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Just when the post-lockdown global supply chain crisis seemed to be in the rearview mirror, problems resurfaced with a series of crises involving two of the world’s most important waterways.
Extremely low rainfall since last year, exacerbated by the El Niño phenomenon, has forced Panama Canal authorities to limit daily crossings and the amount of cargo ships can carry through the Atlantic-Pacific shortcut.
At the same time, many shipping companies have halted all transit through the Suez Canal amid threats of attacks by the Houthis, a militant organization that controls much of Yemen.
Given how critical the Suez Canal is to Britain’s trade and economic prosperity, the “Red Sea crisis” has directly impacted British businesses.
Unless the situation is resolved soon, businesses will continue to suffer another extended period of uncertainty plagued by delayed and more costly deliveries.
Different route: Many shipping companies have stopped all transit through the Suez Canal amid threats of attacks by the Houthis, a militant organization that controls much of Yemen.
What has caused the Red Sea crisis?
On November 19, 2023, six weeks after the October 7 attacks sparked the war between Israel and Hamas, the Houthis hijacked the ship Galaxy Leader while it was in the Red Sea, through which it travels about 15 percent. percent of world trade.
The Houthis, widely considered an Iran-allied militia, later warned that any Israeli-linked ship traveling by sea “would become a legitimate target for the armed forces.”
Over the following weeks, they attacked numerous merchant ships, many of them with no connection to Israel.
Some of the world’s largest shipping groups, including Maersk, Hapag-Lloyd, CMA CGM and Mediterranean Shipping Company, suspended all voyages transiting the Red Sea in December in response.
A US-led military operation called Prosperity Guardian was launched, often targeting Houthi forces with cruise missiles and airstrikes, but this failed to deter them.
Militant group: The Houthis, widely considered an Iran-allied militia, have attacked numerous merchant ships sailing through the Red Sea in recent months.
Daily transit through the Bab el-Mandeb Strait was 1.2 million metric tons on April 12, up from 3.9 million a year earlier, according to the International Monetary Fund’s Portwatch platform.
Numerous ships have been diverted to go around the Cape of Good Hope, at the southern tip of Africa, adding at least ten days to journeys and approximately £1.6 million in costs.
Average container rates globally have soared about 64 percent over the past year, from $1,521 per 40-foot container to $2,795, according to the Drewry World Container Index.
Transporting goods from Shanghai to Rotterdam has become particularly expensive, with freight rates for this route doubling to $3,050, after reaching $5,000 at the end of January.
Insurance risk premiums have also increased, from less than 0.1 percent of a ship’s value in mid-December to 0.7 and 1 percent in early February, as reported by the United Nations Conference on Trade and development.
How have UK businesses been affected by the crisis?
A British Chamber of Commerce survey in February found that 37 per cent of UK businesses were affected by the crisis, including just over half of exporters and manufacturers.
The BCC said some companies were paying an extra 300 per cent to rent containers or waiting up to four weeks to receive goods, creating cash flow challenges and parts shortages for production lines in some cases.
Ben Laidler, global markets strategist at online platform eToro, says the Red Sea disruption is affecting those who import electronics, toys and furniture.
It has also affected sectors that rely on just-in-time supply chains, such as automobiles, and time-sensitive seasonal goods, such as clothing.
In January, Kenny Wilson, chief executive of boot maker Dr Martens, said his group would face “cost implications” if delivery times were around 12 days longer.
The following month, sofa seller DFS warned that continued delays could result in £4 million of pre-tax profits being carried forward to the next financial year should disruption in the Red Sea continue for the rest of 2024.
Walking small: In January, the chief executive of boot maker Dr. Martens said his group would face “cost implications” if delivery times were around 12 days longer.
The crisis is contributing to rising global oil prices, with BP and Shell indefinitely avoiding all shipments through the Red Sea.
A barrel of Brent crude oil stands at $91, compared to $73 in mid-December.
But the supply chain pressures faced by UK businesses pale in comparison to those they experienced two or three years ago.
Tea drinkers were left gasping in February when Tetley, Yorkshire Tea and Sainsbury’s said they were experiencing supply problems, sparking panic that Britain’s domestic beer was running out.
However, retail bosses insisted the problems were temporary and would have little impact on consumers. Reports of tea shortages in recent weeks have faded.
Food imports are also unlikely to have been affected by the crisis because they mainly come from the European Union, says Helen Dickinson, chief executive of the British Retail Consortium.
What are UK businesses doing to minimize disruption?
While the shipping industry is diverting a lot of cargo towards the southern coast of Africa, another “obvious solution” is for companies to increase stock levels in the UK, says William McBain, head of trade policy at the BCC.
However, this would affect the companies’ cash flow.
Many companies increased their inventory levels ahead of Britain’s departure from the European Union due to concerns about increased trade friction.
There is also a growing trend toward domestic manufacturing or “nearshoring,” whereby companies source their products closer to home.
A March 2023 report from Make UK and software developer Infor found that 40 per cent of UK manufacturers had increased their UK sourcing over the past year, while a similar percentage planned to do so in the coming years. 12 months.
Another alternative is air freight, which has gained popularity in recent months and is a much faster way to ship goods.
Global air cargo demand grew 11 percent year-on-year in January, February and March, according to transportation data provider Xeneta.
Niall van de Wouw, group chief executive, said the air transport market during the first quarter of 2024 – traditionally a quieter period – was “surprisingly busy”.
However, transporting products by air is more expensive than shipping them, in part because of the limited quantity that planes can carry and restrictions on shipping hazardous materials.
eToro’s Laidler says air freight is “only viable for the most valuable and time-sensitive products” and is “especially prohibitive for heavy items.”
eToro’s Laidler says air freight is “only viable for the most valuable and time-sensitive products” and is “especially prohibitive for heavy items.”
eToro’s Laidler says air freight is “only viable for the most valuable and time-sensitive products” and is “especially prohibitive for heavy items.”
Xeneta found that the average spot rate in the Middle East and South Asia corridor to Europe in March was $2.82 per kg, up 71 percent compared to the same period last year.
These costs are often passed on to consumers, many of whom have struggled with increased inflationary pressures in recent years, in addition to a grueling Covid-19 pandemic.
While inflation is falling, this progress will be significantly threatened or even reversed if the current Middle East conflict remains unresolved.
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