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Columna De Expertos The Impact of the Israel-Hamas War on Global Logistics

Fecha de inscripciónDEC 01, 2023

The Impact of the Israel-Hamas War on Global Logistics
The tragic military conflict between Israel and Hamas, the Palestinian Islamist militant group controlling the Gaza Strip, began with Hamas’ surprise and massive attack on southern and central Israel on October 7. In response to this unprecedented assault in the history of the State of Israel, the Israel Defense Forces (IDF) initiated Operation Swords of Iron in the Gaza Strip, a campaign that has been still ongoing for more than a month. Thousands of Israelis and Palestinians have lost their lives in the war, and casualties are anticipated to increase. On October 20, Israel's Defense Minister Yoav Gallant, outlined three phases of the war against Hamas: airstrikes, ground maneuvers aimed at dismantling Hamas, and the establishment of a new security regime in the Gaza Strip.

Not many political and military experts, including Israeli generals, expect a short and quick military operation similar to previous Israel-Hamas armed conflicts. Firstly, ground maneuvers in the Gaza Strip are extremely challenging and risky. Despite its small land area of 365 square kilometers, the Gaza Strip is home to over 2 million people. Additionally, approximately 240 hostages seized by Hamas are scattered throughout the 'Gaza metro,' an intricate network of over 500 kilometers of underground tunnels housing Hamas military forces. Uprooting Hamas and rescuing hostages through military action without harming civilians seems impossible, even for the strongest army in the region..

Moreover, the most daunting and protracted task will be the political power transition in Gaza. On November 7, Israeli Prime Minister Binyamin Netanyahu announced that Israel would maintain “overall security responsibility” in Gaza; however, the Israeli government has no plan for establishing a new administration. Approximately one million people under the age of 18 in the Strip have lived in what is often described as Israel’s ‘Open-Air Prison’ for 16 years without experiencing life beyond the confines of the Strip. It is an obvious expectation that another Hamas may emerge when Israel walks out from the Gaza Strip. While no country wants to send a peacekeeping force there, especially any Arab neighboring states. Even Hamas’ political competitor, Fatah, which dominates the Palestinian Authority governing the West Bank, will not enter the Gaza Strip with Israeli guidance to avoid being seen as betraying its people.
[Israel-Palestine border] Israel-Palestine border
Many regional and international experts were initially concerned about a possible international armed conflict in the Middle East. However, the situation with Iran and its proxies in proximity to Israel appears to indicate a lack of readiness and willingness to engage in direct conflict. Instead, they keep only warnings that they will retaliate if Israel occupies Gaza. The recent development might suggest some relief to countries in the region and around the world, as it suggests that a physical confrontation between Israel and Iran, the worst and most disastrous scenario, is currently less likely than in the early stages of the war. While the United States has deployed forces to the region as a deterrent against Iran and its allied groups attacking Israel, the area remains fraught with numerous sources of risk that could further escalate the conflict. The hope for a two-state solution still appears dim amid these tensions and uncertainties.
What is Hamas?
Hamas, or the Islamic Resistance Movement, is a Palestinian Islamist political party and militant organization currently governing the Gaza Strip. It was founded in 1987 during the first Intifada as the Palestinian branch of the Muslim Brotherhood, a Sunni Islamist organization founded in Egypt in the late 1920s. Hamas established with the goal of destroying Israel and establishing an Islamic society in history Palestine. Hamas initially opposed the "two-state solution" of the Oslo Accords agreed by Israel and the Palestinian Liberation Organization (PLO) in 1993, but amended its charter in 2017 to accept the establishment of an interim Palestinian state in Gaza, the West Bank, and East Jerusalem, along the ‘Green Line’ border established before the 1967 Six-Day War.

Hamas is reportedly supported financially and militarily by Qatar, a longtime supporter of the Muslim Brotherhood, as well as the Islamic Republic of Iran, which is Shiite based. It has administrative and welfare organizations as well as military force, gaining support among Palestinians. In the 2006 Palestinian elections, Hamas won a majority of seats over the Fatah Party which succeeded the PLO, leading to its control of Gaza after ousting Fatah in the 2007 civil war, while Fatah runs the Palestinian Authority in the West Bank. The United States, the European Union, the United Kingdom, and Israel designate Hamas as a foreign terrorist organization due to its armed resistance against Israel, including suicide bombings in and around Israel.
Where is Gaza Strip?
