Sedat Baştuğ: Restructuring of global maritime supply chains

Recent geopolitical events have emphasized the need to de-risk supply chains and diversify suppliers and markets. The COVID-19 pandemic, the war in Ukraine, Red Sea tensions, and Panama Canal disruptions have accelerated this trend, leading to a focus on building resilience and self-sufficiency in supply chains. 

a) Maritime supply chain restructuring
Over the past decade, maritime supply chain restructuring trends have become evident, particularly in Asia. Since 2010, the distance traveled per ton in container trade has decreased due to increased intra-Asian maritime trade, supporting manufacturing activities in China and its neighboring countries. This reflects a shift towards China becoming the global manufacturing hub, supported by intermediate goods from East Asia. As China becomes more self-reliant in producing components and intermediate goods, imports from distant locations have declined.

Impact of geopolitical tensions
The ongoing trade wars between the United States and China since 2018 have imposed additional costs on their mutual trade, affecting manufacturing industries in both countries. The US tariffs impacted around 18% of its imports, while China's retaliation affected 11% of its imports. Countries like Canada, Mexico, India, Vietnam, and the European Union have benefited from these shifts.

The COVID-19 pandemic, global logistics bottlenecks in 2021-2022, and the war in Ukraine have accelerated changes in trade patterns. Companies are adopting strategies to improve their resilience, such as supply chain restructuring, shifting production to new locations, re-shoring, near-shoring, and friend-shoring.

“China Plus One” strategy
To reduce overdependence on China, many companies have adopted the “China Plus One” strategy, which involves diversifying operations outside China while maintaining a presence in the country. This strategy has implications for container shipping demand and transportation costs, as companies like Apple, Samsung, Sony, and Adidas shift some production to Southeast Asia. As a result, the share of US imports from countries like Taiwan, Mexico, Vietnam, and the European Union is increasing. Meanwhile, the share of US container imports from China has declined, although China remains a major player in global trade.

b) Maritime trade and challenges
The maritime sector continues to face challenges, including geopolitical tensions and the need for a more sustainable, decarbonized future. International maritime trade volume contracted by 0.3% in 2021, reflecting the normalization following the market volatility of 2021. Despite these challenges, the sector remains resilient, with seaborne trade expected to grow by 3% in 2023.

Container transportation
Container transportation plays a significant role in maritime trade, accounting for over 60% of the total cost of cargo transported by sea. Recent events, such as the Ever Given incident and Red Sea tensions, have highlighted the importance of the container market in shaping global trade.
In 2022 and early 2023, the rebalancing of supply and demand in container transportation and the reduction in port congestion led to a rebalancing of container freight rates. However, excess supply of container ships and the Red Sea tensions have created challenges for the industry. The total container ship capacity is expected to reach 31.9 million TEU by the end of 2025. The excess supply of ships has been somewhat alleviated by the Red Sea tensions, which have led to increased freight and insurance rates as major shipping companies divert Asia-Europe traffic to alternative routes.

Impact of red sea tensions
The conflict in Israel in October 2023, which later became regional, has significantly impacted maritime trade. Attacks on ships in the Bab el-Mandeb Strait have led to disruptions in Asia-Europe supply chains, increased costs, and delays. This has resulted in a shift of traffic to the Cape of Good Hope route, leading to higher costs and emissions.

The diversion to the Cape of Good Hope has brought significant costs and disruptions, particularly for European supply chains. The longer route increases sailing time and fuel consumption, adding to overall costs.

c) Global trade disruptions
The United Nations Conference on Trade and Development (UNCTAD) has highlighted the impact of disruptions to key global shipping routes like the Suez Canal, Panama Canal, and Black Sea. These disruptions have led to significant changes in trade routes, increased costs, and heightened uncertainty.

Economic and environmental costs
Diverting ships around the Cape of Good Hope instead of the Suez Canal incurs both economic and environmental costs. Longer travel distances increase trade costs, insurance premiums, and greenhouse gas emissions. Developing economies, particularly those in South America and East Africa, are heavily dependent on these routes and are vulnerable to such disruptions.

Rising prices and climate impact
UNCTAD warns of the potential economic impacts of prolonged disruptions in container transportation, which could lead to higher costs, inflation, and delays in deliveries. The higher freight rates will eventually be passed on to consumers, affecting global supply chains.

Moreover, the need to maintain trade schedules has led to increased vessel speeds, resulting in higher fuel consumption and greenhouse gas emissions. The higher emissions from longer distances and faster speeds could significantly impact the environment.

As conclusion, the global maritime sector faces numerous challenges due to geopolitical tensions, changes in globalization patterns, and the need for sustainable practices. As companies adapt to these changes, the maritime industry will continue to play a critical role in global trade, despite the uncertainties and risks ahead.