How will the Red Sea crisis affect UK businesses?

Just as the post-lockdown global supply chain crisis seemed to be in the rear-view mirror, the issues 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 Nino phenomenon, has forced Panama Canal authorities to limit daily crossings and limit the amount of cargo ships that can travel through the Atlantic-Pacific highway.

At the same time, many shipping companies have halted all transit through the Suez Canal due to the threat of attacks by the Houthis, a militant organization that controls much of Yemen.

Given how crucial the Suez Canal is to British trade and economic prosperity, the ‘Red Sea Crisis’ has had a direct impact on British businesses.

Unless the situation is resolved quickly, companies will again face a long period of uncertainty, characterized by delayed and more expensive deliveries.

What 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 Galaxy Leader ship while it was in the Red Sea, through which about 15 percent of world trade travels .

The Houthis, widely regarded as a proxy militia of Iran, then warned that any Israeli-affiliated ships passing through the sea “would become a legitimate target for the armed forces.”

In the following weeks they attacked numerous merchant ships, many of which had no connection with Israel.

Some of the world’s largest shipping groups, including Maersk, Hapag-Lloyd, CMA CGM and the Mediterranean Shipping Company, suspended all Red Sea voyages in response in December.

A US-led military operation called Prosperity Guardian was launched, often targeting Houthi forces with cruise missiles and airstrikes, but this has failed to deter them.

According to the International Monetary Fund’s Portwatch platform, daily transit through the Bab el-Mandeb Strait reached 1.2 million tonnes as of April 12, up from 3.9 million a year earlier.

Scores of boats have been diverted to sail around the Cape of Good Hope, at the tip of southern Africa, adding at least ten days to journeys and costing around £1.6 million.

According to the Drewry World Container Index, average global container rates have increased by about 64 percent in the past year, from $1,521 per 40-foot container to $2,795.

Transporting products from Shanghai to Rotterdam has become extremely expensive. Freight rates for this route have doubled to $3,050 after reaching $5,000 at the end of January.

Insurance risk premiums have also risen sharply, from less than 0.1 percent of a ship’s value in mid-December to 0.7 and 1 percent in early February, as the United Nations Conference on Trade and Development has reported.

How have British businesses been affected by the crisis?

A survey by the British Chamber of Commerce in February found that 37 percent of British businesses were affected by the crisis, including just over half of exporters and manufacturers.

The BCC said some companies were paying 300 percent extra to rent containers or wait up to four weeks to receive goods, in some cases causing cash flow problems and shortages of parts for production lines.

Ben Laidler, global market strategist at online platform eToro, says the Red Sea disruption is hitting those who import electronics, toys and furniture.

It has also affected industries that rely on just-in-time supply chains, such as automobiles, and time-sensitive seasonal goods, such as clothing.

In January, Kenny Wilson, CEO of shoe maker Dr. Martens, that his group would face ‘cost implications’ if delivery times were approximately twelve days longer.

The following month, banking vendor DFS warned that continued delays could result in £4m of pre-tax profits being deferred to the next financial year if disruptions in the Red Sea continue for the rest of 2024.

The crisis is contributing to higher global oil prices, with BP and Shell indefinitely avoiding all shipments via the Red Sea.

A barrel of Brent Crude costs $91, compared to $73 in mid-December.

But the pressure on Britain’s supply chain is fading compared to two to three years ago.

Tea drinkers gasped in February when Tetley, Yorkshire Tea and Sainsbury’s said they were experiencing supply problems, sparking panic that Britain’s national brew would run 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 as they mainly come from the European Union, notes Helen Dickinson, chief executive of the British Retail Consortium.

What are UK businesses doing to minimize disruption?

While the shipping industry is diverting much freight along the South African coast, another “obvious solution” is for companies to increase inventory levels in Britain, says William McBain, the BCC’s head of trade policy.

However, this would weigh on companies’ cash flow.

Many companies built up their inventory levels ahead of Britain’s departure from the European Union amid concerns about increased trade frictions.

There is also an increasing trend towards domestic production or ‘nearshoring’, where companies source their products closer to home.

A March 2023 report from Make UK and software developer Infor found that 40 percent of UK manufacturers had increased their UK sourcing in the past year, while a similar percentage planned to do so in the next twelve months.

Another alternative is air freight, which has exploded in popularity in recent months and is a much faster way to transport goods.

According to transport data provider Xeneta, global demand for air freight grew by 11 percent year-on-year in January, February and March.

Niall van de Wouw, group chief executive, said the air freight market was “surprisingly busy” in the first quarter of 2024 – traditionally a quieter period.

Yet, transporting products by air is more expensive than shipping products, partly due to the limited quantity that airplanes can transport and the restrictions on the transportation of hazardous materials.

eToro’s Laidler says air freight is “only feasible for the most valuable and time-sensitive products” and is “particularly prohibitively expensive for heavy items.”

eToro’s Laidler says air freight is “only feasible for the most valuable and time-sensitive products” and is “particularly prohibitively expensive for heavy items.”

eToro’s Laidler says air freight is ‘only feasible for the most valuable and time-sensitive products’ and ‘particularly prohibitively expensive for heavy items’

Xeneta found that the average spot price on the Middle East and South Asia to Europe corridor was $2.82 per kg in March, up 71 percent compared to the same time last year.

These costs are often passed on to consumers, many of whom have faced increased inflationary pressures in recent years on top of a debilitating Covid-19 pandemic.

As inflation falls, this progress will be significantly threatened or even reversed if the current conflict in the Middle East remains unresolved.