The Gaza Strip is a region of approximately 365 square kilometers (about two-thirds the size of Seoul), located in southwestern Israel. It is bordered by the Mediterranean Sea to the west, Israel to the north and the east, and Egypt to the south. Home to about 2.3 million people, many of whom are Palestinian refugees who were displaced from the current territory of the State of Israel before its founding, the area has a complex history of occupation and conflict, involving Egypt and Israel from the First Arab-Israeli War in 1948 to the Six-Day War in 1967. Limited self-governance for Palestinians in the West Bank and the Gaza Strip began in 1994 under the Oslo Accords, and Israel completely withdrew from Gaza in 2005 following the Roadmap for Peace. However, Hamas took control in 2007, leading to an Israeli naval and air blockade of Gaza. Egypt, which considers the Muslim Brotherhood a terrorist organization, controls Gaza's southern border. International organizations, including the United Nations, have criticized Israel's blockade of Gaza, but Israel has maintained the position that it is a necessary measure to protect itself from Hamas terrorism. The extremely limited human and material movement was allowed through the Erez crossing in the north of Gaza and the Rafah crossing in the south. The current conflict has further restricted movement through border crossings, impacting human and material access to the territory, including humanitarian deliveries.
[Map of Gaza Strip] Map of Gaza Strip
Why Did Hamas Attack Israel Now? Hamas attributed its recent attack to longstanding grievances over Israeli policies, particularly focusing on the recent violence at the Al-Aqsa Mosque in Jerusalem, which it contends was a result of the far-right Israeli government's actions. However, a more fundamental motivation may lie in the apprehension regarding Arab-Israeli diplomatic normalization.
Since the First Arab-Israeli War in 1948, Israel has been considered a public enemy by Islamic countries in the Middle East. The signing of the Camp David Accords in 1978 between Anwar Sadat, Egyptian President, and Menachem Begin, Israeli Prime Minister, followed by the Egypt-Israel peace treaty in 1979, led to the suspension of Egypt from the Arab League and imposed political and economic sanctions. In 2002, Saudi Arabia proposed the "Arab Peace Initiative," advocating for the establishment of an independent Palestinian state with East Jerusalem as its capital, based on the pre-1967 borders. In exchange, Arab countries would normalize relations with Israel.
The changing dynamics in the region were further accelerated as the Obama administration shifted its foreign policy focus towards prioritizing interests in Asia, causing Gulf Arab states to lose confidence in continued U.S. protection against the military threat of Iran. Arab nations sought strategic and economic cooperation with Israel. On September 15, 2020, Israel, Bahrain, and the United Arab Emirates (UAE) normalized diplomatic relations as a result of the Abraham Accords mediated by the United States. Subsequent agreements followed with other Arab countries, including Morocco and Sudan. These diplomatic shifts diminished the significance of the Palestine issue for some Arab nations. Even Saudi Arabia, the kingdom as Guardian of the Two Holy Mosques, also changed its stance on Israel, as the United States supported Saudi-Israeli negotiations. The potential conclusion of a Saudi-Israeli normalization deal would mark a crucial juncture in the Arab-Israeli conflict over Palestine and the prospects for the “two-state solution.”
[The Abraham Accords] The Abraham Accords (source : The White House[1])
In addition, Hamas has been working to restore its ties with Iran, particularly after Hamas refrained from supporting Syrian President Bashar al-Assad, whom Iran has been supporting during the Syrian civil war. Iran also hopes for the failure of the Saudi-Israeli deal, as the deal aims to marginalize Iran in the region. Domestically, Hamas might seize a potential opportunity to launch a significant attack on Israel during Israel’s political upheaval, marked by difficulties in forming a coalition and repeated elections in recent years. The political turmoil resulted in the formation of the ultimate far-right and anti-Palestine alliance, which saved Prime Minister Netanyahu from prosecution for his corruption cases and possible indictment. This might present a one-time chance for Hamas to carry out its historically largest attack on Israel.
