knock-on in terms of every single small component that goes into manufacturing advanced technology [10:20] that is affected by this crisis. [10:22] And it's very hard to understand, you know, how people speaking to those launching these kind of attacks [10:30] didn't explain in detail what exactly the consequences would be of launching this kind of full-scale military action. [10:39] Ben, what's the trickle-down effect of taking so much helium offline? [10:43] I mean, what is the industries? [10:44] I mean, Adrian just explained the semiconductor industry, but are they likely to feel it most in terms of the impact? [10:50] Let me just give you a couple of examples. [10:56] I wanted to start with perhaps the semiconductors, just to give people a sense of how acute, sort of tight the supply chain is. [11:04] So if we just took one example, ASML in Holland is, I think, the only business in the world with the capability [11:13] to manufacture the transitions needed in the microchips for processing things like certainly all the AI large models we have these days, [11:28] also military communications equipment. [11:30] So there's just a sort of choke point. [11:32] I keep describing the era as the choke point economy, as we increasingly find not just geographical choke points like the Straits of Hormuz [11:41] or Suez Canal, Panama Canal, Straits of Malacca, but also in the sense of the technology we've become increasingly reliant upon [11:49] and a few nodes around the world able to produce vital components that we increasingly rely on. [11:56] So there's one example of that. [11:58] But then that cascades into sort of the necessity for helium, for example, in MRI scanners in hospitals. [12:04] I was in Delhi a couple of weeks ago, and quite quickly, the impact was apparent there in hospitals, for example. [12:13] So this is not just an incident sort of restricted to the sort of chip world, but the consequence of that is very far reaching, I think. [12:24] And, you know, the point you're making about whether the consequence was fully understood. [12:31] We have members of SIPs in 180 countries and we have offices across the world. [12:36] I've been talking to my team this morning across the Middle East and Africa and the like. [12:42] And what is apparent is we've sort of moved to a world of four generations or four decades of globalisation. [12:49] And I'm not sure that everybody's really understood the supply trade implications of that globalisation [12:57] until something like this happens. [12:59] And now there's a sort of dawning reality, because often organisations and nations don't really understand [13:04] the length and breadth of their supply, you know, in third and fourth order tier suppliers. [13:12] And then there's a conversation about the necessity to think about resilience and understanding your supply base. [13:17] Can I just quickly also ask you, Ben, about aluminium. [13:19] We've seen two aluminium facilities in the Gulf that have been hit by Iranian strikes, [13:25] but you've also seen this entire Gulf region importing less aluminium. [13:29] Do you think that the sort of less demand or less imports is going to offset the lack of supply [13:35] and prices may not jump too much? [13:40] Do you know what? The evidence we've got so far is that has not been played out. [13:44] I don't think that anyone's considering the supply and the demand in a rounded sense [13:48] in the way you're describing at this stage. [13:50] But I think we have to be realistic about where we are in terms of the volatility of the market. [13:55] We spend a lot of time talking to our teams around the world and professionals in procurement [14:00] and supply about managing the markets, managing price volatility. [14:04] And typically what they say to me is we see the prices going up very quickly [14:09] and coming down much less quickly. [14:11] Very slowly. [14:12] We've got to see how that all plays out. [14:14] All right. Ian, I just want to show you, our viewers, two graphs that really show the prices of sulphur and urea. [14:22] Both of them are used in fertilisers, half of which comes from this part of the world. [14:27] Notice they both shot up right when the war began. [14:31] So, Ian, what will be the impact on agriculture, and especially in places like Africa, [14:37] where so many people are already struggling to afford food? [14:40] This is really a devastating impact on many people around the world, farmers. [14:46] It's the Northern Hemisphere's planting season. [14:49] In the Southern Hemisphere, climate change is impacting, [14:52] and there's a need for more fertilisers, more sulphur, more nitrogen in the soils. [14:57] So, we're seeing very rapid increases in prices. [15:00] We've had a couple of shocks already. [15:02] The Russian invasion of Ukraine led to a big shock. [15:05] Before that, COVID led to a big shock in supply chains. [15:08] And so, this is increasing the fragility of agriculture and will certainly undermine yields in Africa, [15:16] but also in the Northern Hemisphere. [15:18] We're going to see this reflected in food prices. [15:22] Increasingly, I think what we'll find is that those crops which are intensive in this, [15:27] so that's all the food crops, as well as vegetables, salads, et cetera, will be greatly impacted. [15:36] And we should expect higher prices, and for those that depend on it, subsistence farmers, [15:42] we're going to see rail hunger resulting from it. [15:44] Ben, can you help us understand this from a layman's perspective? [15:47] I mean, is there some sort of alternative to these fertiliser components? [15:50] And I guess, would most farmers have a stockpile sitting around in cases like these, [15:57] or are they really at the whims of the global market price? [16:00] So, probably worth starting with statistics on this, 50% of the food production of the world [16:06] is sort of accelerated using fertiliser, particularly, as you imagine, [16:14] and Ian describes there, in