As the world tries to recover from the inflationary shock, a new threat is coming to commodity prices. With the flare-up in the Red Sea disrupting shipments of everything from cars to energy, it’s only a matter of time before pressures on supply chains, corporate profitability, and prices emerge. And many are already warning of the effects.
- Electric vehicle maker Tesla plans two-week production shutdown at German factory due to shipment delays.
- while the Swedish Volvocar AB announced a three-day stoppage at its Belgian factory.
- British retailers Tesco Plc, Marks & Spencer Group Plc and Next Plc have all pointed to the risk of higher prices for consumers.
That’s because at least 2,300 ships are taking a massive detour around Africa to avoid attacks by Houthi fighters in the Red Sea – a waterway that normally handles more than 12% of the world’s maritime trade. Central bankers are warning of a rise in inflation that could delay interest rate cuts. For many companies, especially in Europe, it increases transit times and fares and also raises insurance costs. And it’s forcing analysts to revise their estimates of companies’ results for next year.
On the other hand, shippers are emerging as winners – with container prices up 300% on some routes, earnings estimates for MSCI Europe’s transport index have risen 7% in just two weeks.
Shipping and Insurance
Current container shipping costs, if sustained, could increase headline inflation in the UK and the euro area from late 2024 and early 2025.
The events boost the fortunes of global shipping companies such as AP Moller-Maersk A/S and Hapag-Lloyd AG in Europe, US-listed ZIM Integrated Shipping and Japan’s Mitsui OSK Lines Ltd.
Insurers should also benefit as they are now asking ten times the premium on some routes. Among shippers, Maersk has enjoyed a number of upside recommendations.
Additionally, a profit boost is also predicted for logistics companies, including freight forwarders, if companies that have run out of shipping options turn to air transport.
Retailers
Next, which sources most of its fashion and home products from Asia, was among the first retailers to express fears.
Primark, which is owned by Associated British Foods Plc, and Hennes & Mauritz AB are particularly exposed to seaborne volumes, while Zara owner Inditex SA sources mainly from neighboring countries.
Similarly, French furniture retailer Maisons du Monde SA is seen as highly vulnerable, sourcing 75% of its merchandise from Asia and shipping 90% by sea.
The prolonged outage is expected to hit global brands such as Nike Inc., Adidas AG and Capri Holdings Ltd.
The problem for such companies is that the economic background can make it difficult to pass on higher costs to consumers. Companies may have to absorb them, which would reduce their profit margins.
Car-industry
So far, Tesla and Volvo Car are the only automakers to have announced production stops.
It is estimated that the auto industry will not see a repeat of the problems of the Covid era. More expensive fuel, extra space rental days and higher shipping rates will be negative for companies’ P&Ls but, taking this into account, transport costs are around 57% below Covid levels.
The crisis could even allow automakers to keep vehicle prices higher.
Energy
The impact on crude prices has been relatively light this year, but that could change if a prolonged conflict causes supply shortages.
However, oil markets are bracing for weeks of disruption. Fewer tankers are crossing the Bab el-Mandeb strait at the southern end of the Red Sea, according to data from Vortexa. The number of ships carrying crude or oil products such as fuel oil has fallen by 25 percent this year through Jan. 19 from a year earlier, the data show.
