Red Sea crisis: US freight rates up 70%, region disruption could impact India's crude oil imports

Suez Canal attack: Around 12 percent of global trade passes through the Red Sea region.

A series of attacks on cargo ships in the Red Sea by the Houthi militia of Yemen since November has had a big impact on freight rates. The quickest marine route linking Asia with Europe through the Suez Canal has become more expensive for freight carriers, with a twofold increase in rates to Europe, India's second-largest export destination, according to a report in The Indian Express.

The attacks have forced companies to take a longer transit around the Cape of Good Hope in Africa’s southern tip, making shipments both dearer and longer to deliver.

Rates to the United States of America have also taken a hit, according to the Container Shipping Lines Association. The association's executive director, Sunil K Vaswani, in an interview with CNBC-TV18, said, "If things deteriorate rates could go up by roughly 80 percent. To the US, the rates have increased by 70 percent while for Europe they have gone up by more...almost tripled to Europe."

These attacks have compounded the woes of global trade as they add to the problems that have risen during the aftermath of the pandemic, the Russia-Ukraine war, and a potential global economic slowdown. Global shipping giant Maersk on Friday, January 5, decided to extend its diversion of vessels from the Red Sea for the 'foreseeable' future, which could further cement a sharp rise in freight and insurance costs for Indian products.

Also Read | Maersk warns of major disruption as it diverts ships away from Red Sea

“Multiple things are getting mixed here. Normally, the freight rates range from $500 to $600 through this route to Europe. But the peak season which is between January to March goes up to $1,500. Exporters have informed us that this rate has gone to $2,000. Over and above there (war risk) surcharges being added which is taking the freight rates to nearly $3,000,” Indian Express quoted an official as saying.

Crucial route for India

Meanwhile, the Global Trade Research Initiative (GTRI) has said that the Indian government must have a plan in place for long-term shipping disruptions at the Bab-el-Mandeb Strait.

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

The Strait is crucial for India as the country is heavily reliant on the route for its crude oil and LNG imports, in addition to trade with key regions. GTRI says India faces substantial economic and security risks owing to the crisis in this area since approximately 65 per cent of India’s crude oil imports in FY 2022-23, valued at $105 billion, come from countries such as Iraq, Saudi Arabia, and others, and likely pass through the Suez Canal.

Also Read | Red Sea crisis may push shipping cost by up to 60 pc, insurance premiums by 20 pc: GTRI

“For overall merchandise trade with Europe and North Africa, about 50 per cent of imports and 60 per cent of exports, totalling $113 billion, might have used this route. The conflict has necessitated India to consider alternative routes, such as going around Africa via the Cape of Good Hope, which could lead to increased energy costs. India might look to diversify its sources of crude oil and LNG, and explore alternative trade routes to reduce dependency on the conflict-prone Red Sea passage,” GTRI said in its report.