Recent attacks on commercial ships in the Red Sea by the Iranian-backed Houthi militia have forced companies to pay higher insurance rates or reroute goods around Africa, adding costs and delays that could put a dent in companies’ profit margins and, ultimately, push up prices for consumers.
Many executives whose companies ship goods through the Red Sea and Suez Canal have said the impact so far has been limited, in part because of lessons they learned from the more severe, worldwide supply chain disruptions during the worst of the Covid pandemic.
“Moving forward, disruption will hit companies,” said David Simchi-Levi, a professor at the Massachusetts Institute of Technology. “Today it is the Red Sea, tomorrow it will be something else.”
The attacks in the Red Sea, which handles about 12 percent of global trade, have forced companies to make tough decisions. Going through the Red Sea would mean risking an airborne strike, and paying more for insurance. Avoiding the route adds costly delays.
Maritime freight prices have soared since mid-December, more than tripling on the Asia-to-Europe route and more than doubling between Asia and the East Coast of the United States, according to the analytics firm Xeneta.
For now, analysts expect the impact on consumers to remain limited. Shipping makes up a small portion of a product’s total cost, analysts at Goldman Sachs noted. They estimate that the disruptions will add only one-tenth of a percentage point to the global inflation rate this year.
Still, it’s a concern for analysts and investors, who have raised questions on earnings calls with company executives. Here’s what business leaders have been saying.
European companies will feel it first.
The Red Sea is a particularly important route for companies moving goods from Asia to Europe. Those goods now cost more to ship and take longer to arrive.
It could also affect manufacturing in the region. The disruptions caused Tesla and Volvo to suspend production in Europe. Automakers rely on just-in-time production, in which parts arrive at an assembly line shortly before they are needed, which leaves little room for shipping delays.
Doc Martens
The British shoemaker’s chief executive, Kenny Wilson, said that it faced major delays in Europe, but felt almost no impact in Asia or in the United States. Businesses in Britain were hit hardest by shipping delays in January, according to S&P Global.
“There is obviously a cost implication to that,” Mr. Wilson told analysts on an earnings call on Jan. 24. “And then I think, really, it’s more about what would be the impact next year if this were to continue.”
Bang & Olufsen
Nikolaj Wendelboe, chief financial officer of the Danish audio equipment company, told analysts on a Jan. 10 call that the company is shifting some shipping to air or rail.
“There will be a slight cost increase and some longer lead times, but it is nothing compared to what we saw during the Covid crisis, at least not what we see at this point in time,” Mr. Wendelboe said.
Logitech
Chuck Boynton, chief financial officer of Logitech, a Swiss maker of computer keyboards, mice and other accessories, said the company would be shipping more of its products made in Asia by air instead of by sea. While that is more expensive and could eat into profits, it’s better than running low on inventory, he said.
“We will eat some margin to take care of customer satisfaction,” Mr. Boynton told analysts on Jan. 23.
American companies are less exposed.
Goods imported to the United States don’t rely as much on crossing the Red Sea. Still, U.S. companies and consumers are subject to the general rise in global shipping rates.
Not all industries are affected equally. Analysts at Bank of America said that retailers were particularly exposed, with companies like Target and Dollar Tree facing a higher risk of a hit to profits than their main competitors because they source more of their products from Asia. Those retailers have not yet reported their quarterly earnings, but other consumer-focused companies have discussed the impact to their bottom line.
AMAZON
Brian T. Olsavsky, Amazon’s chief financial officer, said the disruptions have not yet had a “material impact” on the e-commerce giant’s forecast for profit in the current quarter.
“We’re vigilant on that and we’ll work to take steps where we need to, to make sure that customer experience is not impacted,” he said.
1-800-Flowers
Bill Shea, chief financial officer of 1-800-Flowers, said the company wouldn’t start to feel the effects unless the disruptions continued into the summer.
“The bigger unknown is how long the issues in the Red Sea persist and whether that affects future negotiations and next year’s holiday season,” Mr. Shea told analysts on Thursday.
Ethan Allen
Farooq Kathwari, chief executive of Ethan Allen Interiors, told analysts that the furniture manufacturer is not as exposed to the turmoil as others because most of its products are made in North America.
“But if we had most of our products coming through from offshore, it would be an issue,” he said on a Jan. 24 earnings call.
Source link: https://www.nytimes.com/2024/02/05/business/red-sea-shipping-companies-cost.html