The Red Sea Crisis – what does it mean for me?
As canals go, the Suez Canal is a pretty important one. It’s only around 30km long, making your little jaunt down the Norfolk Broads seem positively epic in proportion. But what it lacks in distance, it makes up for in significance to the global supply chain.
It is estimated that around 50 container ships pass through the Suez a day, more than its equally fabled Central American counterpart the Panama Canal. These ships are responsible for around 12% of global trade [The Guardian], providing vital passage for shipments from Asia to Europe and North America.
This was evident in 2021, when the Ever Given container ship crashed in the canal, blocking it for six days in what became a global news story. According to the BBC, this blockage cost approximately $400 million and blocked 3.3 million tonnes of cargo an hour, or $6.7 million a minute. Truly staggering sums, felt by all consumers globally, particularly given it occurred in a point in time when the shipping industry was creaking under the pressure of the COVID-induced demand for goods.
The recent attacks on cargo ships in the Red Sea (the stretch of water leading to the Suez Canal) by Houthi rebels poses a far greater and longer-term threat. Having started in November 2023, the events are forcing shipping firms into a difficult decision: proceed via the Suez and accept the risk or avoid the region altogether and re-route around the Cape of Good Hope.
Both strategies come with weighty implications. Insurance costs have sky-rocketed as a result of the attacks, making the same journey considerably more costly, aside from the other myriad considerations when sailing through a pirated shipping lane. In contrast, the safer option of re-routing shipments around the Cape of Good Hope adds about 3,000-3,500 nautical miles (6,000km) to journeys connecting Europe with Asia, adding about ten days to the duration of the trip, according to the Dutch bank ING. This will in turn likely have a knock-on impact for turnaround times at ports in the UK and large European hubs such as Rotterdam, Antwerp and Hamburg.
So what does this mean for FMCG retailers? Well, put simply, in the short-term the availability of certain goods is likely to be impacted. A recent statement from leading clothes retailer Next is unlikely to be the last, with their plight particularly acute due to a heavy reliance on sourcing from Asia. How much this affects individual brands, products and supply chains within FMCG – natural and organic specifically – is difficult to predict, but it is likely. Having multiple brands and/or suppliers of the same product is likely to be necessary at times over the coming months for retailers looking to keep certain products on shelf.
Longer term, the price of shipping – and therefore oil – is likely to rise, adding fuel to inflationary pressures that global banks have been working hard to stamp down over the past couple of years. This will inevitably filter down to the cost of goods, and therefore the price to the consumer, although how much it is felt is yet to be seen; it may simply be a more gradual decline to inflation as opposed to a further rise. I must confess I am not an economist, and a more informed insight is likely to be available elsewhere for those interested.
What is clear is that the recent actions of Western governments clearly shows the severity of the situation, and how grave a threat the destabilization poses to international trade, and in turn their own domestic economies.
With no obvious end to the conflict in sight supply chains will continue to adapt, but the effects will likely be felt by all in the retail chain for some time to come.
By Tom Campbell-Smart, operations director, Brand Organic