Soaring energy prices hit the logistics industry

The rise of energy prices in western Europe is a major driving force for the current unsustainable financial pressure manufacturing and logistics industries are facing. According to data from TI’s Dashboard, average western European energy costs have risen 19.4% since January 2022, compared to the UK’s sharper rise of 42%. Warehouses and logistics operations can be very energy-intensive, with heating/cooling requirements for large buildings, plant and automation equipment, and transport and delivery costs associated with freight and fleet. Thus, transport, logistics and warehousing companies in particular are facing substantial increases in the cost of energy and materials, with many having to pass on costs to the customers in order to avoid financial losses.

The industry is also struggling with inflated HGV fuel prices, as pump diesel increased by up to 31.05% in the UK, and 19.75% in western Europe, during the first six months of 2022, according to TI data. The cost of warehousing and transporting goods is expected to rise further during H2 2022. As operating costs have continued to rise substantially, resulting in a predicted increase in freight rates across all modes in Q3 2022 compared with Q2 2022.

The latest Office for National Statistics (ONS) Business Insights report shows that more than a third (37%) of transportation and storage businesses reported their turnover had decreased in July 2022, which was the biggest turnover decrease reported across all industries surveyed.  In addition, 28.2% of transportation and storage companies reported that soaring energy prices were their main concern regarding operation costs. In June 2022, 58% of trading businesses experienced an increase in challenges while importing, an increase from May 2022. 

Earlier this year, 37.3% of transport, logistics and storage businesses were forced to pass on higher costs to their customers. This is due to 56% of them facing higher costs as the energy crisis loomed. Consequently, transportation costs were the most commonly reported challenge for importing and exporting businesses, at 43% and 37%, respectively.

As Consumer confidence and industry confidence indices fall, according to data from OECD, we observe the resultant impact of these price hikes on demand. The indices suggest that the cost to transport goods and the broader cost of living squeeze are beginning to impact demand for goods. 

Many haulage and courier companies operate on relatively low margins, so the sector has little protection or wiggle room against increases in fuel and equipment costs. Currently, 67.8% of the transportation and storage industry expects revenue to stay the same. However, if operating costs continue to rise, government intervention might be needed. This is evident as retail and home delivery prices are already climbing, causing a downwards turn for consumption. 

Subsequently, it is consumers that will bear most of the burden for rising supply chain costs, and household expenditure for food and goods is expected to increase in the coming months. In the long run, the skyrocketing energy costs can push logistics service providers to turn to more sustainable supply chain solutions, such as green onsite energy generation and storage, and electrifying their fleets. However, for now, logistics companies might have to hasten their plans to reach their sustainability goals, alongside absorbing some of the costs, near-shoring and other methods to reduce costs related to energy and fuel in the meantime.