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Economy
Mahesh

07/01/24 08:36 AM IST

How has Red Sea trouble impacted India?

In News
  • A spate of attacks on cargo ships in the Red Sea has forced freighters to take a longer transit around the Cape of Good Hope in Africa’s southern tip, making shipments both dearer and longer to deliver.
Impact on Indian Trade
  • After the attacks, major cargo shipping lines decided they would not operate on this route.
  • Even small feeder vessels have of late stopped plying in these waters.
  • Almost 90% of western hemisphere cargo, both inbound or shipped from India, that used to go through the Red Sea is now getting re-routed through the Cape of Good Hope.
  • The impact of this move varies on the type of buyer-seller contract. If it is FOB (free on board), the freight burden is on the buyer, and in CIF (cost, insurance and freight) or C&F (cost and freight) contracts, the freight has to be borne by the exporter.
  • In cases of FOB, and where the buyers have comfortable inventory, they are asking the Indian exporter to hold back consignment.
  • Likewise, exporters who have to bear the freight are requesting their buyers to allow them to hold the consignment given the increase in freight costs, which includes peak season surcharge and contingency surcharge.
  • Roughly 20-25% consignments are being held up. Container Corporation of India is saying about 25% of its containers are being held back by Indian exporters.
  • All consignments are likely to be impacted by the increase in freight cost — by up to six-fold in some cases — and the longer voyage time, the pinch would be felt most by low-value, high-volume cargo as well as perishables. 
Impact on India's Imports
  • Besides the extra time taken on account of the longer route, the developments could make imports costlier and call for better inventory management.
  • For instance, the Red Sea crisis could come in the way of any plans to reduce pump prices of petrol and diesel. Gross imports of crude oil and petroleum products as a share of India’s gross imports in value terms was 25.8% in 2022-23, and 22.6% in the first half of the current fiscal.
  • In fact, India’s import dependence (based on consumption) in the April-September 2023 period was 87.6%, according to the government’s Petroleum Planning and Analysis Cell.
  • Additional war risk premiums in the Red Sea have been partially contributing to the freight-rate increases for the relevant routes, but this surcharge is significantly lower than the costs linked to re-routing via the Cape of Good Hope.
  • Because of the current pricing dynamics, the tankers that are diverting are predominantly the ones chartered from companies announcing diversions as well as the ones operated by U.S. and Israel-linked entities.
  • Commodities are the worst affected whether it be chemicals, plastic, petrochemicals, because margins are not there to absorb the hike in freight.
  • For high value, low volume commodities airlifting is possible, but goods which are moved are generally large volume.
Source- The Hindu

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