Impact of Red Sea crisis on global trade
Red Sea crisis has increased shipping costs following a detour of 12 days in transit time, and many exporters are reluctant to insure their shipping cargo as war risk premia has increased. The exporters are now waiting for the provision of security measures in the Bab-al-Mandab/Suez Canal by various countries, including India.
It has been over two months now, but the situation in the Red Sea seems to be worsening. The Strait of Bab-al-Mandab, unfortunately, has turned into a Gate of Tears. After a spate of attacks from Houthis on ships passing through the Bab-al-Mandab Strait, it was the near-miss incident involving ‘Maersk Gibraltar’ on the 14 December and yet another attack on a container vessel on 15 December 2023 that prompted Maersk and key shipping lines to pause their passage through the Red Sea. Any chances of resumption of regular services in the Red Sea/Suez Canal were thwarted by attacks on ‘Maersk Hangzhou’ on 31 December 2023.
Since then, practically all the services of the container shipping lines over the Bab-alMandab Strait/Red Sea/Suez Canal have been suspended. Almost 24,000 ships, which account for 12 per cent of the global trade and one-third of container vessels, pass through the Bab-al-Mandab Strait/Red Sea/Suez Canal every year. Avoiding this stretch meant vessels had to take a longer route of navigating through the Cape of Good Hope—a detour of as many as 6,000 nautical miles or 12 days in transit time. A round trip between the west Indian coast and Europe, for instance, takes 56 days and eight vessels. With this detour, two or more ships need to be added to maintain the schedules.
Thus, about 25 per cent more capacity is required to maintain those service levels. This not only adds to the transit time but also to the costs— charter of ships and additional charter hire on existing ones due to the extra number of days involved, while sailing via the Cape of Good Hope. Besides in a situation like this, where demand for ships increases, the cost of acquisition or the charter rate rises too. Besides this, expenses on fuel, crew, insurance among others too add to the costs.
Shipping lines may also have to incur further costs due to berthing delays due to the possible bunching of vessels, feeding (as the main line vessels may prefer to call only at key ports to maintain their schedules), repositioning of both ships and equipment to demand locations. All this is likely to increase freight costs as long the crisis lasts. As far as India is concerned, the bulk of its exports are directed to the UK/Europe/MED/the USA, but now the exports move to the Cape of Good Hope.
While insurance companies have increased their war risk premia from 0.1-1 per cent of the value of the ship, it is learnt that many of them are reluctant to insure the cargo. In the meanwhile, many overseas buyers have suspended their imports. Fresh orders are, however, expected to be placed once the existing inventory levels deplete, by which time, the supply chains are likely to have adjusted themselves to the higher costs and longer transits. However, exports of perishables such as grapes to Europe, for instance, are a matter of concern as they will be unable to withstand the longer transits over the Cape of Good Hope.
Hopefully, the situation will improve before the end of this grape season in April. In the meanwhile, the grape exporters will possibly be looking at other markets such as the Persian Gulf, China and the Far East to absorb some of their stock. On the other hand, 60 per cent of India’s imports are from China/Far East, which have not been impacted much. Going forward, it is hoped that a sort of a political settlement or the presence of the Indian Navy in the Arabian Sea and the Gulf of Aden, along with the USA-led Operation Prosperity Guardian in the Red Sea and the security measures proposed by some European countries are likely to come into effect from 19 February 2024. It will help restore some semblance of normalcy sooner rather than later in the region.
Exports of perishables such as grapes to Europe, are a matter of concern as they will be unable to withstand the long detour over Cape of Good Hope