With the increasing escalation of the Red Sea crisis, the construction industry needs to stay both aware of and prepared for the financial implications that the crisis may bring. The crisis is highlighting the need for strategic agility and stability in the face of uncertainty as the unfolding situation continues.
Overview
The Red Sea crisis began to unfold in the wake of the ongoing Israel-Palestine conflict. Houthi rebels in Yemen, allegedly funded by and linked with Iran, have shifted from launching missiles at Israel to targeting commercial shipping, escalating tensions. The increased attacks on shipping vessels in the lower Red Sea have hit targets in Pakistan, causing a retaliation response.
The Red Sea connects Europe to Asia and East Africa and is a crucial shipping channel. About 12% of global trade, including 30% of global container traffic, passes through it. Recent security issues in the Red Sea led shipping companies to avoid the Suez Canal route with vessels rerouted around the Cape of Good Hope, seeing delays of between 7-14 days.
In response, the United States government has formed Operation Prosperity Guardian, a coalition with the UK and other nations, to patrol the southern Red Sea and protect vessels.
The Impact on UK Construction
The UK construction industry has, at present, been relatively unaffected by the disruptions in the Red Sea, with around 76% of construction products in the UK being domestically manufactured. The potential for disruption though cannot be ignored. Approximately 24% of construction products in the UK are imported and many more rely on imports for their production. The crisis, affecting shipping, could lead to delayed supply and increased freight prices, meaning construction could see longer waits and increased spending on the same materials.
The Role of Strategic Procurement
Strategic procurement is the process by which a company can make sure that they are able to fulfil the needs of their customers even during unprecedented times like this during the Red Sea crisis. Procurement makes up 40-70% of a company’s total annual spending and can be leveraged for a competitive advantage.
Diversifying supply chains will allow contingency if supply lines from one route is disrupted. In the unlikely event that one supply chain is completely stopped, diversified suppliers across different locations can help to mitigate the impact of disruption.
Early procurement can mitigate against delays and price increases. Early action and anticipation, whilst potentially expensive in the short term, could lead to avoiding further spending and time delays in the future.
Finally, leveraging technology can help to enhance efficiency, help to make more informed decisions and provide better market insights. For example, using technology to recycle your product offcuts more efficiently can lead to better use of your supply. If your supply chain becomes disrupted, then this use of technology can ensure that your company gets the most out of the supply they already have.
Financial Implications
The crisis also poses financial challenges, particularly for smaller or less financially robust companies. Extended waiting times for goods already paid for can strain cash flows and impact overall financial health. Furthermore, companies may need to fund larger amounts of work-in-progress inventory, necessitating additional capital. This situation could exacerbate financial pressures on companies already facing tight margins, potentially leading to increased consolidation in the industry.
This situation highlights the interconnected nature of global supply chains and the ripple effect that disruptions in one sector can have on others. The lessons learned from the pandemic emphasise the importance of having a flexible and resilient supply chain strategy, capable of adapting to sudden changes in the market.
Conclusion
Summarily, the Red Sea crisis is an obvious call for all companies to evaluate and strengthen their procurement strategies. Even in the circumstance that UK construction is minimally affected, strengthening processes within construction should always be contemplated when possible, and navigating crises becomes a skill rather than a consideration to be made.
Timeline Of Events
Date | Event |
8 October 2023 | U.S. Secretary of Defence Lloyd Austin directed the Gerald R. Ford carrier strike group to the Eastern Mediterranean. |
19 October 2023 | U.S Destroyer USS Carney intercepted three cruise missiles and eight drones launched by the Houthi militants in Yemen. |
8 November 2023 | The American MQ-9 Reaper was shot down off the coast of Yemen in the Red Sea by Houthi forces. |
22 November 2023 | U.S Destroyer USS Thomas Hudner shot down multiple drones launched by Houthi groups. |
26 November 2023 | Houthi forces tried to seize an Israeli-affiliated ship near the coast of Yemen. |
3 December 2023 | Carney and civilian-owned commercial ships were attacked in international waters in the southern Red Sea, with anti-ship ballistic missiles fired from Yemen by Iranian-backed Houthi rebels. |
7 December 2023 | The US announced it would impose sanctions on 13 individuals and entities whom it claimed are funding the Houthis. |
14 December 2023 | Mohammad Reza Ashtiani, Defence Minister of Iran, said that any naval coalition formed by the US would face major problems. |
16 December 2023 | While operating in the Red Sea, Carney successfully shot down a barrage of 14 unmanned aerial system (UAS) one-way attack drones launched from Houthi-controlled areas of Yemen. |
19 December 2023 | US Defence Secretary Lloyd Austin announced that the US had formed a coalition of ten nations who would send ships to assist in fighting against attacks on shipping in the Red Sea. |
21 December 2023 | Defence Minister of Greece Nikos Dendias announced in a televised address that Greece will join the US-led coalition. |
1-10 January 2024 | Manufacturing supply chains were impacted by longer wait times for container freight during January in the wake of the Red Sea crisis. |
17 January 2024 | The MV Genco Picardy, a US-owned bulk carrier, became the latest victim of Houthi rebel assaults on commercial ships sailing through the Red Sea. |
21 January 2024 | Hundreds of cargo ships are being rerouted around the southern tip of Africa to avoid Houthi attacks in the Red Sea. |
22 January 2024 | Two Navy SEALs, Navy Special Warfare Operator 1st Class Christopher Chambers and Navy Special Warfare Operator 2nd Class Nathan Gage Ingram, who went missing during an operation to seize Iranian weapons bound for Yemen’s Houthi rebels off the Somalian coast, have been declared dead. |
23 January 2024 | The Houthis traded fire with fire once again, claiming they had carried out a strike on an American navy heavy load ship called Ocean Jazz. |
24 January 2024 | The UN trade and development body, UNCTAD, warned that attacks against shipping in the Red Sea by Houthis are devastating for global trade and supply chains. |
25 January 2024 | Greece announced that it will join the US-led coalition. |
26 January 2024 | A British-linked container ship, the Martin Luanda tanker, caught fire in the Gulf of Aden after it was hit by a missile fired by Houthi rebels. |
28 January 2024 | Three US service members were killed and at least two dozen were injured in a drone attack overnight on a small US outpost in Jordan. |
30 January 2024 | Joe Biden confirms the USA have “decided on a response” to the Jordan incident but “doesn’t see a need for a war in the Middle East”. |
18 February 2024 | Belizean ship Rubymar attacked by anti-ship missile strikes, leading to an 18-mile oil spill and new environmental disaster. |
2 March 2024 | Belizean ship Rubymar sinks after 34 miles of drift, marking the first such loss of the Red Sea Crisis. |
Additional Resources and Further Reading:
For those interested in delving deeper into the topics of global trade, supply chain management, and strategic planning in the face of geopolitical disruptions, the following resources are recommended: