With a pandemic that upended global trade through lockdowns and travel restrictions still fresh in managers’ minds, international supply chains are again under pressure.
Shippers are facing myriad issues, from the conflict in the Middle East and drought in Central America to strike action in the US, and companies are finding it more difficult – and more expensive – to transport supplies.
Why are supply chains under pressure?
Global shippers have been faced with a growing number of headaches in moving goods over the last year.
At the top of this list is the disruption in the Middle East and the impact on the movement of trade through the Red Sea. Traffic has plummeted by two-thirds through the key shipping route since attacks on vessels by Houthi rebels began last year. The route accounted for 12% of all global trade before the attacks began.
Many companies, including major shipping firms such as Maersk, have all but abandoned the route, instead opting to travel around the Cape of Good Hope, which can add 10 days to journeys, and significant costs.
A fresh flare-up of tensions in the Middle East in recent days has raised fears that even more ships may shun the route.
Peter Sand, chief analyst at shipping analytics platform Xeneta, believes the latest escalation will have a smaller impact, as most container ships are already avoiding the Red Sea.
However, he warns that a “further deterioration in the political situation means a large-scale return of container ships to the Red Sea region seems to be a more distant prospect”.
Separately, traffic through the Panama Canal has also dropped after a drought forced its operator to reduce the cap on the number of ships that could travel through it earlier this year, from 36 a day to 20.
Fears of trade disruption have been further exacerbated by the port workers’ strikes on the east coast of the US.
On Tuesday, nearly 50,000 members of the International Longshoremen’s Association went on strike indefinitely, affecting 14 ports across the east coast of the US.
Marco Forgione, director general at the Chartered Institute of Export and International Trade, said all of these issues have meant “highly fragile” supply chains are facing “exceptional pressures”.
He said Russia’s invasion of Ukraine and the US-China trade standoff, as well as events such as the Baltimore bridge collapse, have added to supply chain pressures.
What has been the impact so far?
The biggest impact from the disruptions has been on the cost for business to transport goods.
Freight companies opting for the Cape of Good Hope route face an added 40% in fuel costs, while container prices have also risen.
According to Xeneta, spot rates for 40ft shipping containers moving between the east Asia and northern Europe stood at $8,587 a container when the market peaked in July – 468% higher than in December 2023, before the Houthi attacks ramped up.
The US port strikes have already affected container prices from northern Europe to the east coast of America, with an average 40ft container costing $2,861 on Tuesday, compared with $1,836 at the end of August.
The disruption, particularly in the Red Sea, has also led to longer lead times for companies.
Earlier this year, manufacturers and retailers said the diversion around Africa to avoid the Red Sea had added four weeks to delivery times.
Carmakers such as Volvo and Tesla have had to suspend production lines because of a lack of parts as a result of the disruption.
Meanwhile, retailers in the UK, including DFS and JD Sports, have said the Red Sea crisis has hit some sales.
Forgione said continued disruption would ultimately hit the consumer.
He said: “Where there is instability and uncertainty, the impacts are either price increases, ‘shrinkflation’, or you’re going to see availability issues.”
What is the outlook for oil prices?
The oil price climbed for a second consecutive day to almost $76 a barrel on Wednesday, from $71 at the start of the week. Some analysts believe it could break $80 within days.
The market is braced for a potential threat to Iran’s crude output by an Israeli retaliation against its oil infrastructure. Goldman Sachs estimates Iran can produce 1m barrels of oil a day. But there could be further disruption to supplies if problems with key shipping routes through the Red Sea affect crude exports from the wider Middle East region.
In an “unlikely tail scenario”, Goldman Sachs warned that an interruption of oil trade through the strait of Hormuz, a narrow waterway at the mouth of the Persian Gulf, would result in a “large oil price spike”.
However, Saudi Arabia has said prices could actually fall, to about $50 a barrel, due to a supply glut as it tries to regain market share.
Could inflation start rising again?
The cost of oil and gas began to soar in 2021, sending inflation above 10% and pushing up the price of everything from food to household energy bills.
Inflation has tumbled back to near the Bank of England’s 2% target over the last year, but left prices more than 20% higher than before the pandemic, giving households a financial shock.
Brexit has pushed up the price of imported goods from the EU, while the US’s trade war with China threatens to widen into a broader battle over tariffs.
The UK is one of the most open trading nations in the world and the scars from the pandemic and two major conflicts are being deeply felt by importers and exporters. If they choose to pass on those costs to consumers, then Britons may face a squeeze on their budgets again.
