Manufacturers tread water as Red Sea crisis disrupts supply chain

Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index which has risen to 47, Mike Thornton, national head of manufacturing at RSM UK, said: ‘The manufacturing PMI in January continued to show signs of stagnation rising to just 47, up from 46.2 in December, adding to concerns around levels of demand as we enter 2024. 

‘To compound things further, the supply chain has been impacted by the Red Sea crisis and the delayed shipment of materials, which is reflected in the marked decline of the suppliers’ delivery time index to 45.4, down from 51.3 in December. In addition, the input prices index saw a sharp uptick to 53.5, potentially reflecting the consequence of scarcity of material. This latest challenge certainly contributes to overall dampened sentiment, leaving manufacturers treading water and unable to invest or build back margins in the short term. We envisage supply chain disruption continuing through at least Q1.’

He added: ‘However, there are some signs for cautious optimism, as future output rose to 73.1, coupled with new export orders seeing a slight uptick to 47.5. The industry has previously shown its resilience to challenging geopolitical conditions, including the pandemic and the Ukraine crisis, both of which had a far greater impact on manufacturing output. This optimism will also be boosted by less volatile economic conditions, and, if interest rates continue to stabilise, will provide manufacturers with better foundations to consider long-term investment.’

Tom Pugh, economist at RSM UK, said: ‘The deteriorating situation in the Red Sea poses clear risks to the UK economy, especially the manufacturing sector, in the form of both supply disruption and higher inflation. However, unless there is a wider escalation and a bigger impact on commodity prices, the impact would be manageable, and it is unlikely to influence the Monetary Policy Committees decision later today.  

‘The attacks on international shipping in and around the Red Sea have caused significant disruption to shipping routes from Asia and the Middle East to Europe. Indeed, eight of the 10 largest container liners controlling 61% of global shipping capacity are now avoiding passage Bab al-Mandab Strait, the maritime chokepoint linking the Indian Ocean with the Red Sea through which about a third of global container traffic passes. Instead, ships have to travel around Africa, which adds about ten to fourteen days to journey times and significantly increases costs. Spot rates for containers travelling from Asia to Europe have more than doubled in the last month, although they remain well below the rates reached during the pandemic-induced supply chain crisis. All this will undoubtedly cause delays with UK manufacturers and retailers who may be looking at delays of two weeks. 

‘The biggest impact on prices will be for those low-value bulky goods where shipping makes up a significant portion of the total cost. But this isn’t set to be a repeat of the pandemic-induced supply chain crunch. Ports are not congested and there are more ships available for transport than in 2021. The best estimate is that higher shipping costs could add between 0.7ppts to 0.2ppts to inflation in the UK and Europe, but this could grow the longer the situation continues. 

‘However, unless there is an escalation into energy markets, the impacts from the crisis are probably not large enough to warrant the Bank of England taking any action.’