Supply Chain Impacts of the Diplomatic Crisis in the Middle East

Supply Chain Impacts of the Diplomatic Crisis in the Middle East

Executive Summary

  • SevencountriesintheMiddleEasthavecutdiplomaticrelationsandsuspendedland, air, and sea travel to and from Qatar
  • Withphysicalbordersclosed,re-routingofairandoceantrafficisexpectedtocause shipment delays, increase costs and result in port congestion at major transshipment hubs in the region Low productivity and threat of strike have already led to cancellation and re-routing of vessels
  • Potentialcontingencyplanscouldincludeotherairlines,directvesselstoQataror diverting cargo to airports and ports in Oman, which remain unaffected by the ban

Recent Developments

On Monday, June 5, the governments of Bahrain, Egypt, the Maldives, Saudi Arabia, the United Arab Emirates, Libya and Yemen announced that they are cutting diplomatic relations with Qatar. In addition to the political ramifications, some of these countries have also halted land, air, and sea travel to and from Qatar, which went into force on Tuesday, June 6. These measures will have significant impacts on supply chains operating or relying on transshipment hubs in the region. Some contingency plans are emerging, but these may be altered over the next few days as the situation remains extremely dynamic.

Supply Chain Impacts

Air freight

Multiple airlines have suspended all flights to and from Qatar, including Etihad Airways, Emirates, FlyDubai, Air Arabia, Gulf Air and Egypt Air. The service suspensions are indefinite in nature, and there is no estimate for when normal services will resume. Reacting to these measures, Qatar Airways also suspended flights to Saudi Arabia, Egypt, Bahrain, and the United Arab Emirates. In addition, Bahrain, Saudi Arabia, and Egypt have banned Qatar-registered aircrafts from flying over their airspace. Losing access to Bahrainian airspace is particularly problematic as the country’s airspace almost encircles Qatar and could potentially ground all flights from and to Qatar.

The International Airport Transport Association (IATA) has disapproved of the ban on flying to Qatar by specific airlines; however, it has no executive authority over its members and its recommendations are not binding. As Bahrain allows flights by Qatari aircrafts through its airspace on a single air route, Qatar Airways has been forced to re-route its flights over Iran, Turkey and Oman. This has already caused heavy air-traffic congestion, and will result in payload restrictions, longer flight times and higher fuel costs on many routes. Some 70 flights have been reportedly grounded in Qatar since Monday, June 5. Minimal contingency planning by airlines are expected to have a ripple effect on operations as a whole. One Iranian official confirmed that the number of flights passing through Iran’s airspace has increased from 100 to 150 to about 1,100 per day, likely owing to the re-routing of Qatar Airways flights. For example, Indian carriers are said to be by-passing UAE airspace to Qatar which increases flight times by up to 40 minutes. Africa-bound flights have to pass Iran and Oman before U-turning the Peninsula to divert to Africa. Latest sources also stated that Oman Air will fly larger capacity planes to Doha, Qatar from June 8 until June 14, responding to the growing demand for contingency flight routes in order to by-pass the ban. Further contingency measures for cargo shipments are said to include other airlines aside from the national carriers in the aforementioned countries.

Road freight

Authorities in Saudi Arabia also confirmed the immediate border closure with Qatar by land, which is also the country’s only land border. This has caused trucks to line up across the border, unable to enter Qatar. There have been no reports indicating when the border or other transportation links are expected to reopen. About 40 per cent of Qatar’s food is believed to come by lorry from Saudi Arabia. Qatar is reportedly in talks with Iran and Turkey to secure food and water supplies amid concerns of possible shortages and stockpiling by residents. One Iranian official said earlier that food shipments can reach Qatar in 12 hours via its three Iranian ports.

Ocean freight

Vessels arriving from or going to Qatari ports, flying the emirate’s flag or which are owned by Qatar or Qatari individuals have also been banned from ports in Saudi Arabia and the UAE, including the latter’s Port of Fujairah, which is the main bunkering port in the region. Vessels arriving from or going to Qatari ports, flying the emirate’s flag or which are owned by Qatar or Qatari individuals have also been banned from ports in Saudi Arabia and the UAE, including the latter’s Port of Fujairah, which is the main bunkering port in the region.

This includes both Jebel Ali and Khorfakkan ports in UAE, which are major transshipment hubs for cargo heading to Qatar, and are thus likely to be affected by serious port congestion over the next days. Reports already emerged of aluminum exports from Qatar for customers in Asia, Europe and the US which remained blocked in the UAE. Latest shipping data showed, however, that exports of Qatari crude have not been hindered by the ban as tankers are loading Qatari grades along with cargoes from UAE. This was confirmed by Abu Dhabi port authorities, which on June 7 eased some restrictions on non-Qatar owned, flagged or operated vessels sailing to and from Qatar.

Significant disruption might also arise from Egyptian restrictions on vessel movements through the Suez Canal. Although the Canal Authority said that under an international agreement, Egypt allows all ships to pass through except for those from countries at war with Egypt, any ship barred from using the canal would have to sail around the African continent, adding 1 month to shipping times. Nevertheless, LNG traders were tracking the Al Ruwais LNG tanker yesterday, which was the first ship from Qatar to pass the Canal since tensions arose on June 5. In terms of potential contingency measures, shipping analysts are suggesting that container liners could by-pass the ban by diverting Qatar-bound cargo to the port of Sohar or Salalah in Oman, which remain unaffected by the dispute. Among carriers particularly affected could be Qatar’s Milaha with currently 11 container ships deployed, although ships may be diverted to ports in Kuwait or Iran to retain connections by sea with the rest of the world. Other contingency measures may include vessels calling Qatari ports directly or services with no transshipment points in UAE, Bahrain, Yemen, Egypt and Saudi Arabia.

Outlook

There have been similar, albeit more contained, diplomatic flare-ups between Qatar and its Gulf Cooperation Council (GCC) counterparts in recent years. Some analysts thus suggest that since Qatar hosts the largest American base in the Middle East, al-Udeid, and because US President Donald Trump has in his most recent statement called for unity in the Gulf states, the situation could ease within a couple of days. However, others predict that Qatar’s isolation may be unlikely to end soon. Saudi Arabia has yet to define its demands for restoring diplomatic relations and closer ties with Iran and Turkey, which has just yesterday approved the deployment of military troops in Qatar, may further increase the risk of conflict escalating in the region.

Monitor Everstream Analytics for the most updated information on the situation.

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