Fuel and Freight Costs in Australia: What to Do While the Strait of Hormuz Stays Shut
The surcharge line on your freight invoices now moves more than the base rate you negotiated last year. Your transport provider has reset its fuel levy three times since March. Inbound containers cost more than they did in January, and your suppliers are adding surcharges of their own on top. And the thing you were waiting for, the crisis ending so prices could settle, has now failed to happen twice.
Fuel and freight costs are the biggest cost shock most Australian supply chains have faced since 2021. Unlike the pandemic, this one hits every kilometre of domestic freight, not just the ocean leg. This article sets out what has actually happened, why Australia is more exposed than almost any other economy, what to do in the next 30 days, and the two moves that fix the problem properly rather than patching it: going to market on freight the right way, and getting your network design right for a world where diesel is expensive and unreliable.
What has actually happened
The Strait of Hormuz has been disrupted since late February. The crisis began on 28 February 2026 with the US and Israeli attacks on Iran, tanker traffic through the strait fell to near zero, an interim truce broke down on 8 July when Iran struck commercial ships, and although Middle Eastern oil exports had recovered above pre-war levels by mid-October, the federal government’s update on 31 October still put Australia’s diesel stocks at 34 days of consumption and aviation fuel at 29, with 43 fuel ships on the way and reports of four tankers on fire in the strait in the previous 24 hours.
Australia is unusually exposed. Roughly half of the country’s diesel imports trace back to Persian Gulf crude refined in Singapore, South Korea and Malaysia, and when tanker traffic collapsed in late February and March, shipments to Australia were cancelled or deferred and the government had to scramble for alternative supply from the United States and Europe. Australia is the world’s largest importer of diesel, which powers long-range freight, mining and agriculture, and the stockholding figures the government prefers to quote have been declining. Hundreds of service stations ran dry after the strait closed, and on 10 April Australia signed a bilateral deal with Singapore to supply refined fuel in exchange for LNG.
The cost has flowed through fast. Wholesale diesel has risen more than 67 per cent since early March and surcharges of 8 to 10 per cent are now appearing on building projects and freight contracts across the country. Every major carrier has applied emergency fuel surcharges on all Australian trade lanes, spot air freight to Europe is up more than 35 per cent since March, and Toll, Linfox, StarTrack and Australia Post have all lifted their fuel surcharges. Australian manufacturers’ input costs hit a four-year high in April, with output price inflation among the fastest in the decade-long history of the S&P Global PMI, and the headline index was propped up by safety stock building rather than real demand. It is not only fuel: Australia had secured only 20 per cent of the urea it needed for the current farming season, has had no domestic urea manufacturing since Gibson Island closed in 2023, and the government has launched a national food supply chain assessment.
Businesses are responding, mostly by passing it on. BSI found one in three Australian businesses plan to raise prices in the next six months, 39 per cent have been hit by geopolitical events and 29 per cent by raw material shortages, 79 per cent are nearshoring or planning to, and one in four expects to cut jobs or recruitment because of supply chain pressure. The uncomfortable finding sits underneath all of that: Proxima’s research found more than half of Australian businesses would stumble within three weeks of a major supply chain disruption, one in five within a fortnight, and only 5 per cent could hold out for four to six months, the weakest result of any major economy.
Why this one is different from the Red Sea
The Red Sea disruption of 2024 was a freight problem. Ships went around the Cape, transit times stretched, rates spiked, and the cost landed mainly on the ocean leg. Painful, but contained.
This one is a fuel problem, and it lands on every leg. The Strait of Hormuz has no bypass, which is what makes it more severe than the Red Sea disruption, and because most of the refined diesel and petrol Australia uses comes from Asian refineries that rely on crude transiting the strait, a Middle East conflict shows up directly in domestic delivery costs. Australian road transport burns around 10 to 12 billion litres of diesel a year. Every pallet moving from a port to a distribution centre, from a distribution centre to a store, and from a farm to a processor now costs more to move than it did in February.
That means four cost channels are open at once. Ocean and air freight surcharges on imports and exports. Fuel levies on domestic linehaul and last-mile delivery. Input costs on anything made from oil or gas, including plastic packaging, fertiliser and chemicals. And lead-time variability, which quietly pushes up the inventory you need to hold to keep service steady. Most businesses have been managing the first channel and absorbing the other three without measuring them.
The next 30 days: get control of surcharges
Before anything strategic, get a grip on what you are actually paying. Pull every transport invoice since February and separate three things: the base rate, the fuel surcharge or levy, and everything else (emergency surcharges, peak season surcharges, terminal and wharf charges, detention). In our experience most businesses cannot do this in under a day, which tells you something about how the cost has been managed.
