Dive Brief:
- S&P Global Ratings issued a research report last week honing in on how supply chain issues can threaten corporate finances amid global volatility and layered disruptions.
- Since early 2020, the rating agency has issued 200 negative ratings actions, which include ratings downgrades as well as negative outlook changes and putting firms on credit watch, according to the report.
- Tensions between the U.S. and China, COVID-19, semiconductor shortages, shipping snarls, blockages of shipping routes and military conflicts have “taken their toll on the free flow and cost of resources and goods,” the agency said.
Dive Insight:
The impact of production, supply and shipping on a company’s financial life is as stark as it has been in years.
Rising costs for products have raised consumer prices and eaten into margins since the pandemic began. Shortages in components or products have left sales on the table. And several — in retail, aerospace and other industries — have filed for bankruptcy, citing supply chain struggles as a chief cause of their financial woes.
S&P’s report comes at a time when, as it noted, backlogs of orders have remained at their lowest since the start of the COVID-19 pandemic and manufacturers have cut activity. In other words, supply chains have largely recovered from the disruption of recent years. But the ratings agency anticipates no end to risk.
“In the medium to longer term, we still expect disruption events stemming from existing or new geopolitical conflicts, economic and protectionist pressures, governments and industries exploring further decoupling strategies, climate events such as adverse weather, cyber-attacks, and potential industrial action in some sectors,” the S&P analysts said in the report.
As an example of potential risk, they cited some of Israel’s largest exports — including pharmaceuticals, telecom equipment and aerospace — that could be disrupted due to the ongoing war between the country and militant group Hamas.
Supply chain disruptions figure into S&P ratings when they are severe enough to hurt a company’s ability or willingness to meet its financial commitments. Of the 200 negative ratings actions it has taken around supply chain, 30% were in consumer products, followed by capital goods and machines and equipment (15%), and restaurants and retail (10%).
Written for a financial audience, the analysis spent several pages explaining supply chain models and risks, and noted the importance of considering things like a company’s geographic concentration of suppliers as well as the potential for climate events, cyberattacks and economic slowdowns that could disrupt supply or shipping.
“While companies and governments seek to evaluate and manage supply-chain risks, depending on the severity and duration of a disruption, there may be no timely or immediate panacea,” the analysts wrote.
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