- Global shipping crisis: Panama and Suez Canals face disruptions
- Solutions include nearshoring, air freight, and inventory management
- Red Sea conflict escalates, impacting UK businesses and oil prices
Just as the global supply chain bottleneck that followed the lockdown appeared to have passed, a series of crises involving two of the most vital waterways in the world resurfaced.
The El Nino phenomenon, which has worsened the extremely low precipitation since last year, has compelled Panama Canal authorities to restrict daily crossings and the amount of cargo ships can transport via the Atlantic-Pacific bypass.
Concurrently, numerous shipping companies have suspended all transit through the Suez Canal in response to the Houthis’ threat of attack, a militant group that controls a significant portion of Yemen.
UK enterprises have been directly affected by the ‘Red Sea crisis’ due to the vital role that the Suez Canal plays in the country’s trade and economic well-being.
If the issue is not promptly resolved, organisations will persist in experiencing an extended phase of unpredictability characterised by increased costs and delivery delays.
The cause of the Red Sea Crisis is unknown.
Six weeks after the 7 October attacks that instigated the Israel-Hamas conflict, on November 19, 2023, the Houthis boarded the Galaxy Leader, a vessel traversing the Red Sea that facilitates the passage of approximately 15% of global trade.
Widely regarded as an Iranian proxy militia, the Houthis subsequently issued a warning that any maritime vessels with ties to Israel would “become a legitimate target for armed forces.”
They launched assaults against numerous merchant vessels in the weeks that followed, the majority of which had no connection to Israel.
In response, several of the largest shipping companies in the world, including Maersk, Hapag-Lloyd, CMA CGM, and the Mediterranean Shipping Company, halted all voyages through the Red Sea in December.
Prosperity Guardian, a military operation commanded by the United States, frequently employed cruise missiles and airstrikes against the Houthi forces, but to no avail.
The daily transit through the Bab el-Mandeb Strait decreased from 3.9 million metric tonnes a year ago to 1.2 million metric tonnes as of April 12, according to the Portwatch platform of the International Monetary Fund.
Many vessels have been rerouted to circumnavigate the Cape of Good Hope, situated at the southernmost point of Africa, resulting in journey extensions of at least ten days and expenditures of around £1.6 million.
The average global container rate has increased by approximately 64% in the past year, from $1,521 to $2,795 per 40-foot container, as measured by the Drewry World Container Index.
The cost of transporting goods from Shanghai to Rotterdam has significantly increased, as freight rates for this route have doubled to $3,050 from $5,000 at the end of January.
Insurance risk premiums have experienced a significant increase, according to data from the United Nations Conference on Trade and Development. In early February, they rose from less than 0.1 per cent of a vessel’s value in mid-December to between 0.7 and 1 per cent.
Which enterprises in the United Kingdom have been impacted by the crisis?
A survey conducted in February by the British Chambers of Commerce revealed that 37% of companies in the United Kingdom were affected by the crisis. Of these, slightly more than half were exporters and manufacturers.
As reported by the BCC, certain companies were incurring additional costs of 300 per cent to rent containers or were subject to delivery delays of up to four weeks, resulting in cash flow difficulties and, in some cases, shortages of components for production lines.
According to Ben Laidler, a global markets strategist at the eToro online platform, importers of electronics, toys, and furniture are being affected by the Red Sea disruption.
Furthermore, industries dependent on just-in-time supply chains, such as the automotive industry, and time-sensitive seasonal products, like apparel, have been impacted.
Kenny Wilson, chief executive officer of boot manufacturer Dr Martens, stated in January that his company would incur “cost implications” as a result of approximately 12-day longer delivery periods.
Sofa retailer DFS issued a warning the following month that £4 million in pre-tax profits could be deferred to the subsequent fiscal year if the Red Sea disruptions persist for the remainder of 2024.
As a result of the crisis, oil prices are increasing internationally, and BP and Shell have suspended all shipments through the Red Sea indefinitely.
The price of a barrel of Brent Crude has increased from $73 in mid-December to $91.
However, the supply chain challenges encountered by businesses in the United Kingdom are significantly less severe than those that were present two to three years ago.
In February, when Tetley, Yorkshire Tea, and Sainsbury’s all reported supply issues for tea, consumers panicked that the national beverage of the United Kingdom would soon run out.
Nevertheless, retail executives maintained that the issues were transient and would minimally affect customers. There have been fewer reports of tea shortages in recent weeks.
The crisis is also unlikely to have had an impact on food imports, as the majority of these items originate from the European Union, according to Helen Dickinson, chief executive officer of the British Retail Consortium.
What steps are British businesses taking to reduce disruptions?
William McBain, the BCC’s chief of trade policy, explains that while the shipping industry is rerouting a great deal of cargo around the southern African coast, firms based in the United Kingdom should increase their stock levels as an “obvious solution.”
However, this would disrupt the financial flow of businesses.
Numerous businesses increased their inventory levels in anticipation of increased trade friction before the United Kingdom’s exit from the European Union.
An additional emerging phenomenon is the practice of ‘nearshoring,’ or domestic manufacturing, in which companies procure their products in closer proximity to their native countries.
According to a report published in March 2023 by Make UK and software developer Infor, forty per cent of UK manufacturers have increased their procurement from the United Kingdom in the past year, and another twelve per cent have plans to do so within the next twelve months.
Air freight is an additional option that has experienced a significant surge in popularity in recent months and offers a considerably faster means of transporting products.
January, February, and March saw an 11% year-over-year increase in global air cargo demand, as reported by transportation data provider Xeneta.
Niall van de Wouw, the group’s chief executive officer, remarked that the airfreight market was “surprisingly busy” in the first quarter of 2024, a traditionally slower time.
However, air transport incurs higher costs compared to shipping, in part because of the restricted cargo capacity of aeroplanes and the regulations governing the shipment of hazardous materials.
Air cargo, according to Laidler of eToro, “is only feasible for the most valuable and time-sensitive items” and “particularly unfeasible for heavy items.”
Air cargo, according to Laidler of eToro, “is only feasible for the most valuable and time-sensitive items” and “particularly unfeasible for heavy items.”
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Air cargo, according to eToro’s Laidler, “is only feasible for the most valuable and time-sensitive items” and “particularly burdensome for heavy items.”
The average spot rate on the corridor connecting Europe the Middle East and South Asia in March was $2.82 per kilogramme, according to Xeneta. This represents a 71% increase compared to the same month last year.
In addition to enduring the arduous COVID-19 pandemic, a significant number of consumers have laboured in recent years with heightened inflationary pressures, which are frequently passed on to them.
This downward trend in inflation will be severely hampered or even reversed if the ongoing Middle East conflict is not resolved.
