Red Sea shipping crisis will toss UK shoppers into new costs crunch

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UK shoppers, who have been enjoying some of the effects of deflation and a marked slowing of price increases, may soon have to pay more for many goods and groceries as the impact of attacks in the Red Sea is already on a par with the 2021 Ever Given incident.

The rising costs associated with shipping goods from Asia to Europe has leapt both for materials brought through the Red Sea or alternatively down past the Cape of Good Hope.

Insurance premiums have leapt in the past month, as Iran-backed Houthi rebels in Yemen began launching attacks on ships they perceived as supplying and exporting goods to and from Israel.

"Red Sea war risk rates jumped from 0.1 per cent to 0.2 per cent, to 0.5 per cent to 0.7 per cent of the insurance value for a transit,” Svein Ringbakken, managing director at Den Norske Krigsforsikring for Skib (DNK), which is the Norwegian Shipowners’ Mutual War Risks Insurance Association, told The National.

That means the extra premium on a $50 million shipment is now £250,000 ($315,605), four times what it might have been just six months ago. So, depending on the type of cargo, going round the Cape of Good Hope actually might more financial sense than going through the Red Sea and the Suez canal.

The big shipping companies have started to re-route their Asia-Europe routes around the bottom of Africa and away from the Red Sea and Gulf of Aden routes which take Europe-bound Asian goods through the narrow Bab El Mandeb and up the Red Sea to the Suez canal.

Going via the Cape of Good Hope means an extra 3,500 nautical miles and $2 million more in fuel and other transport costs.

Safe on the Sea

The independent UK Warlike Operations Area Committee, which is made up of Nautilus International, the RMT union and the UK Chamber of Shipping, recently recommended that seafarers on ships should receive double their salaries on days sailing through the danger zones in the Red Sea and the Gulf of Aden.

Nonetheless, most of the big shipping lines have decided to by-pass the Red Sea for the moment. Maersk made that decision when one of its ships was attacked on December 29 and joined MSC, CMA CGM Group and Hapag-Lloyd in avoiding the area, favouring the route around South Africa.

"This reflects a desire to ensure that seafarers are kept safe," Tom Bartosak-Harlow at the UK Chamber of Shipping told The National.

"As hopefully, through international action, passage through the Red Sea becomes safer, shipping companies will make the decision about when to resume transit through this region based on how safe it is for those on board vessels."

Containing container costs

Rising shipping costs have also been illustrated through the jump in the cost of containers. The widely-used Shanghai Containerised Freight Index (SCFI), increased to $2,694 per container on December 29, up from $1,497 the week before, according to data from global logistics company, DSV.

The index is based on the average cost of shipping a 20-foot container from Shanghai to Europe.

The last time container prices surged was in March 2021 when the Ever Given (owned by the Taiwanese shipping company Evergreen) became stranded and blocked the Suez canal for six days.

About 12 per cent of global trade, about one million barrels of oil and an estimated 8 per cent of liquefied natural gas (LNG) pass through the canal each day.

It has been calculated that the blockage cost the Suez canal between $14 million and $15 million a day.

Figures from Lloyd's List showed the Ever Given's predicament held up global trade valued at $9.6 billion each day, equal to about $400 million worth of cargo an hour, or $6.7 million a minute.

Mr Ringbakken told The National the Ever Given disruption and current tensions at the southern end of the Red Sea are having the same knock-on effect.

"The consequences are similar, the less traffic through Suez, the less efficiency for world trade. Transport costs will increase."

But the two situations are very different at the core, Marco Forgione, director general at the UK’s Institute of Export and International Trade, told The National.

"The issue we face now is that there is a complete lack of clarity as to when this will end or how it will end and unfortunately what the likely escalation looks like," he said.

"So, the impact on global trade is more significant and, I’m afraid to say, this will take a very long time to put right.”

Supply chain strain

The fragility of global supply chains means that when there is a problem is one area prices often rise.

The trouble is, this time there is more than one problem.

Because of a drought last year, traffic through the Panama canal in Central America has been significantly reduced. By February, the canal will have a maximum set capacity of just 18 ships a day – a 50 per cent reduction in normal activity.

Even though Panama has a high-rainfall tropical climate, the drought has meant 30 per cent less rain, leading to lower levels in the lakes that feed the canal's locks.

Some analysts have speculated that many large ships may avoid the Panama canal soon and re-route eastward-bound Asian traffic via the Cape of Good Hope as well.

All of this re-routing not only costs time and money, but it puts ships in the wrong places in relation to the global supply chain.

"A ship taking an additional two weeks to arrive at its destination ports means that those containers aren’t available to be unloaded or reloaded and reused," Mr Forgione told The National.

"So, the global integrated supply chain is fragile, and this disturbance is having a significant impact.

“What’s happening is a destabilisation of a global supply chain, not just the ships that go through Suez or plan to go through Suez."

Prices on shelves

Basic economics says a product's price is found at the intersection of the demand for it and the supply of it. Crimp the supply and the price goes up, assuming the demand remains the same.

British consumers are still mired in a cost-of-living crisis brought about by high inflation and a resultant rise in interest rates. While inflation has been falling rapidly in recent months, shoppers are still facing rising prices.

Tensions in the Red Sea will lead to higher prices for the goods that usually come through the region to UK supermarket shelves, including certain meats, fish and tea.

“Over the coming months, some goods will take longer to be shipped, as they are re-directed via longer routes and there could be a knock-on impact on availability and prices as a result of higher transportation and shipping insurance costs," said Helen Dickinson, chief executive at the British Retail Consortium, which represents the UK's big supermarkets.

"Retailers will work hard to ensure their customers are not affected.”

However, not all agree that retailers will be able to absorb price increases and delay passing them on to to their customers. Mr Forgione told The National the price rises are "going to be beyond anything that can be absorbed currently".

"Over the course of the last few weeks, we’ve seen key indicators like oil, wheat, corn, and iron ore [show] significant price increases.

“Even if the product itself is manufactured in the EU or North Africa, the inputs for those products are dependent on that movement through Suez or around the Cape of Good Hope.

“This is a very tricky situation."