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Red Sea crisis : Indian exporters save on higher shipping costs as importers start sharing burden

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NEW DELHI : Even as the Red Sea crisis pushes up shipping expenses, Indian exporters are getting some relief from the higher cost burden by negotiating rates afresh with their buyers, a government official said.“With the renegotiated rates, the increase in cost is being split between the exporter and importer,” the official said.

The Drewry World Container Index, which serves as a composite measure of container freight rates, reached $3,786 per 40-foot container in the week up to February 8, up 90 percent when compared with the same week last year, and 167 percent more than average 2019 (pre-pandemic) rates of $1,420.

However, according to the official, in the new contracts getting forged now, Indian exporters are able to lower their burden of higher shipping costs. 

“The maximum impact of the crisis on exporters was during the first 15 days since the commitments had to be shipped irrespective of the changes in the costs. To that extent, the exporter takes the major part of the hit. But over a period of time, they renegotiate the rates so the increase is borne by the exporter and importer and then passed on to the consumer,” the official added.

Taking the hit

“Exporters have now accepted the new rates and are working with the increased freight costs,” said Israr Ahmed, president (officiate) of the Federation of Indian Export Organisations. “Since the crisis has been going on for a few months, new contracts are being negotiated and importers are also sharing some of the cost burden.”

With attacks on commercial vessels using the Red Sea route persisting, freight companies are choosing the longer route around Africa to reach the west or wait at nearby ports to ensure safe passage through the Suez Canal.

According to Ahmed, overall shipping costs have increased by 50 to 100 percent in some cases for every container shipped out. However, since freight costs were five to 10-fold steeper during COVID-19, exporters can accept the hit due to the fallout of the Red Sea crisis, he added.

The increase in overall shipping rates is still less pronounced than those seen during the peak of the pandemic over 2020-2022, BMI, a Fitch Solutions company, said in its summary report for January 2024.

India’s exports to Europe through the Suez Canal (in the Red Sea) include food products, apparel, and electronics, and its imports primarily include crude oil. New Delhi has been worried that the attacks on cargo ships could particularly impact its agricultural exports to Europe.

“People are finding alternatives. Those who would ship to the US East Coast are now shipping to the West Coast and trucking it down to the US East Coast. Some are going around the Cape of Good Hope. I believe prices will gradually come down as alternative routes become the norm,” Ahmed told.

Following the outbreak of the Israel-Hamas war in October, there have been periodic attacks on commercial vessels traversing the Red Sea by Yemen-backed Houthi rebels since late November.

The United Nations Conference on Trade and Development said last month the Suez Canal, connecting the Mediterranean Sea to the Red Sea, handled 12 percent to 15 percent of global trade in 2023. UNCTAD estimated that trade volumes going through the Suez Canal decreased by 42 percent over the past two months.

According to J.P. Morgan Research estimates, 30 percent of global container trade passes through the Suez Canal, and the Red Sea shipping crisis is upending supply chains.

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