Red flags from the Red Sea

world economy was alrey battling ramifications of pandemic and war-induced supply-chain disruption, all through 2022, and 2023, when anor problem- Houthi’s attack on Red Sea- knocked on door at end of 2023, which could be a potential disrupter for pandemic battered economies. 

It was in middle of December 2023, when Iran-backed Houthis started attacking ships passing through Bab al-Mandab strait at end of Red Sea. disruption in one of most crucial tre routes in world could derail global tre, spook economies, push up intractable inflation, leing to higher commodity prices, and lower profitability for companies. In totality, this is a perfect recipe for disaster for tre in 2024, if not tamed well before this crisis hits hard. 

“It's a very important route, as 40-45 per cent of India’s total tre to European Union goes through this route, this route holds major importance in India’s tre route, our imports and exports both are heavily dependent on this route, be it oil import from Russia, we export pulses to Africa,” Ram Singh, Professor of Tre at Indian Institute of Foreign Tre told Republic Business. 

Global tre artery

Red Sea, Suez Canal, and Bab-el-Mandeb Strait toger form artery of world tre, when y get clogged, a major heart attack follows. Bab-el-Mandeb Strait, a crucial shipping route connecting Red Sea and Mediterranean Sea to Indian Ocean, is vital for 30 per cent of global container traffic. Suez Canal’s importance can be gauged by fact that waterway carried over 1 billion tonnes of cargo in 2019, representing four times cargo carried through Panama Canal.

“It is a major shock after pandemic and Russia-Ukraine war, 30 per cent of Indian tre take place through this route, import of crude oil also happens through this route, agro-commodities are exported from India through this route, it has its ripple effect across world,” Manu Chaudhary, Co-Chairman, Logistic Council, ASSOCHAM, told Republic Business. 

economy watchers are factoring in this ongoing crisis as a bump in taming inflation, derailing global and Indian economic recovery. ripples of crisis are visible in form of edgy crude oil, rising logistics costs, shortage of containers pushing up container prices, soaring freight costs, delay in order delivery, and increase in transit time. 

disruption in route has necessitated giant and leing shipping companies to go by alternative route via Cape of Good Hope traversing an extra distance of around 10,000 km leing to higher freight charges and delays.  Amid troubled tre routes, shipping companies have raised freight charges by 30-40 per cent, posing a challenge for trers across world.

EURONAV, Belgian oil tanker firm said that it would avoid Red Sea area until furr notice. Similarly, global logistic firm C H Robinson also rerouted more than 25 vessels around Cape of Good Hope over past week, and that number would likely continue to grow. 

MAERSK, second largest shipping company in world, also announced on December 31 that it is pausing all sailing through Red Sea for 48 hours after Houthi militants attacked container vessel Maersk Hangzhou with missiles.

“Global shipping companies like Maersk, MSN have imposed a peak season surcharge between $1500-1800, emergency recovery surcharge of $2,000, and freight cost has gone up almost by 30-50 per cent in last few days,” Chaudhary of ASSOCHAM said. 

One freight forwarder claiming anonymity said that freight rates for some routes have gone above pandemic levels. 

Freight charges for Kolkata to Rotterdam in Nerlands are currently floating around $4500, prices shot up from $1850 a week ago to $4500 now, which is well above freight charges of $3800 for same route during pandemic. 

For Mumbai to Rotterdam, freight charges went up from $1200 a week ago to $3500 now. It is not only freight charges that are making trers jittery, but increase in insurance premiums has also hit trers hard. 

“Since we export to US and Europe, this ongoing crisis in Red Sea is tossing up many challenges for us. Our consignments are being delivered late, almost 15-20 days late, waiting time for containers has also surged from 3-5 days to 8-10 days,” Rajendra Kumar Jalan, Vice-Chairman, Council for Lear Exports told Republic Business. 

It's not only rise in fright charges that has posed a formidable challenge for trers but insurance premiums have also gone up significantly. As per S&P Market Intelligence, currently, Long Range, or LR tankers, which carry up to 90,000 mt cargoes, command an ditional $150,0000 security charge for each voyage when moving refined products from Middle East and India to Africa.

Inflationary concern

disruption in and around Red Sea can have a huge impact on inflation. Around 12 per cent of global tre passes through Suez Canal, representing 30 per cent of all global container traffic, and over $1 trillion worth of goods per annum. 

In 2020, approximately 19,000 ships utilised route. This represents 50 ships per day making journey between Suez Port carrying between $3-9 billion worth of cargo. 

“It's one of significant routes through which energy, commodities, consumer goods, and components from Asia and Middle East to Europe are exported and imported. It enables transfer of an estimated 7-10 per cent of world’s oil and 8 per cent of liquefied natural gas,” Singh of IIFT said.

As per data from Suez Canal Authority, approximately one million barrels of oil traverse Suez Canal daily and in 2019, 53.5 million tonnes of ores and metals and 35.4 million tonnes of coal traveled length of canal, this shows importance of route. 

“Our cheap Ural oil import from Russia happens through this route, from Black Sea to Bosporus, Aegean Sea and finally through port of Alexandria to Suez Canal, almost  33,000 vessels in a year go through this route which is very important,” Professor Singh said.

rise in freight charges, container shortages, and this supply chain disruption, will le to price rises across board leing to bro-based inflationary pressure, driven largely by higher oil prices, which will in turn have a cascing impact on economy. 

According to freight analytics firm, Vortexa, Suez Canal is quickest sea route between Asia and Europe and is particularly important in transportation of oil and liquefied natural gas (LNG). “About nine million barrels of oil per day were shipped through Suez Canal in first half of 2023,” it said. 

Singh believes that this disruption will have direct and indirect impacts. This will have an impact on energy supply, and commodity prices. “ biggest impact it can have is on energy prices, which will have a cascing effect on economy, as price of oil goes up, inflation also goes up,” Singh summed up. 

On or hand, Suman Chaudhary, Economist and He of Research, Acuite Ratings, sees only short-term impact in near -term. “I think re is impact which might mean shipping line transportation costs for some of imported goods and exports also, margins may have an impact, not sure wher this will have a long-term impact. issues are being dressed on priority,” Chowdhury said. impact of Red Sea on crude oil is not significant in India, Chowdhury ded. 

“Crude oil impact is not significant, majority of oil comes from Iraq, UAE, and Saudi Arabia, all se are not affected by Red Sea, y all come through Persian Gulf, only Russian part will be impacted, and that will have a short term impact on exports and imports,” Chowdhury said.