Exclusive: Red Sea attacks compel at least 65% of Indian exports shipments to Europe to take longer routes, sources say

The commerce ministry has also set up an internal strategic group, comprising additional secretaries of the ministry, to discuss global issues impacting the country's trade on a daily basis and prepare a strategy to deal with them.

At least 65 percent of Indian export shipments to Europe are taking the longer route via the Cape of Good Hope on the southern tip of Africa as cargo ships in the Red Sea continue to face the threat of attacks, sources told Moneycontrol.

"Most exporters are looking to avoid massive premiums on insurance charges to travel through the Red Sea and the Suez Canal," an executive from a global shipping major told c.

Despite the time taken using the much longer route, Indian exporters are opting for the safer passage notwithstanding the option to pay higher insurance premiums and move through the Suez Canal with military protection. A senior government official on January 5 said that the Indian government is providing security to consignments on the high seas amid the spate of attacks on freighters in the Red Sea region.

But freight rates have also increased with ships being forced to take the longer route to avoid the Red Sea region, increasing the turnaround time by around 14 days, according to a government official.

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A second official told Moneycontrol that container prices at major Indian ports have passed the $2,500 per TEU (twenty-foot equivalent unit) mark and insurance rates for exports to Europe are also soaring regardless of which route a ship takes when traveling to Europe from India.

Shipping and insurance companies are asking Indian exporters to pay nearly equivalent charges for exports to Europe, irrespective of the route taken because of high demand.

Due to this, Indian exporters have asked the government to step in to contain costs, the second official said, adding that the government is in talks with them to come up with ideas to mitigate the issue of soaring container prices, including providing conditional credit to exporters.

Moneycontrol exclusively reported on January 5 that India is mulling a variety of measures, including offering subsidies to Indian exporters to offset higher shipping costs and insurance premiums. New Delhi is also in touch with the US-led multinational coalition to ensure the safe passage of commercial vessels in the Red Sea.

The spot rate for shipping goods in a 40-foot container from Asia to northern Europe now tops $4,000, a nearly threefold jump from just before the diversions started in mid-December. Rates from Asia to North America’s East Coast have risen around 60 percent to $4,000 for a 40-foot container.

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Following the outbreak of the Israel-Hamas war in October, the Red Sea, a route through which around 12 percent of global trade passes, has been in the news for periodic attacks on commercial vessels by the Houthi rebels of Yemen, sparking concerns over its impact on global maritime commerce.

The attacks, which target commercial ships headed to or sailing through the Suez Canal, started with a drone attack on December 15 on the Liberia-flagged MSC Palatium III in the Bab al-Mandab Strait, off Yemen, at the southern end of the Red Sea. Following repeated attacks, some global shipping companies last month said that they would be rerouting some of their services via the Cape of Good Hope. The trading route, which passes through the southern coastline of Africa, can delay shipments by as much as 30 days.

Alternative markets

The first official cited above told Moneycontrol that the Indian government has asked Indian exporters to focus on markets in the east such as Australia in a bid to avoid higher costs as well as security issues associated with sending their outbound shipments to Europe in the current situation.

The second official confirmed this development as freight rates to Europe have more than doubled to around $2,500 for a 20-foot dry container.

"Several products like textiles and agricultural produce being transported to Europe are also transported to Southeast Asian countries and the Middle East from India. Exporters have been asked to study these markets as alternative export destinations," the second official said.

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India has been worried that the attacks on cargo ships passing through the Red Sea could particularly impact its agricultural exports to Europe.

An executive from one of the larger shipping companies said that the Indian government is trying to fast-track services on the Eastern Maritime Corridor to offer an alternative to exporters to transport goods to Europe through Russia.

However, trading companies sending goods to Europe highlighted the lack of demand for high-value spices and textiles in markets closer to India, and also emphasised that long-term investments have been made to meet European standards for exports.

"Markets like West Asia and Southeast Asia do not have a lot of demand for high-value produce like cotton, silk, saffron and cinnamon, amongst others. These products make up a significant portion of India's exports in terms of value to Europe," a Gujarat-based trader said.

This person added that if traders of high-value products consider alternative markets for their exports, they would have to consider a significant discount on their margins.

A Mumbai-based trader operating both in West Asia and Europe said that profit margins for high-value products, especially in the winters for warmer textiles, are much higher in Europe than in West Asian countries.

"Exports are very cyclical. Sweaters, quilts, warmers and warm spices are being exported to Europe from India at the moment, and it will be nearly impossible to find alternative landing spots for these products," the second trader said.

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India's exports to Europe through the Suez Canal include food products, apparel and electronics, and its imports include crude oil. In FY23, India’s overall merchandise trade (exports and imports) with Europe and North Africa were worth $106 billion and $98 billion, respectively. Approximately 50 percent of these imports and 60 percent of exports, totalling $113 billion, may have been through the Suez Canal.

In a paper, the Global Trade Research Initiative (GTRI), a think tank, said that the government must prepare for long-term shipping disruptions at the Bab-el-Mandeb Strait, which connects the Red Sea and the Gulf of Aden and further to the Indian Ocean.

“India’s approach should include looking for alternative trade routes that bypass the Bab-el-Mandeb Strait, negotiating contracts for oil and liquefied natural gas with alternate suppliers, offering humanitarian aid to Yemen, negotiating freight with international shipping companies, and paying part of increased insurance expenses,” GTRI said.

According to the Delhi-based Research and Information System for Developing Countries (RIS), India could face a nearly 7 percent drop in exports in 2023-24, amounting to around $30 billion, due to the threats to cargo vessels in the Red Sea leading to a surge in container shipping rates that would prompt exporters to hold back on shipments.

“The crisis in the Red Sea would indeed impact India’s trade and may lead to further contraction,” said Sachin Chaturvedi, the director general of the think tank.

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For India, the Red Sea is a major route for shipping to Europe, the US East Coast and West African countries. Last week, India sent a warship to the Arabian Sea where a Liberian-flagged vessel said it was hijacked near Somalia’s coast. The Indian Navy said it “successfully rescued” the ship.

The threats have pushed Indian exporters to defer around 25 percent of outbound shipments transiting through the Red Sea, according to Ajay Sahai, director general of the Federation of Indian Export Organisations, which falls under India’s Ministry of Commerce.

"Due to the Red Sea crisis, the Drewry Index—which is a container index for eight major shipping routes in the world—has gone up by $1,000 on average. So, there’s a huge hike in freight. Besides freight, there are other surcharges. Most private companies have put up a peak season surcharge of $1,500, a contingency/Red Sea surcharge which varies between $1,500 and $3,000," Sahai added.