developing nations. [16:16] 30% of the global supply of fertilisers coming from the Straits of Hormuz. [16:20] And typically, there are some nations much more dependent on this supply than others. [16:26] Let me just say, Malawe, for example, 60% of the fertiliser needed in Malawe [16:31] is produced or transit through the Straits of Hormuz, so that has been restricted. [16:38] And I think the flow of fertiliser was reduced by 92% in March through the Straits. [16:46] So, this is having a big impact. There are typically not large stocks of fertiliser. [16:52] So, the yield will be reduced quite dramatically in those nations, [16:56] particularly the developing nations, this year. [16:59] And along with the impact of the plastic production I mentioned for irrigation, for example, [17:05] then I think this is a compound effect and a sort of second-order consequence, [17:10] which has the potential to be extremely serious, as you say, as a sort of cascade of the impact of this. [17:19] Adrian, I just want to shift gears slightly. [17:22] Last month, you had two Amazon Web Services, AWS data centres, that were hit by strikes, [17:28] one in Bahrain, one in the UAE. [17:30] And I imagine that these facilities are built with cyber attacks in mind, [17:35] and they have defences to ward off cyber attacks. [17:38] But maybe the people who were building those centres weren't thinking of physical attacks. [17:42] I wonder, in the future, do you think that they will be built to withstand physical impacts as well? [17:49] Look, I think it's very difficult to defend this kind of infrastructure [17:52] against the sort of attacks we're talking about. [17:54] And we've seen it's not just the infrastructure. [17:57] It's hard to defend people's homes, to defend military installations. [18:00] You know, we're in a very different world. [18:02] The Gulf has made a huge bet on AI, rightly so. [18:05] But it's a bet that's built on security of logistics, on peace, and on cheap energy. [18:14] And all of those things have been put into play by what we've seen in the last couple of months. [18:19] I think that is a profound question going forward. [18:22] It doesn't mean that that bet is not a wise bet, or that it's not important, [18:26] or that the region doesn't have resilience there. [18:28] But we've certainly seen with this attack just how vulnerable some of the systems on which we think we rely for our everyday use are. [18:37] And I think, you know, underpinning all of this is a question I think both Ian and Ben have alluded to, [18:43] which is, you know, the global system was underpinned by U.S. naval power, [18:48] freedom of navigation secured across from Malacca to Hormuz to the Red Sea. [18:52] And we're seeing the kind of withdrawal of that universal guarantee now. [18:57] And I think this is the question of who pays for that that we're going to all be facing in the coming months and years. [19:03] Ben, I want to ask you about alternative routes. [19:06] Obviously, when it comes to oil and gas, you have some pipelines in this part of the world that can pick up some of the slack. [19:12] But when we're talking about plastics and fertilizers, obviously you can't put those things in a pipeline. [19:17] Do you think we'll get to a stage, or maybe we're already there already, where you can take some of these things and transport them by road? [19:24] Do you think that we're going to see a surge in capacity, a surge in transport trucks taking these things around the world? [19:30] Or is it just not really viable financially? [19:35] The capacity doesn't really exist to do that. [19:39] The immediate response we saw, because we have offices and members across the Middle East, [19:45] was, you know, I could see it live on our WhatsApp channels, where people replanning, looking for alternative ports, air freight, for example. [19:52] But quite quickly, the capacity was absorbed. [19:56] We also saw some rerouting of shipping, for example, into Africa. [20:02] But, of course, that was extended routes quite quickly. [20:05] The cost of freight rose and also the reality of finding alternative fuel availability as more and more of the sort of tankers were sent to African ports. [20:18] So there are some inherent limitations with a response like that in the moment. [20:23] But it does, for me, raise the issue of what I'm beginning to increasingly call the necessity to understand a supply web, not a supply chain. [20:32] So people can pull on different parts and look at alternative routes and sources of raw materials, for example. [20:40] So you can begin to see, for example, I saw, I was very interested to see, Dangotti talking about Nigeria as an alternative source of fuels in a situation like this. [20:51] There are other options in terms of some of the raw materials through Morocco, for example, in terms of the fertilizer options. [20:58] So I think, you know, what people need to do is spend some time looking at their supply chain or supply web options and considering how you can architect some resilience and ability to withstand shocks in that. [21:14] And typically and understandably, a lot of it has been planned on the basis of, you know, cost and efficiency. [21:21] And I think because of the world we know new has changed, you know, it's time to consider whether there is a sort of resilience premium to pay for reliability of supply in the future. [21:32] Well, speaking of resilience or lack thereof, I wonder if you can sum this up for us, Ian, and what we've learned here. [21:38] Is it fair to say that globalization has made products cheaper for people, but it has also made the global supply chain or supply web, as Ben calls it, a lot more delicate or fragile? [21:50] Yes, in many respects, that's true. [21:52] Things are cheaper. [21:53] We have many more sources and it's more fragile because it comes from further. [21:57] But it's also made it more resilient. [22:00] I mean, what globalization has done is given us multiple suppliers, different