50% of country’s exports, 30% of imports go through Red Sea route: Report

According to a report, the impact of the ongoing crisis around the Red Sea shipping route, which accounted for 50 percent of the country’s exports and 30 percent of its imports in the last fiscal year, will vary depending on the industry. The crisis in the Red Sea shipping route began when Yemen-based Houthi rebels launched a series of attacks on commercial shipping vessels plying the route in November as a result of the Israeli-Palestinian war that began in early October 2023.

At present, American and British forces are also engaged in counter-attack on the militants.

Domestic companies use the Red Sea route through the Suez Canal to trade with Europe, North America, North Africa and part of the Middle East. In the last financial year, these sectors contributed 50 per cent of the country’s exports of Rs 18 lakh crore and 30 per cent of imports of Rs 17 lakh crore. According to a report by Crisil Ratings, the country’s total merchandise trade in the last financial year was Rs 94 lakh crore, of which 68 percent of the value and 95 percent of the volume was transported by sea route.

The country imports 30 percent DAP from Saudi Arabia, 60 percent rock phosphate from Jordan and Egypt and 30 percent phosphoric acid from Jordan. Companies operating in sectors such as agricultural commodities and seafood may see a significant impact due to the perishable nature of their goods and/or low margins, which limits their ability to absorb risk from rising freight costs. Is.

Shanghai-North Europe container freight rates have increased by more than 300 percent to US$6,000-7,000/TEU) by November 2023. On the other hand, companies operating in sectors such as textiles, chemicals and capital goods will not be immediately impacted, either because they have a better ability to absorb higher costs, or because of the weak business cycle. But a prolonged crisis could also make these sectors vulnerable as the freeze on orders would stretch the working capital cycle.

However, some sectors such as shipping may benefit from rising freight rates. Lastly, players in the pharma, metals and fertilizers sectors will not be much impacted. Increasing attacks on ships sailing in the Red Sea region from November 2023 have prompted ships to consider an alternative longer route past the Cape of Good Hope. This has not only increased the delivery time by 15-20 days, but also significantly increased transit costs due to increase in freight rates and insurance premiums.

For agricultural commodities like basmati rice (30-35 per cent of production is sent to these regions), exporters are feeling the pressure as rising freight costs have curbed exports and a part of their inventory is now destined for the domestic market. Being sold, due to which there is a restraint in receipts. Similarly, a significant impact can also be seen on marine commodities (mainly shrimp and prawns) as 80-90 per cent of the production is exported, and more than half of this through the Red Sea. Their perishable nature and low margins make exporters vulnerable to rising freight costs and competitive pressure from Latin American suppliers.

While textiles, especially home textiles (75 percent of production is exported, mainly to these sectors), their mid-teens margins may absorb higher freight rates for some time. Similarly, in chemicals (25-30 per cent of revenues of agrochemicals and specialty chemicals manufacturers come from these sectors), exports may be less affected given adequate channel inventories and weak near-term demand outlook. Capital goods sector players (with exports and imports of over Rs 2 lakh crore each) may be affected by continued disruption in trade routes due to delivery delays, leading to a slowdown in inventory build-up and order conversion for EPCs . Companies.

For some import-dependent players, such as non-urea fertilizer manufacturers, who source the final product and/or its key raw materials/intermediates, the impact will be limited given the current low consumption period and substantial inventories, but there will be a sustained increase Will happen. Sourcing costs will have to be compensated through higher subsidies from the government. Crude oil may also be less affected because only 10 percent of global oil trade passes through the Red Sea, and the current disruptions have had a limited impact on prices. As the crisis escalated, crude oil prices rose 5-7 percent to US$80/barrel in mid-December 2023, but have since stabilized in the US$77-80/barrel range.

It is not that the Red Sea crisis will have a negative impact on all sectors. In fact, for some areas, it will offer a tailwind. Shipping companies and freight forwarders should benefit from higher charter rates, after a year that saw global trade fall sharply due to the recession. While the immediate impact of the crisis on most Indian industries will be minimal, a longer-term conflict could impact the profitability and working capital cycle of export-oriented industries. Its extent will vary depending on regional specifics. Supply chain issues may also intensify, curbing trade volumes and rekindling inflation pressures.

(This story has not been edited by News18 staff and is published from a syndicated news agency feed – PTI)