Storm in a teacup? Red Sea Crisis strains UK logistics and customs

British tea enthusiasts may soon find themselves grappling with a potential scarcity of certain tea varieties, after the retail industry warned of a risk to supply from shipping disruptions in the Red Sea.

The British Retail Consortium said it had seen "temporary disruption" to some black tea lines, and an industry source said there had been some delays to flavoured lines. Carmakers have already felt the impact, with Tesla in Germany, Volvo Cars in Belgium and Suzuki in Hungary halting certain vehicle production lines.

The Red Sea plays a vital role in global trade. However, recent conflicts in the region have disrupted this vital route, with significant implications for logistics and customs in the UK and globally.

The current crisis in the Red Sea has its roots in the ongoing conflict in Yemen. Houthi rebels have escalated attacks on commercial shipping vessels traversing the lower Red Sea. This has not only disrupted the freedom of navigation, but also heightened global supply chain risks.

The Red Sea, the only route to and from the Suez Canal, handles an estimated 12% to 15% of global trade, predominantly for goods travelling from Asia to Europe. However, the conflict has compelled major carriers to reroute their vessels around Africa via the Cape of Good Hope, resulting in prolonged transit times and decreased cargo capacity.

Opting for the southern Africa route adds an extra 3,500 nautical miles journey, translating to estimated additional costs of up to £1.6 million per trip in fuel and transit expenses. The majority of these costs, amounting to an estimated additional £800,000, are attributed to the increased fuel consumption alone. Container shipping costs have surged, with rates along routes typically passing through the Suez Canal experiencing nearly a five-fold increase. According to the Drewry World Container Index, shipping costs have skyrocketed by up to 400% since early December. Extended routes also lead to longer container bookings, exacerbating container scarcity and resulting in roughly a 30% increase in transit times.

The rise in costs results in increased customs duties and import VAT obligations upon importation. Customs duty and import VAT, payable at the time of import, applies to the total value of the imported goods, which in the UK and the EU, is inclusive of any transportation and insurance costs. Coupled with the overall spike in shipping costs, this could become unsustainable for importers, potentially necessitating the transfer of these expenses to the buyer or end consumer.

Alternative routes are scarce. Some opt to send goods via train to Israel and then by boat into the Mediterranean Sea, while others risk sending goods through Russia. However, neither of these options are ideal. Another, expensive, possibility is sea-air transportation, where goods are shipped from Shanghai to Singapore or Dubai by sea and then flown to their final destination.

Air transport remains an option, albeit considerably more costly due to limited capacity. Currently, sea transport is still more economical than air, but the extended journey time caused by the Red Sea issues is a crucial factor for companies to consider. Typically, companies purchasing products for shipment to the UK subsequently sell them to UK buyers, with contractual obligations often stipulating agreed upon time limits for product delivery. If the extended journey time exceeds these limits, contracts could be jeopardised.

Ultimately, the disruptions in the Red Sea could lead to product availability issues and price rises for imported goods in the UK. With escalating costs and limited alternative routes, importers in the UK will continue to struggle until the conflict is resolved. These increased costs may ultimately be transferred to consumers to alleviate importers' financial burden, or goods may experience delays. Increased costs and delays can create inflationary pressure and reduce economic growth. This could potentially lead to a slowdown in the UK economy, which is heavily reliant on international trade.

So, wait for the potential rush on teabags, if you can take the strain.