Rising diesel prices are only part of the risk. Supply disruption could have much wider implications for manufacturers.
Manufacturers have spent years managing energy as a price risk. The next question is whether they are managing fuel as a supply risk.
September’s UK manufacturing PMI contained plenty to support the view that the sector remains in recovery. It also contained a warning on costs. Input-price inflation accelerated for the first time in four months and factory-gate prices rose again, extending their current run of inflation to ten months. Among the factors manufacturers linked to rising transportation costs was diesel.
Three days after the survey window closed, the average UK diesel price reached a record 199.18p per litre. Within the following week, by 2 October, it moved above £2.
That makes diesel an obvious cost issue for manufacturers, but focusing solely on price misses another question: what happens if the issue stops being what fuel costs and becomes whether it is available when you need it?
For most manufacturers, diesel sits somewhere in the transport or freight assumptions in the budget. It affects inbound raw materials, inter-site movements and outbound finished goods, usually through the rates and fuel surcharges charged by logistics providers. When diesel rises in price, the mechanism is reasonably familiar with hauliers passing on some or all of the increase, and manufacturers either absorb it or attempt to pass it through themselves with margins adjusting accordingly. This can be painful, but it can be modelled.
However, availability is different. A delayed delivery of a critical component can stop a production line irrespective of whether the manufacturer was prepared to pay another 5% for the freight. A finished product that cannot leave the factory cannot be invoiced. A just-in-time supply chain without transport rapidly becomes a production problem rather than a logistics problem.
Diesel is becoming a supply risk
And this distinction is starting to matter more because the structure of UK fuel supply has changed.
Britain now has four operating refineries following the closure of Grangemouth as a refinery and the closure of Lindsey. Grangemouth is now an import terminal, while the loss of domestic refining capacity has increased the importance of imported product.
Our domestic refiners met around 55% of UK road-diesel demand in 2024, which was before the Grangemouth and Lindsey closures took effect. Diesel represents a substantial proportion of UK petroleum-product imports, with the United States an important source alongside European refining centres including the Netherlands and Belgium.
Greater import dependency does not automatically mean greater risk. The UK imports a vast range of commodities through deep and liquid international markets every day. However, it does change the nature of the UK’s exposure.
A domestic refining system carries production risk. Greater import dependency adds shipping, ports, overseas refinery availability, international pricing, export policy and geopolitics to the chain. The number of things that have to continue working increases and is more relevant this autumn as ExxonMobil’s Fawley refinery, the UK’s largest, entered planned maintenance at the end of September with work scheduled into November. Fawley represents a significant proportion of our remaining refining capacity and is an important supplier of road fuel.
The concern is the combination of pressures. UK refining capacity has fallen, import dependency has increased and the country’s largest remaining refinery is undergoing scheduled maintenance. At the same time, diesel prices have risen and manufacturers are reporting higher transport costs and longer supplier delivery times.
There is a distinction here that now matters in a boardroom. A price increase can be absorbed, passed on or negotiated but an unavailable delivery cannot.
The contrast with electricity is also interesting. The British Industrial Competitiveness Scheme opened for applications on 1 October and will provide qualifying manufacturers with exemptions from certain policy costs within industrial electricity bills. Eligibility is determined principally through SIC and product classifications and minimum electricity consumption, with the main exemptions beginning during 2027.
Whatever view you take of the scheme’s design, industrial electricity affordability is recognised as a competitiveness issue. There is no comparable mechanism around diesel, which is understandable because the problem is fundamentally different. Electricity policy can alter levies and support particular industrial users. Diesel is a globally traded commodity whose UK resilience depends increasingly upon refining capacity, imports, storage, logistics and functioning international markets.
What does this mean for manufacturers?
For manufacturers, the practical response therefore starts with understanding fuel exposure rather than simply fuel expenditure.
Boards should know how fuel surcharges operate within their principal freight contracts, how frequently they reset, which benchmark they use and whether there are caps or floors. Contracts written when diesel was substantially cheaper can behave very differently at today’s prices and in-built price escalators can be substantial.
The next issue is freight carrier resilience. On critical inbound routes, is there a second carrier and has that carrier actually run the route? There is a considerable difference between having an alternative logistics provider’s telephone number and having a tested contingency arrangement with agreed terms, available equipment and drivers who understand the collection and delivery points.
The exercise then needs to go further down the supply chain. A manufacturer can have robust logistics arrangements itself and remain exposed because a critical tier two or tier three supplier does not.
Smaller suppliers are already experiencing significant cost pressure, as September’s PMI highlighted. They may also have less purchasing power and fewer options when it comes to alternative carriers and contingency arrangements.
This creates a financial problem as well as an operational one. If uncertainty over supply and cost increases, one rational response is to carry more inventory. But additional stock requires additional working capital and the ability to fund, so the businesses with the least capacity to absorb disruption can also be the businesses least able to finance the obvious protection against it.
Procurement may see continuity risk. Finance may see working capital. Operations may see stock cover. The board may see margin. But these are not separate exposures simply because they appear in different reports.
Four questions boards should be asking
1. How many days of production depend upon inbound deliveries that have no tested alternative carrier or route?
2. Which critical suppliers have the least ability to absorb another increase in freight costs or the working-capital requirement of carrying additional stock?
3. What assumptions about fuel prices and surcharges sit inside fixed-price customer contracts, and when can those contracts next be repriced?
4. If availability tightened, rather than simply becoming more expensive, which customers, products and production lines would be prioritised?
Answering those questions requires manufacturers to connect operational resilience with cash flow, working capital and margin. FRP can help businesses stress-test those assumptions, understand where vulnerabilities sit and assess the financial impact of different supply scenarios.
Manufacturers have become considerably better at understanding energy-price exposure over the past few years. They have hedged where they can, improved efficiency, modelled different price scenarios and become more sophisticated about what an energy shock does to margin.
Fuel currently deserves the same attention, but with one important difference. The critical assumption should no longer be only what it will cost. It should also be whether the supply chain still works if getting it becomes more difficult.
A price increase can be passed on, absorbed or argued about. A non-delivery cannot.