countries, different options to work with. [22:08] And so we need to use that strength of globalization, which is a network around the world, to draw in other suppliers. [22:15] Near-shore ring, simply relying on ourselves, does not necessarily build resilience. [22:20] If you only rely on one or two domestic companies, you're no more resilient and things can happen at home. [22:25] So I think we need to see this as a way of diversifying supplies, as a call to ensure that we have more stocks, lean and mean, having very tight supply chains. [22:37] It might drive down costs, but it also makes it a lot more fragile. [22:41] And the whole system has become more brittle as a result. [22:45] And clearly, there's going to have to be a big rethink about the amount of investment we have. [22:51] We tend to, when we're the mark-to-market accounting, we tend to say that holding stocks is bad. [22:56] And I think there will be a rethink of this, that how many people are able to sustain shocks like this in the future. [23:04] And that will be seen as a strength, not as a weakness. [23:06] One of the results of all of this is that we may end up with something like a toll on the Strait of Hormuz. [23:13] And, Adrian, surely there are other countries that are watching this and thinking, hey, they just cut off this global choke point and it didn't even take that much effort. [23:24] And even the world's great superpower, the United States, couldn't reopen it by force. [23:29] Do you think that in the future, other countries may look to weaponize some of these other global trade choke points? [23:36] I think it's a real danger. [23:38] I mean, if you actually look at the origin of the laws on this, you know, one of the big moments in opening up the seas was when the United States refused to pay a toll for entering and leaving the Baltic to Denmark back in the middle of the 19th century. [23:53] And that was one of the first steps towards opening up the maritime kind of waterways and the freedom of the oceans. [23:59] And I think the danger is that if this becomes institutionalized, it's going to encourage folks in other places to take similar action. [24:07] We saw, for example, when the Panama Canal dried up slightly and it limited the traffic going through, the Panamanians started optioning off their slots and they got to $4 million a slot to pass through the canal. [24:21] That's a lot of money. [24:22] And if you think about those kind of tolls going into coffers of some potentially quite, you know, constrained countries, then, yes, a lot of people are going to look at this and say, hang on a second. [24:33] If the law of the oceans doesn't apply to these guys, it might not apply to me either. [24:38] Yeah, Ian, we've already seen, even before this war started, a real push in some countries, especially in the West, to sort of reshore or nearshore some of these critical supplies around the world. [24:49] And now this crisis is obviously exposed just how reliant the world is on this narrow waterway called the Strait of Hormuz. [24:57] Do you think the future looks a lot less globalized or do you think the future looks a lot like what we have? [25:04] I think we actually see a more integrated future. [25:09] The attempt by the U.S. to become more insular, the protection of nationalism is going to be shown to be very negative for the U.S. [25:17] It's going to lead to slower growth and higher poverty in the U.S. [25:20] The world economy is really going to be moving towards Asia. [25:23] Asia is opening up. [25:25] It's integrating more. [25:26] India is opening up more. [25:28] China certainly is joined at the hip to other countries. [25:32] And although there will be a need for greater resilience, I don't think the lesson is more nationalism and more protectionism works for us. [25:40] So I'm optimistic that what we're going to take from this is more regional integration. [25:44] By the way, that also applies to the Gulf. [25:46] I think we'll see that the Gulf countries are going to be more cooperative, both politically and economically. [25:54] And, for example, long pipelines across the Gulf, things like that, better traffic passing through the Gulf and an ability to get past some of these choke points will, I think, be the outcome rather than each Gulf country becoming more insular as a result. [26:11] Ben, final word to you. [26:13] Do you agree is the future more globalized? [26:18] Yes, I believe so. [26:19] And it was on my mind, actually, as Ian was talking about that, if we look back to the conversation about Greenland and the North, Northern Sea, as the ice caps sort of melt and that route opens up, there are already essentially new routes opening up to mitigate the risk. [26:37] The other thing is I think that humanity has, for many, many years, aspired to, you know, essentially ally with neighbors and to expand its horizon. [26:48] So I think it would fundamentally go against human ambition and instinct to de-globalize. [26:54] So I think it's a reality of where we are, and we just need to accept there is a requirement to manage that effectively. [27:01] Ian Golden, Ben Farrell, Adrian Monk, it's a fascinating discussion. [27:05] Thank you all so much for your time today. [27:06] We appreciate it. [27:08] Thank you. [27:09] Thanks, Scott. [27:10] And that's our show for this week. [27:12] You can get in touch with us on X. [27:14] My handle is at Scott McLean. [27:15] Make sure to use the hashtag AJCTC when you do. [27:18] Or drop us an email, countingthecost at aljazeera.net is our address. [27:22] And there's more for you online at aljazeera.com slash ctc. [27:26] That'll take you straight to our page, which has individual reports, links, and entire episodes for you to catch up on. [27:31] That's it for this edition of Counting the Cost. [27:34] I'm Scott McLean. [27:35] For the whole team here in Doha, thank you so much for joining us. [27:38] The news is next here on Al Jazeera. [27:40] Thank you. [27:40] Thank you.