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What’s Happening in the Red Sea?

Houthi rebels in Yemen, backed by Iran, are attacking commercial ships in the Red Sea.

This is in response to Israel's conflict with Palestine.

Large ships are now rerouting around Africa, avoiding the Red Sea for safety.

The recent tensions in the Red Sea have sent shockwaves through global trade, and Various sectors are feeling the heat. Let's break down the key points:

Impact on the Global Economy 

  • Traffic in the Red Sea: The Suez Canal, through which $1Trillion of goods transverse, is facing adverse effects due to the attacks. A significant number of vessels are now prioritizing alternative routes, leading to potential disruptions to global trade.

  • Increased Costs: 30% of container traffic which passes through the sea will have to be re-routed leading to increased costs of transportation and additional fuel and insurance costs.

  • Commodities: Crude oil prices will increase as 7-10% of oil and 8% of LNG is transported through this route as the link is disrupted there will be delays in supply.

  • Shipping Disruptions: The volume of trade passing through the Red Sea has declined since the start of 2024 leading to Potential shortages and price increases for various goods due to disrupted supply chains like; Footwear, Seasonal goods will be impacted and a rise in prices will be witnessed. 

  • Shortage of Trade Containers:- 

Affected sectors:

  • Refined petroleum and other Oil products: Similar to chemicals, facing rerouting costs and supply chain challenges. Energy supply disruptions could impact commodity prices and the global economy. Experts warn that prolonged disruptions could lead to “stagflationary” effects, characterized by stagnant economic growth coupled with high inflation.

  • Chemical: Chemical companies like BASF, Kemira, and MOSAIC have already been affected. The German Chemical Industry depends on Asia for a third of its Imports outside of Europe. In addition to delayed imports, chemicals groups point to higher fuel costs, as tankers transporting crucial raw materials take around 14 days longer to arrive.

  • Retail: Companies such as CROCS, IKEA, Walmart, Home Depot and Amazon experienced delays in product deliveries, supply chain disruptions, affecting their operational efficiency. This situation particularly impacts seasonal merchandise such as spring apparel, footwear, household items, outdoor furniture, and pool supplies.  

  • Automobiles: European carmakers like Tesla are experiencing production slowdowns due to delayed chemical imports. Toyota, Hyundai and Kia are also experiencing delays because of rerouted vessels adding more than 20 days to trips between Asia and Europe.

  • Production slowdowns: Delays in crucial imports are forcing some companies to scale back production, impacting dishwasher tablets, fertilisers, and more.

Source- United Nations Conference on Commerce and development 

Impact on the Indian Economy

  • Loss of exports: Exports worth $200 billion pass through the suez canal and disrupting this will lead to loss of revenue and may affect Trade deficit. 

  • Inflation: Cost of retail goods like rice and other consumption goods may rise to more than 15-20%. Rise in inflation worsens the growth rate particularly when banks are lowering interest rates. 

  • Trade & Logistics: Increase in cost of transportation and cost of insurance will rise as the travel time will increase due to longer routes. Shipping costs have significantly increased due to rerouting around the affected area. Basmati rice exporters, for example, have seen a 233% hike in costs per container. Shipping a container to Britain now costs around $4,000 compared to $600 before the Red Sea crisis, Ashok Kajaria, chairman at Kajaria Ceramics told an analysts' call last month.

  • Trade disruptions: India, reliant on the Red Sea for 65% of its crude oil imports, is seeing disruptions in key export sectors like chemicals and plastics. The red sea connects Indian trade routes with America and Europe which will be deeply impacted and there would be a significant loss of business. 

  • Looming Dangers: More than 80% of India's merchandise trade with Europe ($8 billion) and the United States ($6 billion) would normally take place via the Red Sea monthly. India's textile industry - which directly employs 45 million people and indirectly another 15 million could lose their business to Turkey’s clothing industry due to their locational advantage.

  • Job losses :   According to a report small indian exporters with exports worth $450 billion are hinting at job cuts and some are visible in Southern India where small exporters are working 1/3rd of their capacity 

Notable Impact on Specific Companies

SRF Ltd: Manufacturer and seller of chemicals, packaging films, aluminium foils.

  • Financials: The company reported fall in OPM% and saw 16% fall QoQ and 50.4% fall YoY in Dec 2023

  • Concalls: The directors emphasises that the margins and profits shrieked due to various factors including slow growth of pharmaceutical industries and competition among local suppliers due to longer shipping cycles due to ongoing red sea crisis. 

Tata Chemicals: Manufactures and exports basic chemistry and specialty products.

  • Financials:  The company reported fall in OPM% and saw 57% fall QoQ and 54% fall YoY in PBT for Dec 2023; margins shrinked by 5% to 15% 

  • Concalls: The management emphasised that the performance fell due to pricing pressure and lower volumes particularly in the US and increase in fixed costs during the quarter with the rise of Turkish exports in Asian markets. 

Businesses Chart New Courses to Beat Disruption

  • Cape of Good Hope Route: The Cape of Good Hope, located at the southern end of the Cape Peninsula, South Africa, is known for its stormy weather and rough seas.

  • Increased Distance and Time: The Cape of Good Hope route adds approximately 3,500 nautical miles (6,482 km) to voyages, increasing shipping times by at least 14 days. This extended journey time can lead to about a 30% increase in cost.

  • Increased Costs: The longer route leads to increased fuel bills and higher insurance premiums. Redirecting ships is expected to cost up to $1m in extra fuel for every round trip between Asia and Europe.

  • Targeted Airfreight: Companies are using air cargo strategically for high-value, time-sensitive goods impacted by Red Sea disruptions. This helps maintain customer satisfaction and mitigate revenue losses. For example, Korean Air Cargo reports an increase in inquiries for electronics, pharmaceuticals, and auto parts shipments. (Source: The Economic Times, "Freighters seek air cargo back-up amid Red Sea shipping crisis"). Though this would not benefit the Chemical sector well as some chemicals are not allowed to be transported by plane.

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