The ever-deepening tension between Iran and the Gulf countries has once again created a deep cloud of crisis over the world’s most important maritime trade routes, the Strait of Hormuz and the Red Sea-Suez Canal. Any disruption on these sea routes directly means a huge increase in shipping and logistics costs. This obstacle coming in the way of foreign trade can also have a heavy impact on the profits of Indian companies.
Pressure on economy due to blockade of sea routes
Whenever security threats increase on these global waterways, the first impact is seen in the form of skyrocketing freight and insurance prices. According to Dr. Manoranjan Sharma, Chief Economist of ‘Infomeric Ratings’, although India’s trade relations are spread across many countries, due to which protection is possible to some extent, but due to continuously increasing tensions, transportation costs are certain to increase.
There is a possibility of huge pressure on the profits of key sectors that are highly dependent on energy, such as aviation, logistics, paints and chemical industries. On the contrary, the rise in crude oil prices can directly benefit oil producing companies. Dr. Sharma warns that if this tension is not reduced soon, the government may have to spend more on its social schemes and subsidies to support the domestic economy, which will put additional pressure on the exchequer.
Bitter lesson learned from Red Sea crisis
The attacks by Houthi rebels on merchant ships in the Red Sea at the end of 2023 can give an idea of how quickly the situation is deteriorating. According to the ‘ICRA’ report of January 2024, about 12 percent of the world’s trade passes through the Suez Canal. This route reduces the distance from the west coast of India to Europe by about 15 days compared to the ‘Cape of Good Hope’ (African route).
When most global shipping companies abandoned the Red Sea route due to fear of attacks and chose the longer African route, freight rates soared by more than 120 percent within a few months. India’s trade with Europe, North Africa and America, which is more than 35 percent of the total foreign trade, depends on this route. Due to the longer route, more fuel was consumed and insurance premiums increased. Due to which the landed cost for the companies increased drastically.
From Basmati rice to fertilizer… who will be blamed?
The impact of such logistics crisis is not the same on every industry. According to the report of ‘Crisil Ratings’, agricultural products and marine foods are most sensitive to this shock. Our country exports 30-35 percent basmati rice and 80-90 percent marine products, a major part of which goes through this sea corridor. Due to the fear of perishability of these products and low profit margins (lean margins), exporters are unable to bear the burden of high freight charges. In such a situation, they are forced to sell their goods in the domestic market at lower prices.
Is there anyone’s benefit in this crisis?
Every crisis in the economy also brings business opportunities for someone or the other. According to CRISIL analysis, during the Red Sea crisis, when container fares around the world increased by 2.5 to 3 times the initial level in December 2023, shipping companies and freight forwarders took advantage of the situation.