Those disruptions have caused carmakers Tesla and Volvo to suspend some production in Europe due to a shortage of components. Without a resolution to the crisis in sight, it is now likely to affect manufacturers in other sectors as well, executives say.
If manufacturers are unable to get the key components they need, then “they are going to cancel orders for all the other components that they don’t need because they’re not making the product,” he said.
Asian exporters face more Red Sea risks after US-led attacks on Houthis
Asian exporters face more Red Sea risks after US-led attacks on Houthis
Manufacturers are facing a double whammy as it is becoming too expensive to depend on inventories to tide over the supply crisis due to high interest rates, Robbins said. Since March 2022, the US interest rate has risen by one of its steepest levels in years.
“One way or another, the cost of your goods are being affected …. The longer [the shipping disruption] goes on, the more you’ll start to see companies pass on the price to consumers,” Robbins said.
The impact is likely to be more acutely felt when retailers start restocking shop shelves for spring in about a month, he added.
Murky inflation outlook
The incident occurred just as the US military acknowledged conducting new air strikes targeting the rebels, indicating that the unrest is unlikely to subside.
Is New Zealand risking ‘reputational damage’ by sending troops to Red Sea?
Is New Zealand risking ‘reputational damage’ by sending troops to Red Sea?
On Tuesday, benchmark oil futures were hovering near three-week highs with Brent Futures trading at US$83.48 a barrel and US West Texas Intermediate crude for April delivery quoting around US$78.36 a barrel.
“After easing substantially throughout most of 2023 – falling to levels significantly below the historical average – supply chain pressures began to pick up in the second half of last year and are currently back at pre-Covid-19 average,” said Jamus Lim, associate professor of economics at ESSEC Business School, Asia-Pacific.
Global shipping costs have been rising steadily since touching lows early last year, spiking briefly in November following the Houthis’ first Red Sea attacks, he noted.
“In my view, a re-emergence of supply chain disruptions represents the biggest upside risk to inflation in the year ahead,” Lim said.
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Yemen’s Houthi fighters behind Red Sea attacks threaten to disrupt global trade
Yemen’s Houthi fighters behind Red Sea attacks threaten to disrupt global trade
“The emerging data are currently concerning but not yet worrying, but if inflation rates are to remain above the Fed’s two per cent target through the middle of this year, I do not see how the Fed can embark on a rate cut cycle, whatever markets may be wishing for,” Lim said.
Analysts said that the current global supply chain pangs are only the tip of the iceberg.
“Overall, it is likely that we are only just starting to see the impact of the Red Sea crisis filter through into production – with supplier delivery times globally [and in the UK and EU] having lengthened for the first time in a year in January,” said Shanella Rajanayagam, a trade economist at HSBC.
“The longer shipping disruption persists, the more delays and disruption to production that can be expected,” she added.
Businesses have been drawing upon inventories that they built up during the pandemic years. However, the stocks of manufacturing inputs have been contracting, [for instance] for the past 16 months for UK manufacturers, and for 17 months for US firms, Rajanayagam said.
“There is a risk that shortages could eventuate especially if it looks like the crisis might persist and businesses then look to rebuild their buffer stocks to help mitigate further trade disruption, triggering a rise in demand that could compound the existing disruption,” she said.
Still, the impact of logistics on overall inflation has been muted though it remains an upside risk, she added.
US-UK attacks on Houthis raise war stakes in Middle East amid Gaza conflict
US-UK attacks on Houthis raise war stakes in Middle East amid Gaza conflict
Naïk Londono, co-CEO & co-founder of smart container tech company AELER, said cargo owners are increasingly considering airfreight as an alternative to avoid shipping delays. Typically airfreight is used for expensive items like semiconductor chips or precious metals.
Some analysts say their expectations about lower interest rates are unchanged.
“It is possible that the current level of disruption is affecting shipping costs and therefore putting some pressure on inflation. But the magnitude at this point seems quite small and not significant enough to change interest rate policies,” said Antonio Fatas, a professor of economics at INSEAD business school.