Neil Farmer ponders the ongoing Red Sea military standoff and related implications for the FMCG sector
In the last few weeks of 2023 and opening months of the New Year we have witnessed events in the Middle East which could have huge ramifications for the FMCG industry.
I refer to the importance of the Red Sea shipping routes, which have been affected by Iranian-backed Houthi rebel attacks. Recent air strikes by US and UK fighter jets in response to the Houthi`s actions could have the effect of plunging the whole region into a full-blown war.
If shipping companies continue to be forced to switch to longer routes, economic consequences will inevitably increase. Inflation will prove more stubborn to control. Supply chain issues leading to shortage of products on the shelf, will ensue. This will mean that the expected interest rate cuts could be delayed and an economic recovery could grind to a halt.
Consequences of supply chain disruption
As I write this, there is a consensus in the FMCG industry that retailers and brands are better prepared to avoid the difficulties that occurred during the pandemic and the Suez Canal blockage in 2021. There is an argument that businesses have mitigated risks to their supply chains over the intervening period. However, there are rising concerns that supply chain disruption leading to soaring prices could lead to shortages of products on shelf, severely impacting the consumer and UK economic recovery.
There are some significant indicators as to what is at stake. Statistics from Project 44, an organisation that undertakes real-time tracking of goods in transit, revealed at the end of January that 373 vessels had been rerouted from the Red Sea since the first attacks in December. 15 percent of global seaborne trade normally goes through the Red Sea. Up to 20 days is the additional time of transit it takes to reroute vessels around the Cape of Good Hope. Oxford Economics said the cost of shipping a container from Asia to Northern Europe has risen from $1,500 in early December to $5,300 at the start of February. The S&P Global survey of activity in the UK manufacturing sector said the disruption is contributing to higher average input costs in January, with some costs being passed on in higher prices. The damaging effects of a prolonged conflict are clear for all to see.
Alternative shipping routes
Companies are able to reroute trade to avoid the Bab al-Mandab strait in the Red Sea, where the attacks have occurred. However, as intensification of the conflict escalates to other areas in the Middle East, there could be even greater consequences for the FMCG industry. One such pressure point is the Strait of Hormuz, between Iran and Oman, which is integral to the safe passage of international oil tankers. A lack of alternative export routes could see oil prices spiralling if Hormuz were to close.
Add to this the issues in the Panama Canal, where a drought has constrained the passage of ships travelling through the region, it becomes clear that global markets are facing a period of uncertainty, as the year progresses.
For the FMCG industry, lead-times are likely to be stretched over coming weeks as the situation continues. Supply of products could become an issue and inflationary pressures inevitable. The mood is positive at present and national governments seem intent on protecting supply routes for UK and US businesses, as the recent air strikes demonstrate. Nevertheless, optimism for 2024 is under threat as global geopolitical events again take centre stage. The global market recovery, which saw equities soar in late 2023 and early 2024 to near record levels and inflation reigned in, could take a severe hit in the coming months.
Neil Farmer needs no introductions. One of the world’s leading authorities on packaging and a fellow of the Institute of Packaging. Regular headline speaker at packaging shows and forums around the world. Author of: Trends in Packaging of Food, Beverages and other Fast Moving Consumer Goods, published by Elsevier
