The Middle East serves as a critical crossroads for global trade, its waterways and resources fueling industries worldwide. But recent years have witnessed a surge in instability within the region, significantly affecting the operations of global manufacturers, including CPG companies.

Beyond the devastating humanitarian impact, the Red Sea crisis (a military standoff, which escalated when the Iran-backed Houthis in Yemen launched attacks against Israel), coupled with the ongoing Israel-Hamas war, has sent shockwaves through global supply chains. These events have challenged the operations of CPG companies, making it harder to optimize trade routes, procure raw materials, and maintain vital supplier relationships. The consequences are significant, leading to delays, increased costs, and ethical dilemmas, ultimately impacting the flow of essential goods to consumers around the globe.

The rising geopolitical tension in the wider Middle East and the Red Sea has impacted global CPG companies in several key areas.

Trade Routes

The Red Sea and Suez Canal connect Europe to Asia and East Africa and accounted for ~12% of global trade, including 30% of container traffic, in 2023. However, conflicts and political unrest have disrupted these routes, compelling shipping companies to seek alternatives.

 To avoid the Red Sea, global carriers such as Denmark-based Maersk, Japan-based NYK Line, and France-based CMA-CGM are now navigating longer paths, specifically around the Cape of Good Hope in South Africa, for their shipments from Asia and the Middle East to the EU and the UK. This detour results in lengthier delivery times, increased transportation costs, higher shipping surcharges, and a scarcity of containers.

Consequently, CPG manufacturers and suppliers are facing dwindling stock levels, shortages of raw materials, and interruptions in production. Major retailers are at risk of higher prices and inventory shortages for the consumer goods that are imported from APAC (Asia-Pacific.

While interventions by major global economies are anticipated to bring some stability, trade disruptions through the Red Sea are likely to persist during 2024.

Commodity Procurement

The turmoil in the Middle East has significantly disrupted the procurement strategies of CPG companies. In 2023, the region was the world’s leading crude oil producer, contributing to over one-third of global production, and was also a crucial source of related commodities such as plastics, fertilizers, and petrochemicals.

The interruption in the supply of these essential inputs has led to global fluctuations in their availability and price, affecting the cost structure and operational effectiveness of CPG firms. For instance, Egypt, Saudi Arabia, and the UAE were among the top plastic exporters, together making up over 20% of worldwide exports in 2023. The trade disturbances from the Middle East led to an approximate 2.5% M-o-M rise in Polypropylene (PP) prices in both European and Middle Eastern markets in January 2024.

This scarcity of raw materials and the spike in prices have caused challenges for the packaging industry catering to the CPG sector. Consequently, CPG companies are compelled to re-evaluate their supply chain approaches and seek out alternative sources to maintain stability.

Supplier Relationships

The geopolitical concerns in the Middle East have led to increased scrutiny and revaluation of supplier relationships. CPG companies are now more vigilant in assessing the geopolitical risks associated with their suppliers across the globe. It has also strained existing supplier relationships due to disruptions in supply and increased operational costs resulting from delays in shipments, heightened security risks, and potential damage to goods during transit. CPG companies are actively developing contingency plans, including identifying alternative suppliers outside the conflict zones and alternative routes to ensure uninterrupted supply chains.

 Additionally, they are establishing policies and incorporating provisions into supplier agreements that are informed by thorough political assessments, evaluating how suppliers might respond to political unrests. This strategic shift has resulted in alteration of long-standing supplier relationships.

HR and IT

CPG companies with operations in the conflict zones face increased risks to employee safety and challenges in talent retention and cybersecurity. These conditions make it difficult to attract and retain skilled workers, while also increasing vulnerabilities in data protection. In response, these companies are establishing partnerships with specialized organizations to bolster their crisis management capabilities, focusing on comprehensive strategies to safeguard employees and operations.

What CPG companies should be assessing now

Procurement and supply chain teams of CPG companies should be actively devising tailored strategies to avoid or mitigate any major disruptions.

CPG companies can also look into product re-engineering and risk assessment if they rely on ingredients sourced from conflict-affected regions. They should focus on developing comprehensive risk management strategies, including diversifying their supplier base, investing in alternative ingredients, assessing varied formulations using alternative ingredients, and maintaining strategic reserves of critical inputs.

 It is crucial to continuously monitor geopolitical developments and develop a risk scenario and forecast model. These models will assess the qualitative and quantitative impact on near-to-medium term procurement of various raw and pack materials, and services, which can help CPG companies in designing business contingency plans.

Paras Kashyap is CPG assistant manager for The Smart Cube,  a procurement intelligence firm.