Violence across the Middle East has been ramping up since the start of the Israel-Hamas war. But it has kicked up another gear since the UK and US joint air strikes last week against Yemeni rebels – a response to Houthi attacks on international shipping vessels using the key Red Sea trading route
UK defence secretary Grant Shapps has vowed to continue to “take the action needed to protect innocent lives and the global economy”.
But how is the Red Sea crisis affecting global supply chains, and what could further military intervention mean?
The west’s decision to launch air strikes against Yemen “tells us just how serious the economic impact of shipping disruption in the Red Sea is,” says Institute of Exports & International Trade (IOE&IT) director general Marco Forgione. He says the gains made by the UK economy in November have been “effectively wiped out” by the conflict, which analysts estimate has hit global GDP to the tune of 1.3% so far.
Experts like Forgione have repeatedly sounded the alarm over the inevitable knock-on effects of the severe disruption caused by the Houthi attacks on shipping and inflation – the Suez Canal, which connects the Red Sea to the Mediterranean Sea, handles about 12% of all global trade. But the volumes going through the key route have dropped more than 20% after many shipping companies including global powerhouse Maersk were forced to pause deliveries in recent weeks, causing delivery delays across Europe and other areas of the west.
Safety concerns have forced businesses to reroute vessels around the Cape of Good Hope, adding around 2,500-3,500 nautical miles to journeys and between seven and 14 days to an Asia-Europe route, increasing costs by 15%-20%, according to HSBC calculations. That is on top of shipping rates having already doubled since November.
What fmcg travels through Suez?
It won’t be long before consumers see the impact on shelf prices, with IOE&IT estimates suggesting increases of up to 10% for goods due to come through from this route, including oil, wheat, rice, and exotic fruits and spices. Clothing and home goods are also set to be affected, with M&S chief Stuart Machin warning last week the retailer’s fashion and home division expected delays to stock due in February and March.
Additionally, a “significant amount” of what travels through Suez is inputs – not just raw food commodities but also petrol and other production components – Forgione notes, which means the manufacturing sector is “at particular risk given it operates on a ‘just in time process’”.
“If these are being delayed then this will feed through into the ability of manufacturers to maintain the production of goods,” he warns.
FDF chief Karen Betts said on Wednesday that manufacturers faced significant uncertainty over how the Red Sea conflict was compounding other supply chain challenges, such as the drought in the Panama Canal.
However, perhaps a bigger concern is what further violence could do to energy markets, particularly as Europe has relied on Gulf supplies since cutting ties with Russia.
Recent Treasury analysis warned of a potential rise of at least $10 per barrel in the international price of crude oil and a 25% increase in the price of natural gas, should tensions in the region escalate further.
When will the Red Sea crisis end?
This is not so far-fetched as the Iran-backed Houthis have showed no intention to scale back, having struck a US-owned ship on Monday, leaving America and the UK in a legitimate position to further intervene in order to protect global supply chains. And violence across other areas of the Middle East including Iraq and Lebanon is on the rise too.
Alarmingly, Britain’s third biggest gas supplier, Qatar, has this week paused shipments through the Red Sea’s Bab el-Mandeb Strait in a move that could force the UK to use up its emergency fuel stockpiles. The Gulf country is also considering a Cape of Good Hope detour, which will inevitably push up costs. This could have a tremendous impact on several food industry sectors, particularly those reliant on oil and energy gas such as farming, fruit & veg production, baking, and transport & logistics.
British Apples & Pears chairman Ali Capper told The Grocer she was “really worried” about the impact of freight costs and fossil fuel increases on UK growers. “It feels like the volatility and the risk of inflation is still high for growers”, she said. “We just feel like we’re turning a corner and then there’s something else.”
It is impossible to predict where the conflict is heading. But it is clear any further escalation could have severe implications – for both global markets and shoppers across Europe and the US, as well as international relations, and ultimately, peace in the Middle East.