Hormuz and the Export of Chaos into Global Supply Chains

Spotlight 

• The implications of the Hormuz blockade are reverberating through multiple global supply chains, expanding the theatre of conflict definitively across geographies. 
• Supply chain bottlenecks of critical minerals and industrial chemicals originating in the Middle East transmit disruptions globally across sectors such as agriculture, mining, defense, and semiconductors. 
• The long-term ramifications of the blockade could be reflected in potential changes in global trade patterns and consolidation of inequities.

While oil and gas are the most ubiquitous to it, the Strait of Hormuz and its Middle Eastern hinterland are equally central to multiple other commodities and global supply chains. Industrial chemicals and critical minerals supply chains are two such crucial linkages that integrate the Middle East with the global economy. This commentary explores the disruptions triggered by the Iranian blockade of the Strait of Hormuz, which has interrupted a global production trajectory oriented towards industrial reshoring, data-centre-led digitisation, electrification, and the reinforcement of defense production lines, while also posing risks to global food security.

The Iranian blockade of the Strait of Hormuz, which has interrupted a global production trajectory oriented towards industrial reshoring, data-centre-led digitisation, electrification, and the reinforcement of defense production lines, while also posing risks to global food security.

Impact on Critical Minerals

In addition to its centrality to fertilizer supply chains, the Middle East’s sulphur serves as a necessary feedstock in critical minerals mining, wherein it is utilised in the process of leaching to remove impurities from low-grade ores of copper, cobalt, nickel, lithium and uranium, among others.  A consistent supply of sulphuric acid is essential for the economical processing of critical minerals at scale. The blockade of the Strait of Hormuz, however, has severely impacted this essential supply chain. Countries such as Indonesia which requires sulphuric acid for mining that produces 50 percent of global nickel supply, the Democratic Republic of Congo (DRC), which needs it for mining cobalt and copper, and China, which requires it for lithium extraction and processing, are expected to suffer considerable supply disruptions and losses due to the Hormuz blockade. There is also the challenge of redirecting bulky sulphuric acid cargo, which by its composition is difficult to substitute. The resultant costs of re-routing and attendant insurance premiums across geographies to address the massive supply shock triggered in the Strait would be substantial.

Impact on Defense Production Chains

Ironically, the critical minerals caught in the Hormuz disruption also feed into the weapons that are used in prosecuting the conflict itself. These minerals are central to defense sustainment chains, whether through repairing damaged weaponry or enhancing production at scale to meet increased demand for replenishing ammunition reserves and stockpiles. It is perhaps in recognition of this need that the Pentagon is reported to have asked domestic mining companies to increase production of 13 critical minerals one day before the US-Israel coalition launched operations against Iran. The demand for these critical minerals will also drive increased defense manufacturing for use in both Ukraine and in preparation for a Taiwan contingency, following the cessation of hostilities in the Middle East. 

Ironically, the critical minerals caught in the Hormuz disruption also feed into the weapons that are used in prosecuting the conflict itself.

Impact on Semiconductors and Data Centres

Critical minerals such as helium, bromine and bauxite (aluminum) sourced from the Middle East, are vital to the production of semiconductors and the functioning of data centres. Qatar’s Ras Laffan, which is now expected to be offline for 3-5 years following Iranian strikes, produces one third of the world’s helium supplies as a byproduct. Helium’s significance to the semiconductor production lies in its properties of heat-management and in its role in lithography processing.

Additionally, much of the energy demand of both Taiwan and South Korea, is met through LNG imports from the Middle East, which  are now stuck in the Hormuz. As a result, these two countries that stand at the heart of global semiconductor manufacturing, are simultaneously contending with the loss of energy supplies from the Gulf that power gas fired facilities while also facing shortages of critical minerals essential to producing the most advanced chips in the world. Asian companies such as Taiwan’s TSMC, SK Hynix, and Samsung KRX are already reported to have suffered substantial market losses due to the disruption in the supply of these minerals.

Impact on Electrification

Electrification is commonly posited as a response to the vulnerabilities and risk exposure of global oil and gas markets. Batteries, therefore, are expected to be the fulcrum around which this energy transition materialises. An essential raw material for the batteries powering EVs is mixed nickel-cobalt hydroxide precipitate (MHP). However, the lithium, nickel and copper supply chains that produce this raw material depend again on the sulphur that is largely sourced from the Middle East and transported through the Strait of Hormuz. Notably, given the composition of these minerals and their role in industries such as battery manufacturing, during supply shortages and bottlenecks it is price that typically serves as the balancing mechanism, rather than diversification of the form or source of the input.

