As Red Sea crisis persists, freight rates move toward a 25-30% increase

Since the outbreak of the Israel-Hamas war on 7 October, a series of attacks targeting commercial vessels in the Red Sea has raised concerns about potential disruptions to the global supply chain. The 21 November incident involving the hijacking of the Israeli cargo vessel Galaxy Leader, which was enroute from Turkey to India, is just one of the many reasons to worry. The vessel, carrying 25 people, fell victim to Yemen-based Houthi rebels aligned with Iran in the West Asian sea.

In the wake of increasing attacks on international shipping in the Red Sea by the Houthi rebels, global freight rates have begun to face the brunt of a perilous surge in insurance and shipment costs. The attacks are believed to be a proxy response to Israel's ongoing conflict with Tehran-backed Hamas militants in Gaza, designated as a terrorist organisation by the EU, US, and other nations.

The Houthi rebels have declared their intention to target any ships heading to Israel, launching almost daily attacks despite most being unsuccessful and often directed at vessels unrelated to Israel. The disruption is of global concern as the Bab-el-Mandeb Strait, a crucial passage connecting the Mediterranean Sea to the Arabian Sea via the Red Sea and Suez Canal, facilitates 30 per cent of global container traffic. India, heavily reliant on this route for trade with West Asia, Africa, and Europe, now faces economic and security threats owing to the turmoil.

The security situation has raised fears of increased energy costs for India, which relies on the strait for crude oil and LNG imports. The Global Trade Research Initiative (GTRI) warns of potential impacts on India's economy and security, with the possibility of longer routes around the Cape of Good Hope leading to higher insurance premiums and freight rates.

The journey will take more than a week longer and will add about 3,500 nautical miles (6,482 km). The Suez Canal, which connects the Red Sea to the Mediterranean, is the shortest route between Europe and Asia. About 12 per cent of global shipping traffic normally transits the waterway.

Major players in the oil industry have begun responding to the crisis. British Petroleum has suspended all shipments through the Red Sea in response to Houthi threats. Shipping giants Hapag-Lloyd and Evergreen have rerouted vessels, prompted by recent near-miss incidents and damages sustained by their ships in the region.

The situation is exacerbated by a majority of insurance companies refusing coverage for shipments crossing the Red Sea. This comes after Houthi militants targeted a Liberian-flagged ship with an anti-ship ballistic missile, leading some insurers to impose a $5,200 war risk surcharge in addition to regular freight charges.

Ajay Sahai, director-general and CEO of the Federation of Indian Export Organisations (FIEO), warns that if the crisis persists, freight rates could see a significant jump of 25-30 per cent, adversely affecting Indian exporters.

However, there is a glimmer of hope as the United States, along with nine other countries including Bahrain, Canada, France, and Italy, announced the launch of a multinational force to patrol the Red Sea and protect trade routes. This initiative aims to alleviate the risk, providing a potential solution to the escalating tensions in the region.

Indian businesses to be directly hit are those exporting manufactured goods like automotive parts, agricultural products, chemicals, textiles, readymade garments and pharmaceutical products. However, despite major shipping lines opting to avoid the Suez Canal route owing to security threats in the region, Indian grape exporters anticipate that they will be able to bear the disruptions. India is set to export Rs 1,500-crore worth of grapes to Europe in the coming months.

The exporters feel that even with potential rises in freight costs, Indian grapes will have customers attributing this optimism to the high demand for Indian grapes in Europe amidst diminishing supplies from South America.

Recognising the critical role of the Suez Canal in global agricultural transport, they remain hopeful of a swift resolution to the current security concerns. Rohit Sareen, senior VP at agritech startup DeHaat, told the Economic Times that while the ongoing issues have led vessels to divert through the Cape of Good Hope, any resulting increase in logistical costs will be absorbed in the final price due to the robust demand for Indian grape varieties in the EU and UK. Exporters argue that even if shipping delays of 15 to 20 days occur, the quality of the grapes will remain unaffected, given their approximate two-month shelf life.

While Indian grape exporters feel as they do, major shipping companies, including Maersk, Mediterranean Shipping Company, Hapag-Lloyd, and CMA CGM have halted operations in the troubled region. With the international community watching closely as geopolitical tensions threaten to reshape the landscape of global trade, it brings back memories of the crisis in March 2021. Memories that serve as a stark reminder of the vulnerability of critical maritime routes.

The present uncertainty takes on even greater gravity as it unfolds against the backdrop of the ongoing conflict involving Israel and Hamas. The link between geopolitical tensions and disruptions in vital trade routes underscores the delicate balance upon which international commerce teeters. The maritime community remains on edge, acutely aware of the broader implications and the need for diplomatic resolutions to ensure the free flow of goods amidst a sea of uncertainties.