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Red Sea crisis : Asia, Africa, Europe to face most disruption, says GTRI

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ATLANTA : The Red Sea crisis is expected to adversely impact trade volumes in a substantial way in 2024, said a report by GTRI, adding that rising shipping, and insurance costs, delayed arrival of shipments will continue to disrupt global value chains, squeeze margins and make exports of many low margin products unviable from current locations. Countries like Asia, Africa and Europe will face the most disruption across industries. Started in a major way on October 19, 2023, the Red Sea crisis is in its fifth month now. 

Trade disruptions due to Red Sea crisis

The Red Sea shipping crisis has disrupted global trade and supply chains, particularly affecting routes through the Suez Canal, which handles about 30 per cent of global container trade. With ships now detouring around Africa’s Cape of Good Hope, transit times have gone up by 30 per cent and the global container shipping capacity too has dropped by about 9 per cent, said GTRI. This detour delays shipments from Asian producers to European consumers by up to 20 days.

Additionally, container freight rates also spiked by $500 in the last week of December 2023, with companies like Hapag-Lloyd significantly raising their rates for shipments from the Indian subcontinent to North Europe. Maersk too is diverting all container vessels from Red Sea routes, warning customers to prepare for significant disruption. 

According to data shared by the IMF, the volume of trade that passed through the Suez Canal dropped by 50 per cent year-on-year in the first two months of the year, and the volume of trade transiting around the Cape of Good Hope surged by an estimated 74 per cent in comparison to the last year’s level. By mid February 2024, approximately 621 container ships had changed their usual routes in order to avoid the crisis zone. 

Now this necessary rerouting, GTRI added, is causing congestion in key ports like Cape Town, Ngqura, Richards Bay, and Durban in South Africa, leading to delays in loading and unloading cargo, which could exacerbate supply chain challenges and potentially lead to shortages.

Impact on India

The impact of the ongoing crisis impacted Indian trade, especially with the Middle East, Africa, and Europe. Approximately 65 per cent of India’s crude oil imports in FY2023, valued at $105 billion, from countries like Iraq, Saudi Arabia and others, passed through the Suez Canal. Further, per the report, for overall merchandise trade with Europe and North Africa, about 50 per cent of imports and 60 per cent of exports, totaling $113 billion, might have used this route. “This conflict is leading to increased shipping costs (40-60 per cent) and delays due to rerouting (upto 20 days more), higher insurance premiums (15-20 per cent), and potential cargo loss from piracy and attacks,” the report said. 

Shipping costs for all container goods, including cars and electronics are also up. Confectionery companies are hit by high cocoa prices and shortages due to late deliveries from Africa, which has ultimately reduced profits. Further, textile and leather industries, which operate on thin margins, are renegotiating shipping costs with buyers, impacting earnings. 

What can India do to mitigate these challenges

To avoid high costs of oil imports, India might look to diversify its sources of crude oil and LNG, and explore alternative trade routes to reduce dependency on the conflict-prone Red Sea passage. “While India is implementing measures to ensure the safety of its ships in the Red Sea, the effectiveness may be limited as most Indian cargo is carried by global shipping firms,” GTRI said. Further, India can also rely on ports outside conflict zones, like Oman and Djibouti, for transshipment and regional trade.  

GTRI also stated that the government can offer financial support and insurance schemes to Indian companies affected by trade disruptions, while also strengthening partnerships with regional players like Saudi Arabia and the UAE to encourage economic cooperation and stability.  

Meanwhile, Indian firms are scrambling to avoid disruption to shipments due to attacks in the Red Sea. They are negotiating costs with logistics providers, insurance companies, and considering alternative ports to ensure the timely delivery of goods. “Firms are adopting strategies like multiple sourcing for less complex components to maintain supply continuity and cost efficiency. For more complex and critical products, companies are exploring strategic sourcing options including onshoring, nearshoring, and friendshoring to reduce geopolitical risks and ensure supply chain resilience,” it said. 

Trade disruption in Europe and Africa

As a result of the Red Sea crisis, countries around the world, including those in Europe, Asia, and the Americas, are also seeing price increases in a variety of products, from food to electronics, which ultimately contributes to inflation and impacts consumer spending power.

European Countries: European countries, heavily reliant on the Suez Canal for Asian imports, are grappling with higher shipping costs and potential goods reception delays, impacting a broad spectrum of industries from food to manufactured items. Countries in Northern Europe like Germany, the Netherlands, the UK, Belgium, and France are particularly vulnerable to these delays and cost increases.  

Africa and the Middle East (including Egypt, Sudan, Yemen): These regions are particularly vulnerable due to their reliance on grain imports of wheat, corn, and rice through the Red Sea. Countries like Egypt, Sudan, and Yemen, already facing food insecurity, could see worsening conditions if grain shipments are delayed or become more expensive. 

Russia: Crude oil exports to India, transiting through the Suez Canal, are impacted by the need for longer transit routes, affecting supply dynamics, costs and decreasing trade volumes.

A comprehensive international collaboration

With such drastic impact, the crisis underscores how geopolitical conflicts can swiftly destabilize global shipping routes, leading to increased shipping costs and significant delays across multiple sectors and regions. The crisis also underscores the importance of exploring alternative maritime and land based trade routes.  This, GTRI said, includes potential investment in the Northern Sea Route and expanded land transport infrastructure. India-Middle East-Europe Economic Corridor (IMEC) becomes important in this context.

IMEC, a key alternative to Suez route to export to Europe

India has proposed the development of the India-Middle East-Europe Economic Corridor (IMEC) and it is facing delays due to the 2023 Israel-Hamas war. Launched in September 2023, the IMEC was announced at the G20 Summit in New Delhi with backing from the US, India, European Union, and several Middle Eastern countries. It comprises rail, road, and sea routes across two main corridors: The East Corridor links India to the Arabian Gulf. The Northern Corridor connects the Gulf to Europe. Despite the delays, the IMEC is seen as an initiative that could significantly boost trade and economic development across three continents when realized.

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