The United Nations Conference on Trade and Development (UNCTAD) has expressed concern over the escalating disruptions in global trade stemming from geopolitical tensions that have escalated following Houthi-led attacks disrupting shipping in the Red Sea.
Maritime transport plays a critical role as the backbone of international trade, as it is responsible for over 80 per cent of the global movement of goods. The recent attacks on Red Sea shipping, coupled with existing geopolitical and climate-related challenges, have given rise to a complex crisis affecting key global trade routes, UNCTAD observes. As per UNCTAD estimates, the weekly transits going through the Suez Canal has decreased by 42 per cent over the last two months. According to CRISIL Ratings, the impact of the ongoing crisis around the Red Sea in the Middle East, on India, is expected to vary depending on the industry and sector-specific and trade nuances.
The ongoing conflict in Ukraine has triggered substantial shifts in oil and grain trades, reshaping established trade patterns. Simultaneously, the Panama Canal, a pivotal conduit for global trade, is grappling with diminished water levels, resulting in a staggering 36 per cent reduction in total transits over the past month compared to a year ago. The crisis in the Red Sea has added another layer of complexity. Major players in the shipping industry have temporarily suspended Suez transits in response. Notably, container ship transits per week have plummeted by 67 per cent compared to a year ago, with container carrying capacity, tanker transits, and gas carriers experiencing significant declines.
The surge in the average container spot freight rates during the last week of December, by plus 500 dollars, in one week, was the highest ever weekly increase. Average container shipping spot rates from Shanghai this week are up by 122 per cent compared to early December. The rates from Shanghai to Europe went up by 256 per cent, i.e. more than tripled. Rates to the United States West coast also increased above average – by 162 per cent, although they do not go through Suez, reflecting the global impact of the crisis, as ships explore alternative routes, avoiding the Suez and the Panama Canal.
The UNCTAD has warned of far-reaching economic implications of these disruptions, spilling over increases in food and energy prices. Prolonged interruptions, particularly in container shipping, pose a direct threat to global supply chains, potentially leading to delayed deliveries and heightened costs. While current container rates are approximately half of the peak during the Covid crisis, passing on higher freight rates to consumers takes time, with the full impact expected to manifest within a year.
As noted by CRISIL, increasing attacks on ships sailing in the Red Sea region since November 2023 have persuaded shippers to consider the alternative, longer route past the Cape of Good Hope. This has not only stretched delivery time by 15-20 days, but also increased the transit cost substantially because of incremental freight rates and insurance premium. Indian companies use the Red Sea route through the Suez Canal to trade with Europe, north America, north Africa and part of the middle-east (ME). These regions accounted for 50 per cent of India’s exports worth Rs 18 lakh crore and 30 per cent of imports worth Rs 17 lakh crore last fiscal. India’s overall merchandise trade (exports and imports combined) last fiscal was Rs 94 lakh crore, with 68 per cent (in value terms) and 95 per cent (in volume terms) shipped through sea, says the CRISIL report.
Players operating in sectors such as agricultural commodities