Red Sea crisis hurts Indian exports as costs soar

The Red Sea, a vital conduit for East-West trade, is witnessing persistent disruptions due to Yemeni Houthi militia’s attacks on ships, causing a significant uptick in fuel and interest costs, longer voyages and straining the capacities of the logistics sector.

PREMIUM FILE PHOTO: People walk on the beach as a container ship crosses the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt April 24, 2017. REUTERS/Amr Abdallah Dalsh/File Photo(REUTERS)

The costs of Indian exports and ocean freight rates for goods from Asia to Europe have more than doubled, led by high insurance premiums payouts and container expenses, exporters and industry officials said.

Most Indian exports are now going around the Cape of Good Hope in the southern tip of Africa, adding up to 4000 nautical miles and 14 days.

Importance of the Red Sea

The Red Sea, one of the world’s busiest shipping routes, lies south of the Suez Canal, a crucial waterway connecting Europe to Asia and east Africa. At its southern end of the Red Sea is a narrow strait of water between Djibouti and Yemen: the Bab el-Mandeb strait, an area Houthi rebels in Yemen have relentlessly targetted in solidarity with Palestinians, a fallout of the Israel-Hamas conflict.

Nearly 80% of India’s trade with Europe, estimated at nearly $15 billion a month, passes via the Red Sea, according to industry estimates. “Shipping companies are demanding more containers now as they avoid red sea. Therefore, shipping companies and leasing companies have placed more than 750,000 TEU (20-foot equivalent unit) ISO container orders out of China in the last two months,” Container xChange, a global platform, said in a note last week.

Impact of the disruption

A global clamour for more containers – the bedrock of international shipping — has directly impacted Indian shippers by raising container booking costs by 40%, an industry official, who asked not to be named, said.

“In the wake of the ongoing crisis, container freight rates for exports from India have experienced a relentless and impactful surge. The epicentre of this surge lies in the crisis zone itself, particularly at Red Sea ports, witnessing staggering increases of up to 850% in container freight costs from pre-crisis levels,” said Vir Kotak, founder, Propelor, a logistics company.

Soaring shipping costs, along with oil prices, are stoking fears of renewed inflationary pressures. Manufacturers and retailers too are again juggling delays, which has added to costs.

A standard 24-foot-long container to Europe now costs nearly $1600-$1700, up from $500-600 before the Red Sea crisis erupted, an exporter said, wishing anonymity.

The container price sentiment Index (xCPSI), a sentiment tool by Container xChange to measure market sentiment for container price development, reached an all-time high last week as container price anticipation peaks. This indicates that the supply chain professionals are expecting these prices to further shoot up significantly in the coming weeks, the leading container platform said.

Impact on India and New Delhi’s response

The Union government has set up an interministerial group anchored at the commerce ministry to monitor the crisis arising from a violent regional spillover of Israel’s war with Hamas, disrupting global trade.

Fertiliser shipments headed for India are now taking up to 20 days, up from 14 says, a fertilizer department official said, requesting anonymity. The interministerial committee, led by an additional secretary-level officer, met exporters and logistics providers last week to discuss plans to keep shipments going, Union commerce secretary commerce secretary Sunil Barthwal said. The committee consists of representatives from ministries of defence, shipping and external affairs.

India’s exported inventories are enough to last a month, a key reason why the country’s exports and imports haven’t been seriously impacted but the situation in the Red Sea region is evolving on a “daily basis”, requiring constant vigil and updates, a second official said.

The government is exploring ways to cushion increased logistics costs to Indian shippers. “India is prepared to respond quickly if the situation escalates and prolongs,” Union commerce minister Piyush Goyal said in a briefing on Saturday.

The government is talking to the Export Credit Guarantee Corporation Ltd to lower interest rate for exporters whose insurance costs have gone up because of the conflict, Barthwal said. The government is also planning alternative routes and looking at ways to reduce container costs for shipments.

Global impact

In its latest report on global economic prospects, the World Bank says the Middle East crisis, with the war in Ukraine, “could disrupt trade, lead to surging energy prices, with broader implications for global activity and inflation”.

The disruption to trade is the most severe since the Covid-19 pandemic and has raised the costs of moving goods by sea to the highest levels recorded outside that period, according to a Financial Times report.