Source: Wall Street News
The Red Sea crisis disrupted the global supply chain, and the automobile manufacturing industry and retail industry were the first to be affected. Against the backdrop of the global economic downturn, it may be difficult for these companies to pass on higher costs to consumers; they will have to bear it themselves, and profit margins are under pressure.
Red Sea shipping risk spillover has intensified. From global supply chain risks threatening automobile production to a sharp rise in freight insurance, the impact has now spread to various industries such as automobiles and retail, and is gradually eroding corporate profits.
On January 23, according to media analysis, the impact on car carriers was obvious. European car companies, including Tesla and Volvo, had to announce the suspension of production. Home furnishing giant Ikea issued an early warning of delivery delays, and the profits of H&M and British retailer Primark, which are highly dependent on shipping, will also be affected.
Frédérique Carrier, strategist at RBC's wealth management division, said the problem these companies face is that the current economic outlook may make it difficult for companies to pass on higher costs to consumers. “Companies may have to bear these costs themselves, which will reduce profit margins.”
Analysts generally expect that in the past three months, automakers' profit expectations have declined by 5%, but on the other hand, shipping companies have become winners. At a time when container freight rates have soared, the profit forecast for the MSCI European Transport Index has risen 7% in just two weeks.
Freight and premiums are rising — big winners for shipping and air freight?
According to data released by Container xChange last week, 500 of the 700 container ships planned to be transported through the Red Sea have been diverted. Affected by this crisis, maritime consulting firm Deluli's World Container Index shows that shipping costs continue to skyrocket:
As of January 18, it reached 3,777 US dollars/FEU, up 23% from last week, up 82% from the same period in 2022, and 166% higher than the 2019 (pre-pandemic) average of $1,420. Not only has the increase in routes between Asia and Europe been astonishing, but the US-West routes and US-East routes have also continued to rise recently.
Meanwhile, insurance sources say war insurance premiums for transportation through the Red Sea are also rising.
The media quoted people familiar with the matter as saying that insurers now charge 0.75% to 1% of the ship's value for ships passing through the Red Sea region. Since the US and Britain launched air strikes against the Houthis in Yemen last weekend, insurance premiums have risen sharply.
Just a few weeks ago, coverage was offered at about one-tenth of that amount, and the sharp rise in premiums may have made crossing this critical waterway too expensive.
However, analysts believe that there are still companies that will benefit from this crisis, such as shipping giant Maersk and insurance companies. Bank of America raised Maersk's profit forecast for 2024 in its latest report. It is expected that its profit will double in 2024. Goldman Sachs expects that the increase in free cash flow will enable Maersk to pay dividends to shareholders.
Sanford C Bernstein analyst David Vernon predicts that if the company exclusively uses air freight, then the air freight company will be the absolute winner
Parash Jain, head of global shipping and port research at HSBC, also believes that air freight rates will soar, and the air transport industry may benefit from this crisis.
He said that industry observers expect air freight prices to rise in the next two to three weeks, especially now that the Chinese New Year holiday is approaching.
Supply chain crisis - big losers for car companies and retail?
Thomas Brenier, a stock strategist at Lazard Freres (Lazard Freres) in Paris, stated in an interview with the media that “due to its complex supply chain, the automobile manufacturing industry will be the first to be impacted.” He believes that the retail industry will also be greatly affected, and “the retail industry may be hit by insufficient supply due to supply chain issues.”
Thomas Brenier predicts: “If this situation continues for another month or two, the market will definitely see some profit warnings associated with this.”
The Red Sea is a major global shipping route. 20% of the world's car carriers will need to pass through the Red Sea-Suez River waterway in 2023. The impact of the Red Sea crisis on the automobile supply chain should not be underestimated.
Recently, Tesla announced that it will suspend production plans at its Berlin plant in Germany from January 29 to February 11. Due to supply chain disruptions due to the Red Sea crisis, some parts are in short supply and forced to suspend production plans.
Tesla said the company is currently making efforts to actively purchase spare parts and is expected to fully resume production on February 12.
Soon, Volvo announced that its factory in Ghent, Belgium, will suspend production for three days next week due to the Red Sea incident. According to reports, the Ghent plant in Belgium currently mainly produces Volvo's XC40 and C40 models.
Volvo explained the reason for the suspension of production. “In order to avoid violent incidents in the Red Sea, the company adjusted maritime transportation routes. The adjusted routes will cause delays in the delivery of spare parts and transmissions.”
Subsequently, Volkswagen also issued a statement to the outside world, stating that it is actively communicating with transportation companies to avoid and reduce the interference caused by the Red Sea as much as possible. The Strantis Group said to the outside world that the company is currently promoting air transportation to resolve temporary supply chain issues.
Balbir Singh Dhillon, head of Audi India, said: “The Red Sea situation has challenged production for two to six weeks. Our car production will decrease this quarter, but it is still difficult to predict the situation for the whole year.”
In addition to the automotive industry, many retailers that rely on shipping have also expressed concern about the supply chain crisis. Some retailers, including Ikea and British retailer Next, have indicated that they will avoid the Suez Canal bypass in Africa, which may delay the arrival of products. British retailers Tesco and Martha both pointed out that consumers are at risk of rising prices.
Richard Chamberlain, an analyst at RBC Capital Markets, believes that the two companies, Primark and H&M, are highly dependent on ocean freight, and the prospects for French furniture retailer Maisons du Monde SA are not optimistic. 75% of their products come from Asia, and 90% of transportation is carried by sea.
Analyst Bernstein said bluntly that if the Red Sea crisis continues, it will have a major impact on multinational companies including Nike and Adidas.
If the crisis continues for a long time, energy prices will be affected
The impact on crude oil prices this year is relatively small, but the situation may change if there is a gap in crude oil supply due to prolonged conflict.
On January 17, British oil giant Shell suspended all oil shipments through the Red Sea indefinitely.
British Petroleum said last month that it would suspend all transportation through key Red Sea waterways. According to some data, Middle Eastern crude oil shipped to Europe is constantly decreasing. The export volume in December 2023 was about 570,000 barrels per day, which is almost halved compared to 1.07 million barrels per day in October 2023. According to another report, a total of nearly 9 million barrels of oil from Saudi Arabia and Iraq may face shipping delays due to oil tankers being diverted around Africa.
According to Vortexa data compiled by Bloomberg, as of January 19, the number of tankers passing through the Red Sea dropped 25% compared to the same period last year.
Currently, oil prices have risen since the beginning of January. On January 22, Brent crude oil was reported at $80.16 per barrel, up about 5% from the low in early January.
Editor/Corrine