Red Sea Houthi attacks roil India trade, may hit production

Houthi attacks in the Red Sea are impacting exports across sectors in India, a report by a New Delhi-based think tank said, warning that production could also take a hit if the crisis continues. 

Widespread trade disruptions may lead to surging freight costs, mandatory war risk insurance, and significant delays due to rerouting, the Global Trade Research Initiative (GTRI) said on Sunday.

“The adverse impact will multiply if the disruption continues beyond few more weeks as it will impact not only trade but local productions of many industries like automobiles, electronics, chemicals that rely on just in time procurement/import of inputs through the global value chains spanning both Europe and Asia,” GTRI co-founder Ajay Srivastava wrote in the report.

India’s exports face a significant surge in shipping costs, with average container spot rates more than doubling since early December 2023.

In certain instances, prices have skyrocketed four-fold when compared to rates from October 2023. The unpredictable security situation in the Red Sea further contributes to uncertainty in shipping schedules.

In response, exporters are deferring shipments, anticipating a more stabilized situation, thereby impacting the smooth flow of trade.

Basmati rice exporters face freight costs soaring to $2,000 per 20-tonne container for destinations around the Red Sea, marking a 233% increase. Farmers exporting perishable goods like grapes are encountering significant challenges due to the delays and uncertainty.

Life-saving drugs, textiles, diesel, aviation turbine fuel (ATF), and steel exporters are expressing concerns about additional charges levied on products.

Extended disruptions pose the risk of production delays in global value chains, especially for companies relying on just-in-time manufacturing processes. This may lead to a re-evaluation of global supply chain strategies to mitigate future risks.

Longer disruptions can lead to increased costs, production delays, and in some cases, a re-evaluation of global supply chain strategies to mitigate future risks, GTRI said.

Disruptions can lead to delays in manufacturing and increased costs in sectors like electronics, automotive, machinery, chemicals, pharmaceuticals, Plastics, textiles, consumer goods, and apparel.

The Houthi group has been employing drones and rockets against ships carrying goods through the strategic Bab al-Mandab Strait, a vital shipping route linking the Mediterranean Sea to the Indian Ocean.

This crucial waterway, supporting 30% of global container traffic, has witnessed heightened tensions in 2023, marked by attacks and military maneuvers involving regional and global powers.

According to GTRI, major shipping companies are actively avoiding the Red Sea and the Suez Canal routes due to the threat of attacks. Shipping companies are facing higher costs, and extended delivery times.

India is heavily reliant on this route for energy and trade imports and amid disruptions, exporters are looking for alternative trade routes.

In a recent development last week, a tanker operated on behalf of the trading giant Trafigura, carrying a shipment of Russian fuel, was hit by a Houthi targeted missile upon exiting the Red Sea. 

On 15 January, Houthi rebels launched a missile that hit a US-owned ship near the coast of Yemen in the Gulf of Aden. This incident occurred within 24 hours of their earlier launch of an anti-ship cruise missile towards an American destroyer in the Red Sea.

The disruptions have reverberated in the oil market. A drone attack on US forces in Jordan, coupled with Houthi attacks on vessels in the Red Sea, including a strike on a Russian oil tanker, contributed to a surge in global oil prices.

On Monday, Brent crude futures rose 26 cents, or 0.3%, to $83.81 a barrel by 0740 GMT after hitting a session high of $84.80. US West Texas Intermediate crude futures gained 23 cents, or 0.3%, to $78.24 a barrel after reaching an intraday high of $79.29 earlier in the session.