What effect will Red Sea attacks have on construction inflation?

Approaching three months since the vehicle carrier Galaxy Leader was seized by Houthi rebels on 19th November, there’s no clear end in sight to attacks on commercial shipping in the Red Sea. 

The Suez Canal route is an important global trade artery, not just for manufactured goods but also for oil and gas. The longer the attacks go on, the more of an inflationary effect they are likely to have on imported goods and materials. 

Dr David Crosthwaite, Chief Economist at BCIS, considers the possible impact on the UK construction industry. 

What effect will Red Sea attacks have on construction inflation? 

The Drewry World Container Index, which tracks the freight costs of 40-foot containers via eight major routes, is up 158% on 16 November 2023, the last update before the first attack. 

In that time, the average freight cost of transit from Shanghai to Genoa has risen from $1,449 to $5,225, a 261% increase. The cost of shipping from Shanghai to Rotterdam has also increased by 261% in the same period. 

While insurers aren’t pulling cover for Red Sea transits, war risk premiums, calculated as a percentage of a ship’s value, have increased.  

The situation, although fluid, is that many ships are now taking the longer route around the Cape of Good Hope in South Africa to avoid transiting the Suez Canal. This adds an estimated 10-12 days to the shipping time from Asia and of course increases the cost of containers arriving in Europe. 

There is also the environmental impact of sailing extra miles at sea. Reports this week suggest some shipping companies, which have typically engaged in ‘slow steaming’ to reduce fuel consumption and emissions, are speeding up to reduce delays.  

Further, the International Union of Marine Insurance (IUMI) this week reported that there is also restricted movement through the Panama Canal due to low water levels, with daily transits expected to halve from 36 to 18. 

What does the situation mean for the construction industry in the UK and is there anything that can be done to mitigate hiked costs? 

It’s clear that any protracted disruption could be inflationary for the wider economy and the construction sector specifically. While we have been here before – the stranding of the Ever Given in the Suez Canal in 2021 held up an estimated £7bn of goods a day – the context is completely different, and military intervention has not so far deterred the Houthi rebels. 

Construction increasingly relies on imported materials and components to function efficiently. These are now often part of a just-in-time delivery strategy, which dispenses with the need to stockpile, but is an approach that relies on supply chains working seamlessly. The current situation will likely impact the working of that supply chain if the crisis lasts for any length of time.   

According to the Department for Business and Trade, the value of imported construction materials into the UK in 2023 was around £25bn per annum. The top five imported materials were electrical wires, sawn wood, air conditioning equipment, structural steel and linoleum floor coverings.   

The largest proportion of imports came from China, accounting for about 20% of the total. The extra costs will inevitably be passed on by the shipping companies to the manufacturers, who in turn will pass them on to their ultimate consumers.   

The severity of any impact will be governed by the length of time the problems persist for. If there is protracted disruption, then the likelihood is that we will see inflationary impacts start to seep through to construction on the ground, driven by shortages and cost increases. 

To mitigate any potential impacts, supply chain managers could stockpile materials that they know will be needed, consider air freight as an alternative, or seek import sources closer to the UK, thus avoiding the Red Sea route. 

The situation doesn’t seem to have reached crisis levels for the construction industry yet, but developers and contractors may want to act now to avoid the worst of any potential impacts that may develop if the crisis was to escalate or persist for a long time.   

After coming through soaring inflation, which saw materials costs skyrocket, and the industry eagerly anticipating an easing in interest rates, the Red Sea attacks are yet another demonstration of how vulnerable construction is to external forces and, significantly, to geopolitical events.   

Far from leaving behind a period of uncertainty, events in 2024 have the potential to pile further pressure on the industry. Aside from domestic politics and the UK general election, it is a global election year with some 76 countries scheduled to hold elections in 2024.  

Changes in governance and shifting policies will have far-reaching ripple effects, both at home and abroad. Many of these could impact on resources relied upon in construction – not least a steady and reliable supply of materials and components to site.   

After Brexit, Covid-19 and Russia’s invasion of Ukraine, the industry has had to become more resilient. The Red Sea is a further test, but it’s unlikely to be the last of the year, and maybe not even of the quarter.

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