Global Rice News

Longer Disruptions at Red Sea Trade Route Could Impact Multiple Industries, Says GTRI

According to the Global Trade Research Initiative (GTRI), longer disruptions at the Red Sea trade route could potentially harm the manufacturing lines of various sectors, including electronics, automobiles, chemicals, consumer goods, and machinery. This is especially true for companies that rely on just-in-time manufacturing processes, as they maintain low inventory levels and depend on the timely delivery of components and finished products. The GTRI also mentioned that disruptions in global value chains could lead to delays in manufacturing and increased costs for industries such as electronics, automotive, machinery, chemicals, pharmaceuticals, plastics, textiles, and consumer goods.

The movement of goods through the Red Sea, which is the busiest shipping route in the world, has been disrupted due to attacks by Houthi rebels on commercial ships. As a result, vessels have to take longer routes for exports and imports, causing immediate ripple effects such as increased freight costs, mandatory war risk insurance, and significant delays due to rerouting.

Ajay Srivastava, co-founder of GTRI, stated that the adverse impact will continue to multiply if the disruption persists beyond a few more weeks. This will not only affect trade but also local production in various industries that rely on just-in-time procurement or imports of inputs through global value chains spanning both Europe and Asia. Srivastava also mentioned that average container spot rates have more than doubled since early December 2023.

Basmati rice exporters, for example, are facing a significant increase in freight costs, with prices soaring to USD 2,000 per 20-tonne container for destinations around the Red Sea. This marks a 233% increase in costs. Other sectors, including life-saving drugs, textiles, diesel, ATF, and steel, have also been affected by the disruptions.

Exporters have expressed concerns that if the crisis continues, it will have a detrimental impact on the country’s trade. As a result, some suggest that India should consider building a large domestic shipping company to reduce dependency on foreign shippers.

The increased attacks by Yemen-based Houthis on commercial ships have been linked to the Israel-Hamas war in October last year. The Houthi group has been using drones and rockets to target ships passing through the strait of Bab al-Mandab, a crucial shipping route that connects the Mediterranean Sea to the Indian Ocean. This strait is vital for 30% of global container traffic and has experienced increased tensions with various incidents in 2023, including attacks and military maneuvers by regional and global powers.

Due to the disruptions, shipping firms, including Maersk, MSC, Hapag-Lloyd, and CMA CGM, have stopped plying ships through the Bab al-Mandab strait for trade with Europe via the Red Sea and Suez Canal since December 15, 2023. Instead, ships are now taking a longer route around the Cape of Good Hope, increasing voyage distances by 40% and raising transportation time and costs.

The Bab-el-Mandeb Strait, also known as the ‘Gate of Tears’, is a crucial trade route that connects the Mediterranean Sea and the Indian Ocean via the Red Sea and the Suez Canal. The strait is only about 29 miles wide at its narrowest point, making it susceptible to blockades and disruptions.

India heavily relies on this route for trade and energy imports, and due to the disruptions, exporters are diversifying their trade routes. The two main shipping routes from India to Europe are via the Bab-el-Mandeb Strait, Suez Canal, and Red Sea, or via the Cape of Good Hope, which encircles Africa. The Red Sea route is shorter and faster, while the Cape of Good Hope route is longer and slower but avoids potential delays or disruptions.

In conclusion, longer disruptions at the Red Sea trade route have the potential to impact multiple industries, with manufacturing lines in sectors such as electronics, automobiles, chemicals, consumer goods, and machinery being particularly vulnerable. The disruptions have led to increased freight costs, delays, and the need for rerouting. Basmati rice exporters, in particular, are facing significant increases in freight costs. To mitigate the effects, exporters are considering diversifying their trade routes.