In the ever-shifting landscape of global trade, geopolitical tensions often serve as a disruptive force, reshaping supply chains and challenging businesses to adapt swiftly. As tensions continue to escalate in the Middle East, together with the ongoing Russia-Ukraine conflict, the repercussions are being felt across the global commodities market.
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Against this backdrop, companies must navigate complex procurement processes with agility and foresight.
2024 will go down as a year in which commodity markets experienced extreme disruption and volatility, with shipping routes playing a particularly key role. Shipping lanes through the Red Sea, serving as a crucial artery for maritime trade between the Middle East, Asia and Europe, have been rerouted to circumvent conflict zones.
That this brings with it significant knock-on effects should come as no surprise: according to the World Economic Forum, the Suez Canal and the Red Sea channel account for approximately 30% of the world’s container traffic, facilitating the movement of over $1 trillion worth of goods annually.
The Suez Canal and Red Sea play a particularly significant role in the transportation of commodities, especially oil and natural gas, between Europe and Asia. The Suez Canal Authority estimates this represents approximately 12% of global trade volume and 8% of global seaborne trade by value transiting through the Suez Canal annually.
Industry leaders have sounded the alarm on surging shipping costs, particularly on routes from Asia to Europe and the U.S., where prices have skyrocketed. Shipping costs from Asia to Europe have jumped nearly five-fold with costs from China to the U.S. more than doubling.
At Quor, we have seen a number of commodity customers forced to explore alternative shipping routes as a way of mitigating higher shipping costs, including the Cape of Good Hope in South Africa, even though this incurs added expenses and prolonged transit times.
According to one major US commodity merchant customer, this kind of rerouting is adding an additional 6,000 kilometres and around 14 days to trade routes from Asia to Europe voyages. This has had a knock-on impact on bunker prices in South Africa, which have risen by 80% according to S&P commodities data.
Heightened geopolitical tensions have translated into increased risk premiums for commodities traded in global markets, exacerbating already troubling procurement challenges for businesses.
War risk premiums have surged as well, with transit through the Red Sea now attracting a premium of above 1.0% of a ship’s value, ten times the charge in mid-October 2023, according to UNCTAD.
This, too, is compelling businesses to reassess their supply chain strategies and explore alternative procurement avenues, requiring a proactive approach to supply chain management, with a focus on resilience and adaptability in the face of the uncertain world we are living in.
Rising geo-political tensions have also impacted commodity prices more directly, including the gold price. Gold has historically served as a safe-haven asset during periods of uncertainty.
Tensions in the Middle East, together with the ongoing Russia – Ukraine conflict, has bolstered the appeal of gold driving up its price. This increased demand has propelled the price of gold, which stood at $1,810 per ounce in October 2023, to hit $2,429 on 12th April 2024, and we could see this rise even further.
The two-year Russian – Ukrainian conflict also continues to exacerbate already significant uncertainty in the commodities supply chain and procurement processes.
According to the OECD, prior to the conflict, Russia and Ukraine together accounted for about 30% of global exports of wheat, 20% for corn, mineral fertilizers and natural gas, and 11% for oil. Such a significant dislocation in the market takes years to adjust to, by preparing and implementing new sourcing strategies for commodity materials, and logistics planning including supply and procurement.
Other geopolitical events on everyone’s radar include rising tensions between China and Taiwan. If this were to escalate to a full-blown conflict, we can expect further significant impact to the global economy, with more volatility in commodity prices, and major new supply chain and procurement disruption.
Such an escalation of geopolitical events, with multiple conflicts coinciding, would be catastrophic, leading to a major black swan event in the commodity markets. The wider impact to the global economy would be of a sort we have not seen the likes of before, even surpassing the volatility seen under COVID-19.
As businesses navigate the complexities of global procurement amidst geopolitical tensions, the need for strategic foresight and resilience has never been greater. Industry executives should remain steadfast in their commitment to empowering other businesses with the expertise and solutions needed to weather the storms of geopolitical uncertainty and emerge stronger on the other side.
