Houthi Attacks on Cargo Ships Impact Global Supply Chains: U.S. Retailers in a Better Position than European Counterparts
In a recent analysis, Moody's Investors Service revealed that the ongoing Houthi attacks on cargo ships in the Red Sea have had a significant impact on global supply chains. However, U.S. retailers are better prepared to deal with the disruption compared to their European counterparts.
The attacks, launched by Iranian-backed Houthi rebels in October, have led to longer transit times for cargo as ships are forced to take alternate routes, bypassing the Suez Canal. This rerouting of cargo around South Africa's Cape of Good Hope has added 10 to 14 days to the supply chains of U.S. retailers, according to the National Retail Federation.
Moody's analyst Christina Boni noted that European retailers, especially those who heavily rely on maritime product imports from Asia, are particularly vulnerable to the disruption caused by the attacks. Major European apparel companies like Adidas and Next rely heavily on the Suez Canal for their imports. Earlier this year, Next warned that the attacks could result in delays of up to two and a half weeks for its U.K. deliveries.
The Suez Canal is a critical trade route, accounting for about 12% of global trade in the first half of 2023, including a significant portion of container traffic, seaborne cargo, and liquefied natural gas shipments. However, U.S. retailers have the advantage of being able to use the West Coast ports and rail networks to move products eastward, providing them with alternative options.
Boni explained that during the COVID-19 pandemic, many U.S. companies successfully pivoted from West Coast ports to the East and the Gulf when the risk of a strike loomed in 2022. This ability to adapt quickly gives U.S. retailers an advantage in navigating the current disruption caused by the Houthi attacks.
However, Boni also warned that if shipments aren't rerouted promptly, the delivery of spring and summer fashion collections could be at risk. This would have a negative impact on apparel and clothing companies such as Abercrombie & Fitch and Gap Inc. In such cases, air freight becomes a more expensive but faster alternative, primarily suited for luxury retailers.
Smaller operators, particularly those heavily reliant on low-cost imports, may face greater risks if contracts need to be renegotiated at higher levels. This could result in a significant increase in their cost structure, undoing the benefits they have experienced from lower freight rates.
Arts-and-crafts companies like Joann Inc., The Michaels Companies, and Harbor Freight, as well as home-goods and furnishing companies like At Home and BDF Acquisition Corp., are identified as examples of businesses that could see a material impact on their profitability due to the disruption caused by the attacks.
In light of the Houthi attacks and other potential disruptions, the National Retail Federation has warned that U.S. retailers are reevaluating their strategies in handling back-to-school and holiday shipments. Additionally, experts have highlighted the potential impact of drought conditions affecting the Panama Canal on global supply chains.
Overall, the Houthi attacks on cargo ships have thrown global supply chains into turmoil. While U.S. retailers have better alternatives for navigating this disruption, European counterparts and smaller operators face greater challenges in maintaining their supply chains and managing costs.
Analyst comment
This news can be evaluated as negative for European retailers and companies heavily reliant on the Suez Canal for their supply chains. The Houthi attacks in the Red Sea have resulted in longer transit times for cargo and disruptions to global trade. However, U.S. retailers are better positioned to deal with the disruption as they have alternative routes and can use the West Coast and rail networks for imports from Asia. Smaller operators and companies in the arts-and-crafts, home-goods, and furnishing categories may face challenges and increased costs. The prompt delivery of spring and summer fashion collections is potentially at risk, with implications for apparel and clothing companies. Analysts warn of the need for quick rerouting or potential use of air freight as alternative options.
