The Red Sea crisis, disrupting shipments across various industries, is on the brink of influencing companies’ earnings reports with escalating costs and supply-chain challenges.
Several companies are already sounding alarms about the repercussions. Tesla Inc., an electric-vehicle manufacturer, plans a two-week production pause at its German plant due to shipment delays, while Volvocar AB in Sweden has announced a three-day halt at its Belgian factory. Major British retailers, including Tesco Plc, Marks & Spencer Group Plc, and Next Plc, are cautioning about potential consumer price hikes.
The root cause is the altered routes of over 2,300 ships, avoiding Houthi militants’ attacks in the Red Sea, which normally handles over 12% of global sea trade. Central bankers are warning of potential inflation surges, complicating interest-rate cuts. Particularly in Europe, this is elongating transit times, increasing freight bills, and elevating insurance costs, prompting analysts to reconsider companies’ earnings estimates for the upcoming year.
Over the past three months, the consensus forecast for car-makers’ earnings has declined by 5%, as reported by Bloomberg. Conversely, shippers are experiencing a surge, with container rates increasing by 300% on certain routes, resulting in a 7% rise in earnings estimates for MSCI Europe’s transportation index within two weeks.
Thomas Brenier from Lazard Freres Gestion in Paris has reduced exposure to the auto sector, anticipating it to be among the first to suffer due to its intricate and tense supply chain. He is also steering clear of the retail sector, which could face challenges due to a shortage of products.
If sustained, current container shipping costs could contribute to headline inflation in the UK and euro area from late 2024 and early 2025. However, this crisis is benefiting global shipping companies like AP Moller-Maersk A/S, Hapag-Lloyd AG, ZIM Integrated Shipping, and Mitsui OSK Lines Ltd. Insurers are also expected to profit, with premiums surging tenfold on some shipping routes.
Next, Primark, Hennes & Mauritz AB, and Inditex SA are highlighted as retailers highly exposed to sea-freight volumes. Additionally, French furniture retailer Maisons du Monde SA is considered vulnerable, procuring 75% of its goods from Asia and transporting 90% by sea.
For the auto industry, Tesla and Volvo Car are currently the only ones announcing production stoppages, posing a potential fresh risk to light vehicle production this year. Nevertheless, analysts believe that the industry won’t experience a repeat of Covid-era problems, with transportation costs being significantly lower.
The impact on crude prices has been limited so far, but prolonged disruptions could lead to supply shortfalls. Oil markets are preparing for potential weeks-long disruptions, with fewer tankers traversing the Bab el-Mandeb strait at the southern end of the Red Sea. The number of ships carrying crude or dirty petroleum products has declined by 25% this year compared to a year earlier, according to Vortexa data compiled by Bloomberg.
