The recent Houthi attacks on cargo ships in the Red Sea and the ongoing drought conditions affecting the Panama Canal have raised concerns about potential disruptions to global supply chains. Companies like British clothes seller Next PLC have already sounded the alarm, warning that these attacks could significantly impact their supply chains and result in delays of up to two and a half weeks for deliveries in the UK. American retailers are also worried about the potential ramifications.
The Red Sea serves as a crucial shipping route for cargo passing through the Suez Canal, accounting for approximately 12% of global trade. In fact, the government of New Zealand reported in 2021 that around 30% of global container traffic passes through the Suez Canal, carrying goods worth a staggering $1 trillion annually.
To circumvent the disruption caused by the attacks and drought, several major shipping companies have chosen to reroute their vessels to travel around the Cape of Good Hope in South Africa. However, this alternative route significantly prolongs the voyage. According to T.D. Cowen, this detour adds an extra eight to 12 days to journeys from the Middle East or Southeast Asia to the Port of Rotterdam in the Netherlands.
The disruption in the Red Sea has had broader repercussions as well. Freight rates have seen a significant spike, as mentioned in a recent note by Citi. The note also highlights that cancelled sailings have risen from 8.5% to 11.5% in response to these challenges. Citi analyst Sathish B Sivakumar writes, “We believe that the bottlenecks in the Red Sea and Panama Canal have contributed to the increased number of cancellations.”
Related: Barrage of Houthi drones, missiles shot down over Red Sea, U.S. says
Toy Industry Giants Well-Positioned to Avoid Spike in Ocean Freight Rates
Toy-industry giants, Mattel Inc. (MAT) and Hasbro Inc. (HAS), are expected to navigate the recent surge in ocean freight rates relatively unscathed, according to D.A. Davidson analyst Linda Bolton Weiser. While the majority of their freight-rate exposure is related to shipping from Asia to the U.S. West Coast, rather than Asia to Europe, both companies have existing contracts for freight rates that provide some protection. Although they may be susceptible to surcharges, Mattel and Hasbro typically do not rely on the spot market for container purchases.
The spot market, which entails one-time fees paid to ship containers, has experienced significant fluctuations in rates. The Wall Street Journal reported a staggering 115% increase in spot-market prices for shipping containers between China and Rotterdam, reaching $3,577 for the week ending January 4.
Bolton Weiser also highlighted the seasonal nature of toy shipping, with the first quarter representing a time of low activity and peak shipping occurring between August and September. Additionally, the analyst pointed out that other aspects of Mattel’s and Hasbro’s cost structures would serve as tailwinds in 2024. This includes favorable trends in plastic resin costs and electronic chip-component costs, as well as lower manufacturing expenses in China.
Regarding other companies in the consumer-goods sector, Bolton Weiser discussed her recent conversation with Helen of Troy Ltd. (HELE), a sizable shipper of durable consumer goods from Asia to Europe. According to Bolton Weiser, Helen of Troy operates under ocean freight contracts and, as such, is not immediately impacted by sudden increases in spot rates. She speculated that the same is likely true for toy companies like Mattel and Hasbro.
Fallout from Red Sea attacks could boost this sector’s margins, says T.D. Cowen
Recent market trends
On Thursday, Mattel’s stock experienced a 1% decline, while Hasbro shares saw a more significant decrease of 3.1%. These drops contrasted the S&P 500 index’s minor decline of 0.2%. However, Helen of Troy’s shares bucked the trend and actually increased by 0.2%.
It’s worth noting that these market movements could potentially be influenced by the fallout from the recent Red Sea attacks, as T.D. Cowen suggests.
