Red Sea crisis risks pushing up prices and threatens wider escalation of conflict
- US and British forces attack Houthi bases in Yemen, believed to be responsible for attacks in the Red Sea.
- Oil gains ground amid concerns about a widening of the conflict in the Middle East.
- British government claims ongoing attacks could see energy prices rises substantially.
- Concerns increase about the potential for inflation to rise again due to conflict.
- Tesla is the latest multinational to announce product disruption due to re-routing of shipping.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Inflationary risks are front and centre again, as the US and the UK and their coalition allies strike targets in Yemen, amid warnings from major companies that shipping delays could see prices ramp up.
While the military action is aimed at incapacitating Houthi rebel units and limiting attacks on shipping, which has caused such widespread disruption, there is concern that it could lead to a wider escalation of conflict in the Middle East.
Oil prices have climbed sharply following the attacks, with Brent Crude now around 7% higher since early December, before Houthi rebels began targeting ships in the Red Sea. Reports coinciding with the UK/US military action suggest the British government is modelling scenarios which could see prices rise by $10 a barrel, if the Red Sea crisis continues, with gas prices at risk of going up by 25%. While its highly uncertain what trajectory energy prices will take, especially given the disruption to trade and the slowing global economy, risks of further price rises will be monitored closely by central bank policymakers. With major manufacturers and retailers warning of significant delays to products and components, the price of a vast range of goods threatens to march upwards again.
There are concerns that the current chaos could last for many months, which will be a huge headache for companies around the world, with 20% of shipping already disrupted. Already global trade has been knocked, falling 1.3% in December, largely because of the big fall in shipments through the Red Sea. Data from the German economic institute IfW Kiel has indicated that the number of containers travelling through the region had dropped 60% from around half a million in November to 200,000 last month.
With ships heading from Asia to Europe being re-routed around the South of Africa, it is taking, on average, an extra ten days, and costs per ship are going up by $1 million dollars, due to the delays and higher fuel bills. At least 20% of global shipping is being disrupted by long journey times and port congestion. The risk is that supply chains are tightening up around the globe, increasing the risk of bottle necks which could once again fuel inflation.
Disruption for companies
A shortage of components has prompted Tesla to announce a two-week shutdown of its Berlin gigafactory. This will affect most of the manufacturing plant’s production and is a big spanner in the works for production of the Model Y SUVs. The company has flagged that it could lead to around 5,000 – 7,000 vehicles not being built. It will be a fresh blow to Tesla’s production targets and comes amid fierce competition from Chinese manufacturers, with BYD knocking Tesla off its perch as the world’s top EV producer. The China based automotive giant Geely, which owns Volvo and Lotus, has also flagged that there would be a delay to deliveries of EV models in Europe.
UK grocery giant Tesco said this week that prices could go up in store due to the knock-on effect of the re-routing away from the Red Sea. It’s flagged that the rise in shipping costs could end up being passed onto the customer, but stressed the situation was still uncertain. Earlier this month Next warned of delays of up to two and a half weeks on deliveries, with most of its stock expected to be affected. If Spring ranges appear on shelves later, it’s likely to affect sales growth. Ikea has also highlighted that there may be availability constraints for some products. Footwear manufacturer Crocs has also cautioned that deliveries to Europe could be delayed for a few weeks.
While consumers have become used to a shortage of products on shelves, particularly given the pandemic experience, the prospect of prices rising as well will be harder to bear, particularly given the pain of inflation of the past two years.”
