How the Strait of Hormuz closure impacts the auto sector
The US-Israel war with Iran has brought turmoil and uncertainty to industries and transnational companies dependent on trade and energy since airstrikes began on Feb. 28. The auto sector is no exception.
Key to the disruption is the effective closure of the Strait of Hormuz, the narrow passage through which roughly a fifth of the world’s oil passes daily, as well as other crucial cargo such as raw materials and finished goods.
In a report published earlier this month, S&P Global Mobility noted transport companies are already avoiding Hormuz, spooked by the risk of getting caught in the crossfire. The practical effect is the same as a closure: sharply higher insurance premiums, longer alternative routes, and a global shipping system that is beginning to seize up.
Asia-sourced components for European auto production have the most immediate vulnerability, analyst Stephanie Brinley wrote, and just-in-time supply chains are under pressure.
Ships line up in the Strait of Hormuz as seen from Mina Al Fajer, United Arab Emirates, on March 11. (AP Photo/Altaf Qadri) ·ASSOCIATED PRESS
The risks of transiting Hormuz, Brinley wrote, have raised “insurance costs for cargo and ships while increasing logistics costs for shippers choosing alternate routes.”
The cascading effects go beyond insurance. Vessels rerouting around the strait are displacing containers and cargo from their intended locations, with knock-on effects rippling through subsequent shipping contracts.
AutoForecast Solutions manufacturing expert Sam Fiorani also said the spillover effects would be quite costly.
“Rerouting shipments around the Strait of Hormuz will add days or weeks to travel time, adding to freight costs and causing a backlog from the slower cargo turnover. And that’s before any increase in the cost of ‘war risk insurance premiums,” he wrote.
In addition, some of these cargo ships burn as much as 200,000 gallons of diesel fuel a day, just as diesel costs soar.
Then there are supply chain ramifications.
(Bildagentur-online/Schoening/Universal Images Group via Getty Images) ·Bildagentur-online via Getty Images
S&P Global’s Brinley noted Turkey as particularly exposed among countries with auto production. She warned that supply chain disruptions “would begin to affect production in Turkey earlier than in other areas,” which is significant given Turkey’s role as a major supplier of light commercial vehicles to the European market.
But it’s not just Turkey and European producers that will be affected.
“Though Iran itself isn’t a semiconductor producer, the conflict’s disruption to global shipping will cause chip deliveries to be delayed or stranded at ports in Asia, reducing availability for assembly lines,” Fiorani added. “Given that modern vehicles may contain as many as 3,000 chips each, and the industry hasn’t completely recovered from a number of supply chain issues over the last half decade, another disruption magnifies the ongoing vulnerability.”
As for the Iranian and greater Middle East auto market, North American-built vehicles have a relatively small market share, Fiorani said. Asian and Chinese automakers dominate, but European automakers are not far behind, selling nearly four times as many vehicles in the region as North American-based manufacturers do — meaning Europe-centric companies like Stellantis (STLA) and Renault (RNO.PA) are most exposed.
Beyond shipping, rising oil and natural gas prices are working their way through the broader economy and through the cost of building a car. Steel, aluminum, plastics, resins — virtually every part in a vehicle’s bill of materials has energy embedded in it.
S&P’s Brinley warned that if the conflict persists, “production cost inflation would become more entrenched,” echoing the dynamics of the semiconductor crisis, when automakers prioritized higher-margin models over affordable entry-level vehicles.
Not surprisingly, Fiorani added that increased costs will be borne by consumers.
“Automotive manufacturers operate on very thin margins compared to many high tech sectors,” he said. “There’s just no room to absorb dramatic changes in input costs such as steel, plastics, and freight, and, ultimately, prices to the consumer rise.”
Prices are posted at a gas station in Brooklyn, New York, on March 18. The war in the Middle East is influencing oil prices, reaching their highest level since 2023. This follows the closure of the Strait of Hormuz, a key route for transporting a portion of the world’s crude oil. (Matthew Hoen/NurPhoto via Getty Images) ·NurPhoto via Getty Images
Consumers, already stretched thin by rising overall inflation, could find new vehicle purchases increasingly out of reach, but there is one potential silver lining buried in the disruption.
Brinley noted sustained fuel cost increases could see consumers increase “consideration for hybrid or electric vehicles to avoid anticipated fuel cost increases” — a demand shift that automakers with EV lineups, such as General Motors (GM), could capture.
While EV sales in regions like Europe are growing at a healthy clip, it’s a different story in the US, where EV demand slumped after the federal EV tax credit expired.
But higher fuel prices for gas-thirsty SUVs mean EVs may be in the mix for US buyers.
“Extended turmoil in the region could upset the oil market and accelerate EV adoption,” AutoForecast’s Fiorani said.
“If only to shield consumers from volatile gas prices, electrified vehicles could be the winner if the buying public does not anticipate a near term resolution.”
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Pras Subramanian is Lead Auto Reporter for Yahoo Finance. You can follow him on X and on Instagram.
