Recent attacks on commercial ships in the Red Sea by Iranian-backed Houthi militias have forced companies to pay higher insurance premiums or reroute goods across Africa, adding costs and delays and forcing businesses to prices for consumers that could reduce margins and ultimately drive up profits.
Many owners of companies that transport goods through the Red Sea and Suez Canal are benefiting from lessons learned from more severe global supply chain disruptions during the worst days of the COVID-19 pandemic. So far, the impact has been limited.
“Companies are going to be disrupted going forward,” said David Simsi Levy, a professor at the Massachusetts Institute of Technology. “Today it is the Red Sea, but tomorrow it will be different.”
The attacks in the Red Sea, which handles about 12% of global trade, are forcing businesses to make difficult decisions. Passing through the Red Sea means risking air strikes and paying more insurance premiums. Avoiding routes introduces costly delays.
Ocean freight prices have soared since mid-December, more than tripling on routes from Asia to Europe and more than doubling between Asia and the U.S. East Coast, according to analysis firm Zeneta.
For now, analysts expect the impact on consumers to be limited. Analysts at Goldman Sachs noted that shipping costs account for only a small portion of a product's total cost. They estimate that the disruption will only increase global inflation by a tenth of a percentage point this year.
Still, it's a concern for analysts and investors, who have raised questions during earnings calls with company executives. Here's what business leaders are saying:
European companies will be the first to feel it.
The Red Sea is a particularly important route for companies transporting goods from Asia to Europe. These items currently have higher shipping charges and take longer to arrive.
The region's manufacturing industry may also be affected. The disruption caused Tesla and Volvo to halt production in Europe. Automakers rely on just-in-time production, where parts arrive on the assembly line just before they are needed, leaving little room for shipping delays.
Kenny Wilson, CEO of the British shoemaker, said: While Europe suffered significant delays, Asia and the United States had little impact. British businesses were hit hardest by delivery delays in January, according to S&P Global.
“There's clearly a cost impact to this,” Wilson told analysts on a Jan. 24 earnings call. “And really, I think the question is what are the implications for next year if this situation continues,” he said.
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Nikolaj Wendelboe, chief financial officer of the Danish audio equipment company, told analysts on a conference call on January 10 that the company is shifting some transportation to air or rail.
“There will be some slight cost increases and lead time extensions, but nothing compared to what we've seen during the coronavirus crisis, at least not what we're seeing right now,” Wendelbaugh said. ” he said.
Chuck Boynton, chief financial officer of Logitech, the Swiss maker of computer keyboards, mice and other accessories, said the company will increasingly transport products made in Asia by air rather than sea. That may cost more and hurt profits, but it's better than running low on inventory, he said.
Boynton told analysts on January 23, “We intend to take a certain amount of margin in consideration of customer satisfaction.''
American companies have little exposure.
Goods imported into the United States are less dependent on crossing the Red Sea. Still, U.S. businesses and consumers will be affected by a general increase in global shipping costs.
Not all industries are affected equally. Analysts at Bank of America say the retail industry has been particularly affected, with companies such as Target and Dollar Tree sourcing more goods from Asia, making them worse off than their major competitors. He said there was a high risk that profits would be hit. These retailers have not yet reported quarterly profits, but other consumer-focused companies are discussing the impact on their bottom lines.
Amazon Chief Financial Officer Brian T. Olsavsky said the disruption has not yet had a “material impact” on the e-commerce giant's profit expectations for this quarter.
“We are vigilant about this and will work to take the necessary steps to ensure the customer experience is not affected,” he said.
1-800-Flowers Chief Financial Officer Bill Shea said the company won't start feeling the impact until the disruption continues into the summer.
“The bigger unknown is how long the Red Sea issue will last and whether it will impact future negotiations and next year's holiday season,” Xia told analysts on Thursday.
Farooq Kaswari, CEO of Ethan Allen Interiors, told analysts that the furniture maker is not as exposed to disruption as other furniture makers because most of its products are made in North America. Told.
“But if most of our products come from offshore, that would be a problem,” he said on a Jan. 24 earnings call.