Then test the fuel component. A fuel levy should be a formula: a percentage applied to the base rate, moving with a published wholesale diesel reference such as the terminal gate price, reset on a defined frequency, and moving in both directions. Check that the formula in your contract is the one being applied. Check the reset dates. Check whether the levy moved down in the weeks after the April ceasefire, when wholesale prices eased, as quickly as it moved up in March. It is a well-worn pattern that levies rise promptly and fall slowly, and the gap is pure margin for the carrier.
Look for doubling up. An emergency surcharge layered on top of a fuel levy that already reflects the diesel price is two charges for one cost. Ocean carriers’ emergency bunker surcharges sitting beside a freight forwarder’s own fuel adjustment is the same thing. Query every stacked charge in writing.
Then take the cheap operational wins. Cut expedited and air freight to the exceptions it was meant for, because the premium on it has widened. Lift truck and container fill, which is the fastest way to reduce diesel per pallet without changing anything else. Review delivery frequencies to low-volume customers and sites. None of this is clever, but at current fuel prices it adds up to real money, and it buys you time for the two structural moves below.
Go to market, but do it properly
Here is the case for running a proper freight and transport tender now rather than waiting for calm. Your existing contracts were priced in a different world. The levy mechanisms in them were written when diesel was stable, and eight months of emergency surcharges have made the true rate opaque. The market has repriced, so you already know what the new base looks like. And carriers have something they want: committed volume in an uncertain year. That gives you something to trade.
The mistake is to tender in a panic. A rushed request for quotation during a crisis gets risk priced in by every bidder. A freight tender done well in the next three months, on the other hand, can reset both the base rate and the mechanism for years. Here is what doing it well looks like.
Start with the data, not the document. Build a clean picture of lanes, volumes, pallet and weight profiles, delivery windows and service levels for the last twelve months. Most businesses discover that 20 per cent of lanes carry 80 per cent of cost. Structure the tender around those lanes and keep the long tail simple.
Separate the fuel component from everything else. Ask bidders to price a base rate and a fuel formula, not a blended number. Specify the reference index, the reset frequency and the floor and ceiling yourself, so every bid is comparable. A carrier who is protected from diesel risk by a transparent formula should offer a sharper base rate. That is the trade.
Decide the shape of the market before you go out. A single national provider gives simplicity and buying power. A panel by region or mode gives resilience and keeps competitive tension alive. For most businesses with more than a handful of lanes, a small panel with a primary and secondary carrier per lane is the right answer in a volatile year.
Put rail in scope where it is viable. Melbourne to Perth, Melbourne to Brisbane and Sydney to Perth are the obvious candidates. Rail’s diesel intensity per tonne-kilometre is a fraction of road, and in a market where diesel is the cost that moves, that advantage is now larger. The trade-off is transit time and flexibility, which is exactly why it belongs in the network conversation below.
Build in the clauses you wish you had in March. A disruption clause that defines what happens to rates and service when a published index crosses a threshold. Volume bands rather than hard commitments, so you are not paying penalties if demand softens. Annual rate resets inside a two or three year term. The right to re-tender specific lanes if service falls below agreed levels.
Run the process like you mean it. Scripted bidder briefings. A clear evaluation model agreed with finance before responses come in. Reference checks. A negotiation round with the top two, not a reverse auction that rewards whoever is most desperate for volume. And a transition plan, because the saving on paper is only real once the trucks are actually running under the new contract.
A freight tender run this way typically takes ten to fourteen weeks from data to signed contracts. That is fast enough to have new rates in place before the next peak season, and slow enough to get it right.
Stock: how much to hold while supply is uncertain
The instinctive response to unreliable supply is to hold more of everything. The PMI data shows that is exactly what Australian manufacturers did in April. It is also expensive, and it is the wrong shape.
The better answer is to segment. Items with long inbound lead times, concentrated supply and high service criticality (a single Asian supplier, eight weeks on the water, a major retail customer with DIFOT penalties) justify a deliberate buffer, sized to the length of disruption you are actually planning for. Items with short lead times, multiple sources or forgiving customers do not. Blanket increases in weeks of cover tie up working capital on the items that least need it while leaving the real exposures under-covered.
Run two scenarios properly rather than ten loosely. The first: the strait is effectively closed for a further six weeks and fuel surcharges rise another 10 per cent. The second: a key supplier or lane fails outright for a month. For each, work out what stops, what it costs and what you would do. Most businesses find the exercise changes their safety stock settings on fewer than fifty items, and changes their supplier strategy on fewer than ten. That is a manageable list.
Nearshoring deserves the same discipline. Four in five Australian businesses are nearshoring or planning to. For some products that is right. For many it is a more expensive supplier chosen in a stressful month, and the premium will still be there in three years. Do the landed-cost comparison with current freight and fuel included, and with a volatility band on both, before you move anything.
Network design is where diesel becomes a design input
Everything above helps. None of it changes the number of kilometres your product travels. That number was set by your network design: how many distribution centres you run, where they are, which ports you use, which suppliers feed which sites, and how much stock sits where. Most Australian networks were not designed at all. They accumulated, site by site and acquisition by acquisition, and the fuel price assumption buried in them was whatever diesel cost when the last decision was made.