It is highly improbable that Hamas would emerge victorious in a military confrontation against Israel, the region's most potent military force. Nevertheless, but its guerrilla tactics could protract armed conflicts in the densely populated Gaza Strip. Israel's swift retaliation against Hamas may lead to a higher number of civilian casualties in Palestine. This extended conflict and Israel's rapid response could negatively impact the Saudi-Israeli diplomatic process and strain Israel's relations with nations that are part of the existing Abraham Accords. In the unclear future of the Middle East order, the geopolitical risk, albeit low and irregular’ will endure. Post-War Logistics Situation in Israel Following the Hamas attack, logistics transportation within and through Israel has largely returned to normal, albeit with an increased cost due to the imposition of a rising war risk surcharge. Notably, the Port of Ashkelon, Israel's largest oil terminal located just 15 kilometers from Gaza, was targeted by the October 7 airstrikes of Hamas. As of mid-November, cargo unloading at this port is still limited. However, the two major trading ports, Ashdod and Haifa, are reportedly operating under normal conditions. The Port of Ashdod, approximately 50 kilometers from Gaza, is experiencing irregular delays in cargo processing, primarily because around 10 percent of port workers were transferred to military reserves. Security measures for handling dangerous cargo have been heightened. Several major global carriers have indicated that cargo destined for Ashdod might be subject to a change of destination (COD) to Haifa, citing a force majeure event. The direct impact on global maritime logistics is expected to be minimal, as the two major ports handling containers in Israel contribute only 0.4%[2] to the global container traffic load.
[Main Ports in Israel] Main Ports in Israel
At the onset of the war, major shipping lines implemented a war risk premium surcharge on cargo to and from Israeli ports, reflecting additional insurance premiums of war risk imposed on vessels calling at these ports. With the armed conflict restricted to Gaza and the limited area around the northern border of Israel to Lebanon, some shipping firms applied the lower war risk surcharge for shipping through Israel and the Eastern Mediterranean retroactively, starting from gate-in dates in October. ZIM, one of the world's top 10 shipping lines based at the Port of Haifa, initiated a war risk surcharge (WRS) for shipping through Israel and the Eastern Mediterranean on October 12, ranging from $50/TEU to $120/TEU. Since October 15, however, new and lower surcharges, ranging from $50/TEU to $100/TEU, have been in effect. Further reductions in the war risk premium surcharges are expected from November 22 onwards.
[War Risk Surcharge (WRS) for ZIM’s Cargo from/to Israel] War Risk Surcharge (WRS) for ZIM’s Cargo from/to Israel (Source : ZIM[3])
Meanwhile, the Israeli finance ministry has stated that subsidizing the cost of additional war risk premiums is not currently under consideration; however, it noted that the ministry is actively exploring "additional solutions that will provide an insurance defense for vessel owners.” Some reports suggest that the government is considering various measures to safeguard trade, including the possibility of covering the risk premiums. This proactive stance indicates a commitment to maintaining the stability of the logistics and maritime sectors in the aftermath of the conflict. As the situation evolves, further government interventions and policies may be unveiled to address the challenges posed by increased war risk surcharges and ensure the continued smooth operation of maritime trade in the region.
In terms of airline logistics, most flights were canceled in the immediate aftermath of the attack. The Israel Airlines Authority, however, has normalized operations at Tel Aviv Ben Gurion International Airport for international flights. As a result, Israeli flag carriers, including El Al Israel Airlines, have resumed most flights, while other foreign carriers have temporarily suspended flights, except for local emergency return transportation. Some airlines do not have any plans to resume their lines until next year. Currently, the only two foreign airlines operating International flights to Tel Aviv are UAE-based airlines, Etihad Airways and Fly Dubai. The primary reason for this limited foreign airline presence is that major insurers providing aviation war insurance have suspended coverage for flights to Israel and Lebanon. Thus, the lack of insurance coverage makes it challenging for foreign airlines to operate in the foreseeable future. To mitigate these challenges, the Israeli Knesset Finance Committee has decided to insure flights of the country's flag carrier up to $6 billion, but foreign carriers are not included in this coverage. Consequently, only 25 percent of the capacity of Tel Aviv Airport is currently in operation. The Impact of the War on Global Logistics In the realm of global logistics, the impact of the Israel-Hamas war seems poised to manifest as an indirect consequence, primarily stemming from escalated transportation costs amid heightened geopolitical risk. The impact of the war on the major global freight indexes—such as the Shanghai Containerized Freight Index (SCFI), which measures the fluctuation of spot freight rates on the export container transport market from Shanghai (the largest shipping port in the world) to various international destinations, and the Baltic Dry Index (BDI), tracking the cost of shipping bulk dry goods—has been very limited so far. On the other hand, the oil tanker index, the Baltic Dirty Tanker Index, jumped after the attack by Hamas and still stays at a higher level.
