GTRI brief

28-01-2024

The trade disruptions in the Red Sea: Update on the Impact on India

The trade disruptions in the Red Sea, primarily caused by Houthi attacks, have affected export from many sectors for India and many other countries. The immediate ripple effects are seen in increased freight costs, mandatory war risk insurance, and significant delays due to rerouting.

However, the adverse impact will multiply if the disruption continues beyond few more weeks as it will impact not only trade but local productions of many industries like Automobiles, electronics, chemicals that rely on just in time procurement/import of inputs through the Global value Chains spanning both the Europe and Asia.

1-Immediate sectorial Impact on India’s Trade:

India’s exports are grappling with a substantial increase in shipping costs. Average container spot rates have more than doubled since early December 2023. In some cases prices have increased 4 times compared to October 2023 rates.

The volatile security situation at Red sea also adds uncertainty to shipping schedules. Exporters are postponing shipments in hopes of a stabilized situation, affecting the trade flow.

· Agricultural Products: Basmati rice exporters face freight costs soaring to $2,000 per 20-tonne container for destinations around the Red Sea, marking a 233% increase. Farmers exporting perishable goods like grapes are encountering significant challenges due to the delays and uncertainty.

· Pharmaceuticals: Life-saving drugs faced over a week's delay in December 2023 due to concerns about attacks near the Suez Canal, endangering essential medical supplies.

· Textile Industry: Clothing manufacturers in Tirupur report delays of up to two months for shipments to Europe due to rerouting around the Cape of Good Hope, leading to missed deadlines and penalty charges.

· Steel Industry: Steel exports to Europe and the Middle East are rerouted through the Cape of Good Hope, adding weeks to delivery times and raising concerns about potential order cancellations.

· Petroleum Products: Oil tankers carrying diesel and ATF from India to Europe have rerouted around the Cape of Good Hope to avoid the Red Sea. This could delay shipments of gasoline, diesel, and other petroleum products to European customers. Indian oil companies may need to increase storage capacity for both crude oil and refined products, incurring additional logistics costs and infrastructure investments.

· Automobile Sector: Increased freight costs for imported raw materials like rubber, glass, and metals. Delays in the delivery of crucial components such as semiconductors, tires, and engine parts. Automakers might need to increase inventory levels of critical components, leading to higher holding costs and increased financial pressure.

2-Impact of longer disruption on India

Longer disruptions may cause Production delays due to disruption in global value chains.

Companies relying on just-in-time manufacturing processes can be particularly vulnerable, as they maintain low inventory levels and depend on the timely arrival of components and finished products. Longer disruptions can lead to increased costs, production delays, and in some cases, a re-evaluation of global supply chain strategies to mitigate future risks. Few industries where production will be impacted due to disruptions in global value chains are:

· Electronics, Automotive and Machinery: Components and finished products are often shipped through the Suez Canal to reach different markets. Disruptions can lead to delays in manufacturing and increased costs.

· Chemicals, pharmaceuticals and Plastics: These products are often shipped in large quantities via sea routes.

· Textiles and Apparel: This industry often relies on just-in-time production and delivery. Disruptions can lead to stockouts, delayed deliveries, and increased costs for retailers and consumers.

· Consumer Goods: A broad category that includes everything from furniture to toys. Disruptions can delay shipments and lead to inventory shortages, affecting retailers and consumers.

3-Countries substantially impacted include:

· Middle Eastern Oil Exporters (Saudi Arabia, Iran, UAE, Kuwait, Iraq): These countries use the Red Sea route extensively for exporting oil to Europe and the US. Disruptions can affect their export volumes and revenues.

· European Countries (Italy, Germany, France, UK): Many European nations depend on the Red Sea for imports of oil and gas. Disruptions can lead to increased energy costs and affect industries reliant on timely shipments.

· Asian Countries (China, Japan, South Korea, India): These nations import significant amounts of oil and gas through the Red Sea. They also rely on the Suez Canal for the efficient transportation of goods and raw materials.

· Egypt: The Suez Canal is a significant source of revenue for Egypt. Any disruption in the Red Sea that affects the Suez Canal traffic can have substantial economic impacts.

· United States: While the US has reduced its dependence on Middle Eastern oil, it still imports oil through the Red Sea route. Moreover, the US is a major player in global trade, so any disruption can affect its import/export businesses.

4-The Indian government response

India has taken a proactive approach in response to the Red Sea shipping disruptions caused by Houthi attacks. The key measures include:

· India is actively engaging in diplomatic talks with Iran, aiming to shield its exporters from the impacts of the attacks in the Red Sea, given that Iran has influence over the Houthi group in Yemen. These discussions were part of the broader diplomatic efforts by Indian External Affairs Minister Subrahmanyam Jaishankar during his visit to Tehran.

· The Indian Navy has been responsive to attacks and hijacking attempts on merchant vessels in the Arabian Sea, providing protective escorts to Indian container ships in the affected region.

· Recognizing the challenges faced by exporters due to delayed cargoes and increased transit costs, the Government is facilitating easier access to credit for those affected by the disruption. This move aims to ensure that the flow of credit to exporters remains uninterrupted despite the prevailing challenges.

5-Global Measures taken to contain the crisis

Here are some of the measures:

Military and Security Responses: The United States, the United Kingdom, and other countries have responded to the Houthi attacks by launching airstrikes against Houthi targets both at sea and on land. This military response is a direct attempt to protect shipping lanes and prevent further attacks.

The United Kingdom and France have deployed naval forces to accompany and protect the ships of their nations, and there is a call for similar involvement from other countries.

Major shipping companies are actively avoiding the Red Sea and the Suez Canal routes due to the threat of attacks. Shipping companies are facing higher costs, and extended delivery times. For example, Hapag-Lloyd and Maersk report that the additional costs run into the high tens of millions of euros per month, with each passage's cost increasing by around 50%.