As the Red Sea crisis continues, pressure on consumer prices follows in its wake | International trade

Observer business agenda

UK manufacturers and retailers are not yet passing on all the costs of diverting ships round southern Africa – but can that last?

Sun 12 May 2024 07.00 BST

When footage first appeared of Houthi rebels hijacking the cargo ship Galaxy Leader in the Red Sea last November, it sent shockwaves through the world of trade.

The coordinated attack on the ship, which was partly owned by Israeli billionaire Abraham Ungar, was the start of a six-month campaign by Yemen-based militants to terrorise western vessels using the route, in response to the conflict in Gaza.

The campaign has since escalated: vessels on the key shipping route are being targeted by missiles and drones, with the Houthis claiming 107 attacks. Three seafarers have been killed. The result has been a complete realignment of global trade.

The Suez Canal, through which 12% of global trade used to pass, saw traffic drop by 66% at the start of April, when compared with a year earlier.

Many shipping firms are now diverting vessels on to the safer, but much longer and more costly, route around the tip of southern Africa, passing the Cape of Good Hope. This can add 10 days to a journey and increase fuel costs by 40%.

The few ships that use the Red Sea route are still under threat, however. This was underlined last week when shipping line Maersk said attacks had intensified, and the risk zone was now bigger. Maersk said it would continue to send its ships around Africa for the foreseeable future, but that that would result in a 20% drop in capacity in the second quarter of the year, and additional costs. Last week, it trebled the surcharge on containers travelling between Asia and Northern Europe from $250 to $750.

For huge companies like Maersk to small businesses in the UK and elsewhere reliant on goods from Asia and the Middle East, the crisis continues to have an impact.

Houthi leader Abdul-Malik al-Houthi said attacks would continue as long as the Gaza conflict does. Photograph: Reuters

A British Chambers of Commerce (BCC) survey in February of its exporter members found that more than half (53%) of manufacturers and retailers had been affected by the Red Sea crisis. Some reported price rises of 300% for container hire, and four weeks being added to delivery times.

Manufactured goods from Asia, including cars, furniture and textiles, appear to be the worst hit, but oil from the Middle East is also affected.

About 70% of all of Europe’s car parts are shipped through the Red Sea from Asia. The disruption has meant carmakers including Volvo and Tesla suspending some production lines because of a lack of parts. Vauxhall owner Stellantis said it was turning to air freight for some parts, to bypass the Red Sea.

The oil market has not seen the huge spike in prices that was initially expected, but the crisis, along with the wider Middle East situation, has contributed to prices increasing from just under $76 a barrel at the start of the year to almost $84.

Despite this, there has as yet been no significant rise in consumer costs. John Stawpert, environment and trade manager at the International Chamber of Shipping, says the crisis has shown how resilient the shipping industry is. “The impact that some people predicted, particularly with respect to inflation, we just haven’t seen. A few months ago, we were talking 0.1 and 0.2%, which is just a rounding error.”

The Office for National Statistics’ UK trade report, out on Friday, said there had been no evidence the crisis had affected UK import levels between January and March.

Some of this will be because companies are realigning their supply chains. Asos and Boohoo have ramped up their “nearshoring” – sourcing more products from Turkey and Morocco rather than Asia. Marco Forgione, director general of the Institute of Export and International Trade, also points out that some companies have switched to rail freight, with the number of trains leaving China for Europe dramatically increasing in recent months.

For William Bain, head of trade policy at the BCC, the long-term impact of the disruption will depend on how long it goes on.

“Companies will have to make decisions on sourcing and supply chains, and if this does become a new normal, they will need to decide whether this is something they can adjust to, or whether it is too difficult,” he says.

With the Houthi leadership reaffirming last week that they would not stop their campaign until the conflict in Gaza had ended, businesses will not be counting on the disruption ending any time soon.

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