Dire straits for flow of trade through Malacca

As a video on China’s catastrophic oil and gas problem explains, Beijing, Vietnam, the Philippines, Malaysia, Brunei and Washington are all directly at odds with each other over the Strait of Malacca because of the importance of this major geopolitical thoroughfare.

China has constructed new islands within the South China Sea, defended by naval and air bases replete with the latest firepower, while the US has continued its own naval and air patrols despite dire Chinese warnings.

China’s increasingly bellicose rhetoric is underpinned by Beijing’s concerns over what it sees as its main geopolitical chokepoint challenge. The strait stretches one and a half miles wide. It is China’s equivalent to the Death Star’s exhaust port – the strategic gate between the Pacific and Indian Oceans between the Malay Peninsula in the north and the Indonesian island of Sumatra in the south. This shipping chokepoint is geographically the shortest possible path for container and cargo vessels to take while travelling between Europe, the Middle East and Africa on one side and East Asia on the other.

According to the report, $3.5trn worth of global trade passes through these gates and across the South China Sea every single year, including two thirds of China’s entire maritime trade volume, 40 percent of nearby Japan’s entire maritime trade and nearly one third of the total volume of all worldwide trade. These flows of trade usually also include around 15 million barrels of oil a day and around one third of all the world’s traded liquefied natural gas to China and Japan.

Each relies on this single straight for 80 percent of all their imports of oil, primarily coming in from Iran and the Arab states. The imports are critical for China as imported oil from abroad makes up 75 percent of its entire oil consumption, which ultimately means that roughly 60 percent of China’s entire supply of oil passes through this one and a half mile wide stretch.

China is heavily reliant on this chokepoint not only because of the energy resources imported through it, but also because of the massive volumes of manufactured goods that it exports through it. If the Strait of Malacca were to somehow become obstructed or blocked for a significant amount of time, China’s entire economy and society would come under significant strain with huge implications for global geopolitics, the economy and trade credit.

Covid-19 and Ukraine as well as other global trade scenarios such as the Strait of Malacca illustrate that the industry lacks the detailed knowledge to react in a timely fashion. More forward-thinking and connected decision-making is required. Russell’s conversations with its Corporate Working Group have therefore focused on devising the mechanics of a resilience solution which is outcome-based and triggered by predefined events.

Features of the resilience solution:

There has been a contraction in the proportion of exposure insured into the insurance market, forcing corporates to retain more. But as exposure is insured into the insurance value chain, knowledge of the original business is lost. This hampers the ability of the insurance industry to step up as it lacks the detail needed.

We need not just data and analytics, but also the imagination to create the solutions and the market collaboration to deliver them.

Suki Basi is managing director at Russell Group