Key Takeaways
- Industries spanning chemicals, tech, and autos are all facing major disruption from stunted trade flows through the Strait of Hormuz.
- Analysts warn that input costs are rising significantly, with shortages of some key products already being felt in financial markets.
- Risks from an extended closure of the Strait threaten to alter consumer spending patterns and inflict damage on European economies.
The ongoing Iran war and the closure of the Strait of Hormuz are transforming an initial energy shock into a wider hit to food supplies, manufacturing, and transportation, creating many losers and a few winners across equity markets.
Stock markets have shaken off initial volatility to push to new records over recent months, but companies in sectors spanning chemicals and materials, tech, and autos are among those to flag supply chain disruptions in their first quarter results. And while for some sectors that has provided a boost, experts say markets’ exuberance belies the deep uncertainty and impending economic disruption yet to come.
“The Iran war isn’t just one sector’s problem: It’s the dominant macro variable across the entire real economy,” says Lauren Hyslop, fund manager at Mattioli Woods.
“The second order effects are everywhere: Diesel shortages, mining operations, shipping rerouted from Asia is doubling transit times, jet fuel scares, construction costs climbing on fuel surcharges,” she adds.
Energy Disruption Rattles Transport
The hit to global energy supplies, chiefly crude oil and liquefied natural gas, or LNG, is well documented. But refined products such as gasoline and diesel face some of the worst disruption, both in damage to refineries themselves and to transport routes.
Jet fuel prices, for instance, which are up 60% since the start of the war, have sparked concerns for airlines ahead of the key summer travel season. That has led many global carriers to cut routes, while those in Europe, which typically hedge against fluctuating costs, fear higher prices once their contracts roll off.
Cameron Love, economic analyst at Aberdeen, says jet fuel costs are weighing on airlines’ already thin margins, with fuel typically accounting for 20%-40% of operating costs. “With airline operating margins often in the low single digits, there is limited scope to absorb a large cost shock.”
Lower-cost carriers are considered especially exposed to both jet fuel inflation and weaker discretionary consumer spending, with many now drawing on promotional fares to maintain booking momentum.
EasyJet EZJ said the conflict has already added to fuel costs, while Ryanair has suspended profit guidance, citing “significant” fuel price volatility and potential supply shortages. EasyJet is trading close to 50% below its fair value estimate after a 33% fall in the share price this year, and Ryanair RYA and Wizz Air WIZZ are trading at 27% and 22% discounts, respectively.
Chemical and Materials Supply Shock
Chemicals and materials also face severe disruption in both production and distribution. While that has provided a near-term boost to some European chemical firms, which have benefited from shortfalls from the Middle East and Asia, global supplies of fertilizer are particularly vulnerable.
Around a third of global seaborne fertilizer feedstocks pass through the Strait of Hormuz, while fertilizer production elsewhere often relies on LNG supplies from the Gulf. And though comparisons have been drawn with 2022’s fertilizer shock following Russia’s attack on Ukraine, Aberdeen’s Love draws a distinction. “[Russian] supply was not actually lost: It was rerouted ... Supply from the Gulf, on the other hand, is facing a genuine physical shortfall.”
Indeed, chemical firms have warned that fertilizer shortages are putting future harvests at risk. Major food brands, such as Unilever ULVR, meanwhile, have stopped short of flagging shortages, instead warning of higher input costs as a result of the war.
“The longer these problems last, the greater the chance you do see those spillover effects” to fertilizers and eventually food prices, says James Knightley, chief international economist US at ING.
Tech Shortages Threaten AI Race: South Korean Stocks in View
At the same time, other critical chemicals and materials such as helium, bromine, and aluminum face major disruptions, risking the production of crucial goods from semiconductors and medical equipment to nuclear reactors.
“It’s probably most tight for helium,” Rico Luman, senior sector economist at ING, says. Qatar accounts for more than one-third of the world’s helium supply, producing it as a byproduct of LNG. Now, the closure of Qatari production is exacerbating already strained semiconductor supply chains. “This has already pushed up prices but it could also lead to supply constraints like we have seen in the recent past,” Luman adds.
Though semiconductor stocks have continued to rally amid the ongoing AI boom, Asia’s chipmakers stand to be among the biggest losers from helium supply shortages, analysts say. That has sparked volatility in South Korea’s tech-heavy KOSPI benchmark, and led Samsung 005930 and SK Hynix 000660 to strike recent deals to shore up supplies from the US. The two stocks are trading at 77% and 46% premiums to their fair value estimates, respectively, after strong share price gains this year.
Still, Aberdeen’s Love says supply shortages could see chipmakers become more selective, prioritizing high-value products used in AI processing and high-bandwidth memory “at the expense of memory for consumer and industrial uses.” Indeed, persistent and severe constraints could even weigh on the AI rally itself, he says. “Alongside higher energy costs, any semiconductor supply shortages may hamper the AI buildout and impact tech equity prices.”
Autos and Consumer Goods Face Delays
Elsewhere, the knock-on effects for industries spanning autos to retail and other consumer goods remain clear if the blockade in the Strait of Hormuz continues. Almost 300 companies, largely in Europe and Asia, have so far flagged the need for defensive actions to blunt the financial hit from the Iran war, including price hikes and production cuts, according to a Reuters analysis of corporate statements.
Autos, for instance, rely not only on tech inputs such as semiconductors, but also on aluminum and oil derivatives like rubber and plastic. Toyota 7203 has warned of a USD 4.3 billion hit from the war this year because of higher material, energy, and transport costs.
ING’s Luman says that it’s rather “supply constraints driving prices up, than real physical shortages at this point.” However, the longer the supply chain disruptions roll on, the greater the effect on consumer behavior, with a worsening macroeconomic outlook likely to hamper consumer industries further still. “The demand side of the automotive industry—businesses and consumers—are affected by higher fuel prices as well. This could also lead to some demand destruction,” Luman adds.
