The UK retail supply chain is prepared for the Middle East conflict. But resilience isn’t cost-free, says Logistics UK head of trade policy.
This week, escalating tensions in the Middle East following the US strikes on Iran have renewed instability around the Strait of Hormuz, sent oil markets reacting sharply, shipping lines reassessing risk and once again placed global supply chains under scrutiny.
But for UK retail, still recalibrating after Covid and Red Sea disruption, the question is no longer whether the system can cope, but at what cost.
Logistics UK head of trade policy James Mills says the supply chain sector is better prepared than it was five years ago, but warns that this resilience comes at a price.
Immediate reaction
This week gas prices surged 93 per cent, its highest level for three years, while Brent crude oil benchmark briefly rose above $85 a barrel for the first time since July 2024.
The disruption to the oil trade came as a result of tanker traffic grinding to a halt after Iran declared the Strait of Hormuz closed, the crucial waterway in which one fourth of the world’s oil and gas exports travel through each day.
And despite calls from countries such as China for protection for vessels in the Strait of Hormuz, no international action has yet been taken to reopen the vital sea passage.
As a result, shipping markets have moved quickly in response to escalating tensions, with some vessels travelling between Asia and Europe are now rerouting around the Cape of Good Hope rather than passing through the Red Sea corridor, tightening effective vessel availability and pushing up costs.
“Ships re-running around the Cape of Good Hope can add 10 to 14 days to Asia–Europe journeys,” says Mills. “That’s significantly increased fuel burn, and that obviously translates into higher operating costs.”
He is clear that while these supply chain contingency options exist, air freight, rerouting and alternative lanes, they are not without consequence.
“There’s obviously a price that comes into that effect. These things aren’t cost-free. The sector is highly adaptable, but that 10 to 14-day delay builds in cost pressures. The system can adapt and reroute, and that’s what logistics is great at, but resilience doesn’t mean it’s cost-free.”
It is, however, not all bad news. In Mills view, the industry is entering this period of disruption in a stronger position than it did in 2020.
“UK retail is probably far better prepared than it was during Covid,” Mills said. “Supply chains are more diversified, and stock management is more sophisticated, and there’s much greater contingency planning.”
Fuel, cost pressures and inflation risk
However, if geopolitical conflict escalates and shipping disruption persists, the bigger issue is not availability but inflation as the energy markets respond rapidly to geopolitical events, says Mills.
“All markets react pretty much immediately to geopolitical risk,” he warns. “Wholesale fuel markets can adjust within days.
“Fuel is one of the largest input costs in logistics, and sustained increases move through freight contracts relatively quickly. Retail pricing effects tend to follow if volatility persists.”
The first areas to feel the strain are the most energy-intensive parts of the system. “The pressure is felt in road haulage, maritime and air freight, because energy is such a core input. From there it builds through transport contracts and margins.”
While container freight rates have not surged uniformly in every lane, the perception of risk has triggered war-risk surcharges, tighter insurance capacity, and higher war-risk premiums for vessels operating near Middle Eastern waters, in some reported cases rising by 40 to 60 per cent or more.
Data from the London Stock Exchange showed the benchmark freight rate for Very Large Crude Carriers (VLCCs), the vessels used to transport 2 million barrels of oil from the Middle East to China, soared to an historic high of $423,736 per day on Monday, up 94 per cent on Friday.
Meanwhile yesterday (4 March), gas producer giant QatarEnergy, responsible for 20 per cent of global liquified natural gas (LNG), declared “force majeure”, essentially excusing it from fulfilling existing contracts. It is understood even once gas production is restarted, it will weeks for the company to reach full capacity again.
And certain product categories are more exposed than others, impacting various area of the global supply chains more than others. “Fresh produce and time-sensitive goods are probably the most exposed to transport disruption,” Mills adds.
“They have to arrive within a certain window to remain classified as fresh. Refrigerated goods need consistent cold-chain logistics, and high-value goods moved by air can see cost pressures if airspace capacity tightens.”
Yet, beyond specific categories the soaring on fuel prices ultimately remains the biggest factor in supply chain volatility. From transport, freight, cold-storage and warehousing, Mills warn they all rise in cost as fuel prices climb.
“Fuel is the transmission mechanism. It affects pretty much every category to some degree because transport underpins it all.”
Outlook: embedded volatility and long-term risk
Whether these pressures are ultimately absorbed or passed on to consumer’s through higher shopping basket prices depends on how long disruption persists. Mills frames duration as the central unknown.
“Short-term volatility can be absorbed. But sustained increases in fuel and freight costs are difficult to contain indefinitely. Duration is the real big issue, that’s the unknown.”
There is also a broader structural risk. Mills warns that “volatility becoming the new normal” could suppress long-term investment in logistics infrastructure, making carriers and service providers more cautious about capital expenditure even as they navigate elevated operating costs.
“It’s very hard for businesses, with small margins and large overheads, to invest confidently in a volatile environment… it suppresses investment and raises price levels.”
This viewpoint aligns with what the UK retail sector is currently saying with British Retail Consortium director of food and sustainability Andrew Opie warning that if goods are re-directed via longer routes there could be knock-on effects on availability and prices, particularly if elevated energy costs remain in place for an extended period.
“Since energy is a significant component of our production costs, sustained increases directly impact the prices of the goods we sell,” warns Opie.
But ultimately, both Mills and Opie say, the UK retail sector has faced this instability before.
“We saw this following the Russian invasion of Ukraine, when higher energy prices drove up manufacturing costs,” Opie says.
“Retailers and their suppliers are adept at managing this type of disruption, with recent experiences of challenges to shipping in the Red Sea, and will work hard to minimise the impact on customers.
Mills adds that, right now, it is too premature to worry about the worst-case scenario, such as retailers reassess their supply chain, looking to localise and simplify.
“We’re not in that position today. The duration of instability will determine sort of the economic impact, he says. “The priority is to keep them going and adapt by rerouting where necessary.”
Yet, against that backdrop, there are things that can be done today to mitigate future impact. Logistics UK has urged government to avoid compounding the problem domestically. As Mills puts it, “You want to avoid additional domestic cost pressures, such as fuel duty increases. That’s why our CEO has called for fuel duty to be frozen rather than increased.”
When it comes to geopolitical crisis and its impact on the supply chain, a short-lived spike can be managed, however, a prolonged period of elevated energy costs and rerouted trade risks embedding higher costs across supply chains.
The final line is that while UK retail may be better prepared than it was during Covid, as Mills makes clear, preparation does not eliminate exposure, and that system can absorb the strain before the bill starts to travel further down the chain.
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