- Yemeni Houthi rebels have intensified attacks on commercial vessels in the Red Sea, disrupting the global supply chain.
- The surge in attacks followed the escalation of the Israel-Hamas conflict in October.
- Houthi militants target merchant ships, raising concerns among Indian shipping companies about rising transportation costs.
In recent times, the Red Sea has become a hotspot for escalating conflicts, particularly with the increased aggressiveness of Yemeni Houthi rebels targeting commercial ships. The repercussions of these attacks are not only affecting the Western nations but are also affects the intricate web of global supply chains, presenting a growing concern for Indian shipping companies.
Rising Tensions and Retaliation
The situation took a significant turn with the retaliation initiated by the United States and the United Kingdom in response to the recent Red Sea ship attacks by the Iran-backed Houthi rebels. While the primary impact was felt by companies in the West, the consequences are now extending to other parts of the world, including India. These attacks have created a supply chain predicament, leading to a spike in transportation costs and causing a ripple effect on various stakeholders.
Genesis of Red Sea Attacks
The genesis of the attacks on commercial ships in the Red Sea can be traced back to the escalation of the Israel-Hamas conflict in October. The Houthi militants, in an apparent show of support for Hamas militants engaged in the conflict with Israel, have been targeting merchant ships passing through Yemen en route to or from Egypt’s Suez Canal. The strategic location of the Red Sea makes it a crucial shipping route for various countries, including India, as it facilitates trade to the US East Coast, Europe, the Middle East, and Africa.
The attacks by Houthi militants have prompted companies to reconsider their routes, opting for a safer but longer path through southern Africa. While this diversion ensures a more secure journey, it comes at a significant cost, both in terms of time and money. This redirection of shipping assets has led to a tripling of transportation costs, affecting the overall dynamics of global trade.
Indian Shipping Companies and the Escalating Costs
The escalating nature of these incidents in the Middle East has raised concerns among Indian shipping companies. Raajesh Bhojwani, the CEO of RBB Ship Chartering, a company specializing in ship chartering services, expressed his apprehensions regarding the impact on shipping costs. According to him, the incidents in the Red Sea have become a significant cause for concern within the shipping industry. Europe-bound containers of cargo companies are now opting for the Cape of Good Hope route instead of the Suez Canal due to the perceived risks in the Red Sea.
This rerouting, while ensuring safety, has resulted in a substantial increase in transportation costs. Bhojwani highlighted that the re-routing of shipping assets has led to a tripling of transportation costs. This escalation is particularly worrisome for Indian companies heavily engaged in global trade through these crucial shipping routes.
Impact on India’s Trade Routes
For India, the Red Sea remains a vital shipping route for the export of various commodities, including steel, engineering goods, textiles, chemicals, vehicles, and agro-products to Europe and the West. However, the current scenario has disrupted the smooth flow of trade through this route. The Suez Canal, being the only waterway allowing direct passage between Europe and Asia, requires ships to pass through the Red Sea. The alternative route, traveling through Africa, adds approximately 30 days to travel time, creating logistical challenges for companies relying on timely shipments.
Furthermore, the situation has led to a spike in insurance costs for shipping companies operating in the Red Sea. Several insurance companies have significantly increased premiums for ships sailing in the Red Sea, with some even opting to cease offering insurance coverage altogether. This has created an additional financial burden on shipping companies, further impacting their competitiveness in the market.
Global Trade Hiccups and India’s Concerns
As the fastest-growing major economy, India has been navigating through global trade hiccups, which became more pronounced in 2023 amid slowing demand. The fragile geopolitical situation in the Middle East, exacerbated by the Red Sea attacks, adds another layer of complexity for policymakers in New Delhi.
A report by the Research and Information System for Developing Countries suggests that India may see a substantial impact on its total exports in FY24, with a potential reduction of $30 billion. The report indicates that, based on an initial assessment, Indian exports could drop by 6.7 per cent this financial year. This projection underscores the vulnerability of India’s export sector to external geopolitical factors and disruptions in global trade routes.
Geopolitical Significance and Diplomatic Moves
India’s role in this tense situation gains prominence due to its proximity to Iran, which has backed the Houthi rebels. Amid these challenges, India’s External Affairs Minister, S Jaishankar, is expected to visit Tehran following discussions with US Secretary of State Antony Blinken. The objective is to navigate diplomatic channels and address the concerns arising from the geopolitical complexities in the Middle East.
The Commerce Ministry in India is also gearing up for an inter-ministerial meeting to strategize measures in response to the trade impact of the Red Sea attacks. This diplomatic and strategic maneuvering reflects the urgency with which India is approaching the challenges arising from disruptions in crucial trade routes.
Clarkson Research Services Insights
Clarkson Research Services Ltd., a unit of the world’s largest ship-broker, sheds light on the tangible impact of the Red Sea attacks on shipping dynamics. The data reveals that the number of ships using the Suez Canal has witnessed a significant decline. In the week leading up to January 3, vessels with a combined gross tonnage of over 2.5 million traversed the canal, down from roughly 4 million at the beginning of the month.
The Houthi rebels have employed various tactics, including drones and anti-ship missiles, to target vessels in the Red Sea. Their audacious move involved using a helicopter to board and seize an Israeli-owned ship and its crew. The rebels’ threats initially targeted vessels bound for or from Israel, but recent indications suggest a broader scope, encompassing ships flagged to countries like Norway and Liberia.
Major shipping container corporations, including Maersk, are responding to these threats by redirecting their ships around Africa and the Cape of Good Hope. While ensuring safety, this alternative route adds an additional week or two to voyages and comes with increased costs related to shipping, insurance, and fuel.
Addressing Global Concerns at the IMO
Recognizing the gravity of the situation, the co-organizers of the recent conference, including BIMCO, INTERPORTPOLICE, INTERMANAGER, the World Shipping Council, and Northeast Maritime Institute, plan to submit a proposal to the International Maritime Organization (IMO). The proposal aims to review and update the existing guidance to mitigate the impact of drug smuggling on ships and safeguard the interests of seafarers, shipowners, and societies.
The upcoming meeting of the IMO’s Facilitation Committee in April 2024 will serve as a platform to discuss and deliberate on the proposed measures. The goal is to formally address the implications of the Red Sea attacks on seafarers and shipping and develop strategies to navigate these challenges effectively.
The Red Sea attacks have not only disrupted global supply chains but have also prompted a comprehensive reassessment of trade routes and geopolitical strategies. The challenges posed by these attacks require a collaborative and diplomatic response to safeguard the interests of nations, shipping companies, and the global economy at large. As the world grapples with these evolving dynamics, proactive measures and international cooperation are essential to navigate the complex waters of global trade.
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Source: The Economic Times
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