[Global Freight Index Graph] Global Freight Index Graph (Source : SCFI, https://en.sse.net.cn [4], BDI/BDTI, balticexchange.com [5])
Notably, the geographical proximity of the Israeli-Palestinian region to key transit points like the Suez Canal, critical for European-Asian logistics, and the Strait of Hormuz, pivotal for energy logistics, raises concerns. However, the perceived risk to the Suez Canal, appears, at present, to be limited. Egypt, the gatekeeper of the Suez Canal, strategically positions itself as a mediator, maintaining a diplomatic distance from the conflicting sides. Furthermore, the likelihood of a substantial influx of refugees from Gaza into Egypt remains improbable. This nuanced landscape underscores the intricacies at the intersection of geopolitical events and global logistics. In mid-November, Houthi rebels, aligned with Iran and controlling northern Yemen along the Red Sea coast, issued a threat to target Israeli ships navigating the Red Sea and the Bab al-Mandeb Strait. More recently, these rebels seized a cargo ship in the Red Sea on November 19. While they identified the vessel as Israeli, Israel countered the claim, asserting it to be a British-owned and Japanese-operated cargo ship named the Galaxy Leader, en route from Turkiye to India. The situation is not anticipated to escalate significantly, given the substantial concerns and engagement of Saudi Arabia and Egypt regarding Houthi rebels, prompting efforts to curtail their activities in the Red Sea. However, this incident raises the potential for a further increase in war risk premium charges on all ships transiting through the Suez Canal connected to the Red Sea.
The increased geopolitical instability in the Middle East following Hamas' attack briefly elevated international oil prices, reaching as high as $90 per barrel for West Texas Intermediate (WTI) as of October 18. However, the impact on global oil prices is projected to be relatively limited in the short term as neither Israel nor Palestine are major oil producers. Yet, if Iran becomes directly or indirectly involved in the conflict, the risk to the Strait of Hormuz—through which approximately 20% of global crude oil supplies pass—could escalate, but with a very rare chance.
While natural gas prices have remained high due to Israel, a gas exporter, suspending production at its Tamar gas field near Gaza amid the ongoing war, the effects are primarily limited at the regional level. Although exports to Europe via Egypt constitute only 5% of Europe's total natural gas imports, a prolonged shutdown, coupled with seasonal factors like the onset of winter and recent supply shocks in other regions, might exert upward pressure on liquefied natural gas (LNG) prices in Europe and Asia. This could contribute to increased logistics costs for land transportation by truck. Nonetheless, sustained upward pressure is unlikely as energy prices have significantly fallen due to the global recession compared to the outbreak of the Russian-Ukrainian war. Gas storage in major countries, including the EU, is currently at an all-time high. Similar to oil transportation, tensions in the Strait of Hormuz are anticipated to amplify the war risk surcharge for LNG shipments, leading to higher freight rates. Overall, gas prices are likely to remain stable unless this winter Is exceptionally cold.
[Global Energy Prices Graph] Global Energy Prices Graph
The long-term impact on the global logistics industry hinges on the trajectory of the Israel-Hamas conflict. While major powers, including the U.S., oppose further escalation, eradicating Hamas and securing civilian hostages will pose a complex challenge for Israel, especially given the fortified Gaza Strait with tunnels and trenches. If unrest in the Middle East leads to a prolonged global economic downturn, it may impact air/ocean logistics demand, reflecting a decline in consumer sentiment.
The risk could extend to global fuel supply as the U.S. strengthens sanctions against Iran, potentially pushing fuel prices to around $100 per barrel, but the chances are limited. Sporadic battles, particularly involving Hezbollah, the Syrian army, Houthis, and Israel, are expected. Eradicating Hamas leadership is challenging, and if successful, addressing the power vacuum in Gaza poses difficulties. The rise of Fatah's self-government in Gaza may threaten Fatah's standing, and increased casualties may force Arab countries to reconsider their stance. A globally isolated Israel could empower extremist groups globally, leading to heightened logistical risks. A prolonged attack may ultimately compel the U.S. and Israel to seek a pragmatic exit strategy, potentially impacting energy prices in the short term. However, decreasing geopolitical risks in the Middle East could benefit the logistics industry in the long term, especially with the G20-backed India-Middle East-Europe Corridor gaining momentum.
[India-Middle East-Europe Corridor (IMEC)] India-Middle East-Europe Corridor (IMEC)
# Reference [1] : The White House
[2] : XChage, https://www.container-xchange.com
[3] : ZIM, https://zim.com
[4] : Shanghai Shipping Exchange, https://en.sse.net.cn
[5] : Baltic Exchange, https://www.balticexchange.com

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Professor Jae Wook JungProfessor Jae Wook Jung