Two countries that stand at the heart of global semiconductor manufacturing, are simultaneously contending with the loss of energy supplies from the Gulf that power gas fired facilities while also facing shortages of critical minerals essential to producing the most advanced chips in the world.

Impact on Manufacturing

In addition to the impact of crude oil and Liquefied Natural Gas (LNG) shortages, which have a direct bearing on the fuel powering manufacturing industries, the Asian petrochemicals sector is substantially dependent on the region for its feedstock of naptha, urea, and ammonia. Through the process of cracking, naptha is used to produce ethylene and propylene which are raw materials for multiple manufactured products. Nearly 60 percent of Naptha imports to Asian plants originate in the Middle East. Furthermore, the conflict has led to several Gulf smelters ceasing operations, creating an aluminium supply crunch, which alongside the limestone bottlenecks significantly affects steel and related industrial production cycles globally. Similarly, methanol supply shortages result in solvent shortages that impact the pharmaceutical industry as well as the production of biodiesels and formaldehyde which are used in the production of industrial adhesives and resins. While the current supply chain bottlenecks have affected  the functioning of most manufacturing units in Asia, further disruptions are likely to lead to shut-downs and plant curtailments, resulting in substantial losses.

Long-term Implications of these Disruptions

Critical Minerals – The ongoing competition for battery-minerals and those used in semiconductors, is expected to worsen as the full scale of the Strait’s blockade becomes evident in an already tight supply-chain. Multiple countries, companies, and industries are likely to compete for the scarce supply of these minerals, thereby exacerbating procurement challenges. This pressure will be compounded by governments leveraging export controls on these minerals to capitalise on the resultant price spikes. What appears to be a logistics bottleneck triggered by transit disruptions may become more serious as production losses enter the market, leading to urgent stockpiling. Given this simultaneous demand impulse from all sides, the possibility that allies and partners in coalitions and groupings such as Project Vault or the Quad may also compete for the already limited supply is considerable, and must be factored into how global critical mineral alliances evolve.

Given this simultaneous demand impulse from all sides, the possibility that allies and partners in coalitions and groupings such as Project Vault or the Quad may also compete for the already limited supply is considerable, and must be factored into how global critical mineral alliances.

Manufacturing – In the case of manufacturing, the substantial time and costs associated with restarting production once it shuts down will pose a longer-term issue. Cracking in the petrochemicals industry, for instance, takes nearly two weeks on an average to re-start once stopped. The losses from stalled production must be absorbed by company balance sheets which are already strained by potential war-risk insurance spikes and the implications of force majeures. Again, supply crunches of ethylene from the Middle East, for example, have a significant impact on the textiles industry, which employs large populations in the Global South that can hardly afford a repeat of production stoppages similar to those triggered by pandemic-related disruptions.

Defense Preparedness– The implications of the disruption in the critical minerals industry caused by this conflict will further accentuate the gap between China’s dominance in the sector and that of other countries or coalitions seeking to build downstream capabilities. This widening gap is expected to have a significant impact on defense production globally. Defense sustainment chains require an uninterrupted supply of the chemicals and critical minerals currently blocked, which are essential for the production and repair of systems ranging from radars and microprocessors to drones, stealth weapons, and jet engines. The supply chain disruptions linked to  the Iran conflict will test defense preparedness in countries anticipating active conflict over the coming years.

Food Security – Finally, while the impact of the blockade will be significant on global industrial supply chains, it is through its relevance to global food security that the repercussions will be most widely felt. Countries that both import LNG and fertilisers from the Gulf also export agricultural products back to the region and much of the Global South. The fact that the blockade is delaying essential fertilizers during the sowing cycle in Asian and African countries is expected to have  a debilitating impact on global food security indicators for at least a year, if not longer. The cumulative impact of the Iran conflict’s supply chain bottlenecks on food production; through high input costs of fertilisers, energy and logistics, will eventually be reflected in both higher food prices and increased inequities in access to adequate quantity and quality of food supplies globally.

The cumulative impact of the Iran conflict’s supply chain bottlenecks on food production; through high input costs of fertilisers, energy and logistics, will eventually be reflected in both higher food prices and increased inequities in access to adequate quantity and quality of food supplies globally.

Through its effectiveness, the Iranian blockade of the Strait of Hormuz illustrates a deliberate intersection of economic warfare with strategic leverage. Through the ramifications on supply chains that span food security, economic security, environmental security, and national security parameters, the global disruptions caused by Iran’s blockade are likely to persist beyond its eventual cessation.

Cauvery Ganapathy, Fellow, Climate and Energy, ORF Middle East.