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Houthi attack in Red Sea: Is higher commodity and crude oil prices in the offing?

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India has remained largely insulated from the two ongoing wars in Europe and the Middle-east. But recent disruptions in the Red Sea, sparked by attacks by the Yemen-based Houthis, have begun to impact India’s shipments. This has set alarm bells ringing in the government.

The recurrent attacks that started on November 19, when the Houthis hijacked a commercial ship in the Red Sea, are becoming a cause for concern because of the looming threat of a rise in freight costs that could hurt Indian exports, and a potential spike in crude oil prices, apart from the safety of Indian ships and seafarers. External Affairs Minister S. Jaishankar took this issue up with Iran, which has backed the Houthis, during a visit to the country in mid-January, while the commerce ministry is working with exporters to iron out their problems. The Indian Navy has also been deployed to ensure the safety of Indian ships.

For now, though, India does not plan to join any multinational naval coalition, such as the one led by the US, to secure cargo travelling through the area.

The Red Sea, which connects to the Mediterranean via the Suez Canal, is a vital conduit for Asia-Europe container shipments, which represent up to 15% of global trade. Because of the Houthi attacks, believed to be retaliation for the war between Israel and Hamas, vessels have had to be rerouted all the way around Africa via the Cape of Good Hope, doubling shipping costs and lengthening delivery times by as much as 25%.

For Indian exporters, this is turning into a major pain point. About 34% of India’s exports are to Europe and the eastern coast of the US, and these shipments are now being rerouted, meaning ships have to traverse an extra 4,000 to 6,000 nautical miles, leading to delays of at least a fortnight.

An inter-ministerial meeting chaired by Commerce Secretary Sunil Barthwal and attended by officials from the ministries of external affairs, defence, shipping and the department of financial services on January 17 took stock of the situation and decided to ensure sufficient credit flow to exporters, who have been facing a spike in shipping costs. The commerce ministry has also met with exporters to understand and address their problems.

“It is a very serious situation for exporters. For a 20-foot container to Europe, shipping costs have gone up to $2,100-2500 from the previous $500-600. In the case of the east coast of the US, shipping costs have doubled to $3,100 from $1,600. Another round of hikes is likely,” says Arun Kumar Garodia, Chairman of the Engineering Export Promotion Council of India (EEPC).

Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations, says many exporters are holding back consignments on the instruction of buyers. Nearly 25% of containers with Indian shipments have also been held back at the port. “The government is trying to resolve this challenge both through diplomatic means as well as by ensuring more credit to exporters. But exports will be impacted if the situation continues,” he says. Besides, getting insurance is also a challenge now as many private insurers have stopped providing cover for the route, he adds.

Moody’s Analytics said its baseline view is that the immediate economic implications are limited. However, risks abound, it warned. “If the disruptions last longer than expected, or if the situation in the region deteriorates, deeper economic damage would be the result. Disruptions, if significant enough, could impair production in Asia’s advanced manufacturing hubs, stretching inventories, and leaving assembly lines idle,” it said. An attendant uptick in commodity prices would worsen the damage, given developed Asia’s overwhelming dependence on energy imports—Japan, South Korea, Taiwan, Singapore, and Hong Kong import more than 80% of the energy consumed domestically.

For now, the Indian government remains hopeful that this will be resolved soon and will not have a significant impact on the economy, which has remained resilient to multiple shocks in the past.

 

@surabhi_prasad

 

 

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