Red Sea shipping attacks threaten to rekindle UK inflation

The Houthis say they are punishing ships linked to Israel but this claim has been called into question by the secretary general of the International Maritime Organization, Arsenio Dominguez, who told the UN Security Council last week that “this doesn’t seem to be the case at the moment”. At least 18 shipping lines so far have rerouted their vessels around South Africa to avoid passing through the Bab al-Mandab Strait at the southern end of the Red Sea, where limited room for manoeuvre allows the Houthis and their Iranian sponsors to cause maximum disruption at relatively minimal effort and expense.

Danish shipping giant Maersk pulled its vessels from the Red Sea in favour of the longer route around the Cape of Good Hope “for the foreseeable future” after militants attacked one of its ships on January 1. Maersk controls about one-sixth of global container shipping, and the alternate route adds as much as three weeks to delivery times.

The extra time also leads to extra costs in the form of bigger fuel and salary bills. For those that continue moving safely through the Red Sea, there are extra insurance costs with the increased risk level. All of this will ultimately be passed on to consumers of the goods on board.

READ MORE: UK ‘considering air strikes’ on Houthi rebels to stop Red Sea attacks

Furniture retailer Ikea was among the first to warn of potential knock-on effects in the days before Christmas, saying that it was “evaluating other supply options to secure the availability of our products”.

“The situation in the Suez Canal will result in delays and may cause availability constraints for certain Ikea products,” the world’s biggest furniture retailer said. “We are in close dialogue with our transportation partners to ensure the safety of people working in the Ikea value chain and to take all the necessary precautions to keep them safe.”

UK fashion giant Next said much the same last week as it issued a trading update following strong festive sales and predicted “zero inflation” across its shops in the coming year.

“It [the diversion of shipping vessels] could add another two to two and a half weeks to lead times in terms of getting stock to the UK,” chief executive Lord Simon Wolfson told reporters.

“Because the ships have to travel further, there will be some level of surcharges. It will impact on sales if this persists for a long time, but not dramatic levels.”

Although Lord Wolfson described the situation as “an inconvenience, not a crisis”, there are mounting concerns that prices for UK shoppers could be pushed higher just as surging inflationary pressures have finally begun to ease. This could spell further trouble for a retail sector still in recovery from the economic rollercoaster of the past three years.

READ MORE: Festive joy at Next tempered by warning of stock shortages

Between 12% and 15% of global trade moves through the Red Sea, but volumes have fallen from roughly 5.5 million metric tonnes in late November to some 2.6 million metric tonnes at the start of this month. This level of decline has not occurred since the obstruction of the Suez Canal by the Ever Given cargo ship in 2021.

The situation is unfolding at the same time as the Panama Canal – which handles 8% of global shipping volumes – is at reduced capacity due to drought. Shippers had been using the Red Sea as an alternate route.

Both waterways are critical to international trade. In addition to consumer goods there are also oil and energy products coming from the Middle East, as well as machinery and parts necessary for manufacturing, so supply chains will be affected at several different levels.

The impact of all of this on freight rates has been sizeable, but not as astronomical as at the peak of the Covid crisis. Spot rates for shipping goods from Asia to northern Europe are up 173% compared to before shippers started rerouting vessels, according to a report from booking and payments platform Freightos. Though rates are likely to rise further, Freightos predicts they will remain anywhere from 45% to 75% lower than during the height of supply chain issues in 2021.

Still, there is now a scramble on to reserve space on vessels ahead of the early February deadline to get goods out of China before factories there close for extended Lunar New Year celebrations. There are also reports that vessel owners have started rationing less expensive contract-rate space that customers can reserve.

Some experts say the biggest impact will likely be in the coming six weeks as diversions cause a shortage of vessel space and strand empty containers needed for China in the wrong places. With many large retailers due to receive their summer inventory in the coming weeks, that could be when consumers start to really feel the impact of what’s happening.

The UK has joined Operation Prosperity Guardian, a naval coalition headed by the United States, to protect shipping in the canal but this has so far had little success in slowing the pace of Houthi attacks. Guaranteeing security will be difficult without escalating conflict in the region, where tensions are already extremely high.

On a more positive note, senior analyst Judah Levine of Freightos notes that carriers are much better equipped to accommodate current shipping diversions when compared to the disruptions during the pandemic. In large part this is down to an oversupply of new shipping vessels coming into service which should keep goods moving, but will only go part-way in stemming rising costs while attacks continue.