Dubai: Dubai businesses are focusing heavily on stockpiling their immediate and future needs to counter any supply disruptions from the Red Sea crisis. Across industries, the focus is on placing orders in advance, where possible, and charting a way to have them delivered on time and within a certain cost spike.
First up, make sure all the required stocks are at ‘optimum levels’ through the Ramadan phase starting next month and then the Eid holidays thereafter. The strategy – lock-in orders – is what these businesses are doing, whether it’s on raw materials or finished goods.
These businesses were also trying to consolidate their staffing requirements, ‘although the rise in employment was only marginal’, according to the latest PMI (Purhasing Managers Index) from S&P Global.
"The Red Sea crisis also appears to be a growing risk, especially if more companies experience delays on their shipments,” said David Owen, Senior Economist at S&P Global Market Intelligence. “Supply chain performance was only just in positive territory in January, with any escalation of the crisis likely to lead to longer wait times, higher costs and capacity constraints."
The slight turnaround in sentiments comes after business conditions hit a 16-month high in December. The decline came ‘amid increased concerns of competition in the market, as well as worries about the impact of supply chain disruption in the Red Sea’.
"Supply chain performance was only just in positive territory in January, with any escalation of Red Sea crisis likely to lead to longer wait times, higher costs and capacity constraints.
In recent weeks, a number of commercial shipping lines diverted their movements from Red Sea lanes - after missile attacks launched by Houthis in Yemen - to routes off the Cape of Good Hope. The Red Sea remains tense, even with the US and UK hitting multiple missile launch sites in Yemen.
Now, where possible, businesses are trying to secure stocks for a 'minimum of six months' in advance as well as the delivery schedules.
Taking more stocks is also seen by businesses as one way of keeping strict tabs on their import costs - and not be forced to pass them on to customers.
Thankfully, few sectors have had to raise their end-user prices. But the situation remains fluid.
Spectre of competition
Businesses are also noticing the intensity of competitve pressures, and resulting in lower prices being offered and with its subsequent impact on operating margins. "There are teething issues starting to appear," said Owen. "Competition is the main one, with surveyed businesses finding it increasingly difficult to drive sales growth as the market becomes crowded.
"Firms were often led to offer discounts on prices, which will likely squeeze profit margins.
"Supplier delivery times improved only marginally and at the slowest rate in just over a year in January, as shipment delays also impacted vendor efficiency. Nevertheless, companies were still able to boost their stocks of purchases, which increased sharply."
Escalated transportation expenses directly reflect in the elevated costs of goods, posing a formidable hurdle for companies to uphold competitive pricing.
Even then, the index is still two points higher than the long-run average (54.6) and indicates a 'sharp
improvement in operating conditions', says S&P Global.
The PMI score is built on business spending patterns, orders taken, cost of sourcing and transportation, as well as employment creation.
Impact on raw material sourcing
Bharat Bhatia is CEO and founder of Conares, the second-largest private steel producer in the UAE. "The ongoing Red Sea crisis is exerting significant pressure on the steel manufacturing and trading sector, not only within the UAE but also across neighboring regions," he said.
"This has resulted in a pronounced escalation in shipping costs, creating formidable challenges for businesses operating in this sector.
"Break-bulk shipments have witnessed a marked increase of 15 per cent, while container shipments have experienced a staggering surge ranging from 30-45 per cent."
The S&P Global report notes that business optimism dropped after the Red Sea isssue broke out, particularly in the construction and travel and tourism sectors.