When transport cost rises sharply relative to warehousing and inventory cost, the cheapest network moves. Fewer long road legs and more stock positioned regionally. Rail for the interstate backbone with road for the final leg. Direct port calls into Fremantle or Brisbane for products that are currently landed in Melbourne and trucked across the country. Consolidation of inbound supply so containers and trucks run full. Cross-docking rather than double handling. A smaller number of larger shipments on the lanes that matter. Each of these trades a little flexibility or a little inventory for a lot of diesel.
The same redesign improves resilience, which is the other half of the problem. A network that depends on one long road corridor is exposed to fuel price, fuel availability and flood at the same time. Regional stock and a second route into Western Australia or Queensland cost something, and in a year like this one they are worth it.
Network design is also where emissions and cost finally point the same way. Diesel burned is diesel paid for and Scope 1 or Scope 3 emissions reported. A redesign that cuts kilometres cuts both, which makes it one of the few supply chain investments that the CFO and the sustainability lead will fund together.
The practical point is this: re-running a network model with current fuel prices, a volatility band, and rail and port options in scope is fast and relatively cheap. Businesses that did a network study three or four years ago have a model built on assumptions that are now wrong. Businesses that have never done one are running on a map nobody drew. Industry benchmarks for network redesigns commonly show transport cost reductions in the range of 10 to 20 per cent, and in our experience the number is larger when fuel is the dominant cost and the network has drifted for a decade. Treat that as a range to test against your own data, not a promise.
Pricing: know your cost-to-serve before you pass anything on
One in three Australian businesses plans to raise prices in the next six months. Proxima’s work suggests Australian executives are more reluctant than their overseas peers to pass costs on, partly because local customers are less forgiving. Both things are true, and both point to the same gap: most businesses do not know what it costs to serve each customer, so they pass through a flat percentage that over-recovers from the easy customers and under-recovers from the expensive ones. A cost-to-serve view by customer and channel, with freight and fuel at actual cost, is what lets you have a specific conversation with a major retailer about minimum order quantities and delivery frequency instead of a blunt one about price.
How Trace Consultants Can Help
Trace Consultants is an Australian supply chain, procurement and operations advisory firm. We spend most of our time inside large, complicated supply chains where freight, fuel and network decisions move real money, and our teams are senior people who have run these processes before. Here is where we help on fuel and freight costs.
Freight and transport go-to-market. Our procurement team runs transport tenders from the data build through to signed contracts and transition: lane analysis, tender structure, fuel formula design, bidder management, evaluation, negotiation and implementation. We also do the quicker job of auditing your current surcharges and levy mechanisms against your contracts, which often pays for itself in the first month.
Network design. Through our strategy and network design practice we model your network with current fuel costs and a volatility band, test rail, port and distribution centre options, and give you a design and a business case your board can act on. We have built the case both to open facilities and to close them, so we are not attached to either answer.
Stock, scenarios and planning. Our planning and operations work sets inventory policy by segment, runs the disruption scenarios that matter, and puts the results into your planning process so they stick. Where the warehouse is the constraint, our warehousing and distribution team deals with the capacity and flow questions that come with holding stock differently.
Resilience that is measured, not described. Our resilience and risk management work answers the question Proxima asked: how many weeks until you stumble, and what would change that number. Where fuel reduction and emissions are linked, our supply chain sustainability team makes sure the same project delivers both.
We do this work across FMCG and manufacturing, retail and the large precincts, airports and resorts where goods movement is the operation.
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Where to begin
In the next two weeks, build the invoice view: base rate, fuel component, everything else, by carrier and lane, since February. Test every levy against its formula and every stacked surcharge against the contract. Cut expedites and lift fill. This is the cheapest money you will find this year.
In the next month, decide whether to go to market and, if so, build the lane data and the tender structure. Separate the fuel formula from the base rate and decide the shape of the market you want. At the same time, run the two disruption scenarios and fix safety stock on the short list of items that actually need it.
In the next quarter, re-run or build the network model with current fuel prices and rail and port options in scope. Take the result, the tender outcome and the cost-to-serve view to the executive team together, because they are one decision about how your product moves, not three.
If the strait reopens tomorrow, all of this still pays. Diesel will stay more expensive and more volatile than the assumptions most Australian networks were built on, and the contracts and the network you set now will decide what that costs you for the next five years.
The bottom line
The fuel shock is eight months old and it has beaten the wait-it-out strategy twice. The businesses that will come out ahead are not the ones that absorbed the surcharges most patiently. They are the ones that cleaned up their freight contracts, held the right stock rather than more stock, and redrew their network for the price of diesel as it is, not as it was.
If you want a plain view of where your freight, fuel and network exposure sits and what it is worth fixing, we are easy to talk to.
Explore our strategy and network design services →