Longer disruptions at Red Sea trade route may hurt auto, electronics production: GTRI

The Global Trade Research Initiative (GTRI) said companies relying on just-in-time manufacturing processes can be particularly vulnerable as they maintain low inventory levels and depend on the timely arrival of components and finished products.

Exporters have also expressed apprehensions that if the crisis continues, it will hurt the country's trade. Image Courtesy: Reuters.

Longer disruptions at the crucial Red Sea trade route may hurt manufacturing lines of some sectors like electronics, automobiles, chemicals, consumer goods and machinery, economic think tank GTRI said on Sunday.

The Global Trade Research Initiative (GTRI) said companies relying on just-in-time manufacturing processes can be particularly vulnerable as they maintain low inventory levels and depend on the timely arrival of components and finished products.

Few industries where production will be impacted due to disruptions in global value chains include electronics, automotive, machinery, chemicals, pharmaceuticals, plastics, textiles, and consumer goods, it added.

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Components and finished products are often shipped through the Suez Canal to reach different markets, and disruptions can lead to delays in manufacturing and increased costs, it said.

Due to the attacks by Houthi rebels on commercial ships, the movement of goods from the Red Sea, the world's busiest shipping route, has disrupted the global supply chains as vessels have to take long routes for exports and imports. The immediate ripple effects are seen in increased freight costs, mandatory war risk insurance, and significant delays due to rerouting.

"The adverse impact will multiply if the disruption continues beyond a few more weeks as it will impact not only trade but local productions of many industries, which rely on just-in-time procurement/import of inputs through the global value chains spanning both Europe and Asia," GTRI co-founder Ajay Srivastava said.

He said that average container spot rates have more than doubled since early December 2023. Basmati rice exporters face freight costs soaring to USD 2,000 per 20-tonne container for destinations around the Red Sea, marking a 233 per cent increase, Srivastava added.

Similarly, he said, the other sectors which have faced issues include life-saving drugs, textiles, diesel, ATF, and steel. Exporters have also expressed apprehensions that if the crisis continues, it will hurt the country's trade.

Mumbai-based exporter SK Saraf said the time is right for India to consider building a big domestic shipping company, as, at present, "we are completely dependent on foreign shippers". Reports have linked the increased attack by Yemen-based Houthis on commercial ships with the Israel-Hamas war in October last year.

Houthi group has been using drones and rockets on ships, which are transporting goods through the strait of Bab al-Mandab, which is a crucial shipping route connecting the Mediterranean Sea to the Indian Ocean.

The strait, vital for 30 per cent of global container traffic, has seen increased tensions with various incidents in 2023, including attacks and military manoeuvres by regional and global powers.

India is heavily reliant on this route for trade and energy imports and due to the disruptions, exporters here have to diversify their trade routes. Strikes have been continuing for many years but escalated this year sharply, with militants now using anti-ship ballistic missiles.

To avoid attacks, most large shipping firms, since December 15 last year, have stopped using the Bab al-Mandab straits for trade with Europe via the Red Sea and Suez Canal. The closure of this route snaps a critical trade link between Europe and India and all of Asia.

Ships going to Europe will now move via a much longer route around the Cape of Good Hope, the bottom tip of Africa. This change increases voyage distances by 40 per cent and raises transportation time and cost.

According to GTRI, the large shipping firms that stopped plying ships include the Danish firm Maersk and Swiss-Italian MSC(Mediterranean Shipping Company), German Hapag-Lloyd, and French CMA CGM (Compagnie Maritime d'Affretement - Compagnie Generale Maritime).

The Bab-el-Mandeb Strait, also known as the 'Gate of Tears' in Arabic, is a crucial trade route that connects the Mediterranean Sea and the Indian Ocean via the Red Sea and the Suez Canal. It separates Africa from the Arabian Peninsula.

The strait is only about 29 miles wide at its narrowest point, making it easy to block or disrupt shipping. The two main shipping routes from India to Europe are via Bab-el-Mandeb Strait, Suez Canal and Red Sea; and II-Via Cape of Good Hope, encircling Africa.

The Red Sea route is shorter and faster, making it the preferred option for most shipping companies. It starts from major Indian ports like Mumbai, JNPT, or Chennai, heads westward through the Arabian Sea, enters the Red Sea, and navigates through the Suez Canal into the Mediterranean Sea.

From there, ships can reach various European ports depending on their destination. On the other hand, the Cape of Good Hope route is longer and slower than the Suez Canal route, but it avoids the potential for delays or disruptions. It is used for bulk cargo shipments where time is less critical or when political instability in the Middle East raises concerns about using the Suez Canal.

It starts from the Indian ports, heads southward across the Indian Ocean, rounds the Cape of Good Hope at the southern tip of Africa, and then sails northward along the west coast of Africa before entering the Mediterranean Sea and reaching European ports.

India is heavily reliant on this strait for its crude oil, LNG imports and trade with the Middle East, Africa, and Europe.

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