Suez Canal closure worries industry but government confident of minimal impact

Shipping majors AP Moller-Maersk, MSC, CMA CGM, and Hapag-Lloyd have stopped using the Red Sea route.

The recent attacks on commercial vessels including hijackings, missile strikes, and drone assaults on ships by Yemen’s Houthi rebels have caused global shipping majors to avoid the Red Sea and Suez Canal.

While most industry experts and participants expect global militaries to get involved soon and secure the Red Sea and the Suez Canal by the end of the week, the consequences of a prolonged delay in reusing the Suez Canal and the Red Sea may be felt by India's Export-Import traders and the increased cost of transportation that consumers may need to bear.

The uncertainty surrounding the operation of the Suez Canal by shipping majors AP Moller-Maersk, MSC, CMA CGM, and Hapag-Lloyd is expected to lead to a 10 percent increase in shipping costs and insurance premiums for Indian companies if operations are hit for a week or less, most industry experts told Moneycontrol. The four companies cumulatively account for 53 percent of global maritime trade.

However, if shipping majors are forced to operate on alternate routes for more than a week, EXIM volumes from India for December may get hit ahead of the new year.

Also Read : How are the Red Sea attacks impacting shipping in the Suez Canal?

As per estimates, around 12 percent of global trade passes through the 193-km long canal, which is the shortest sea link between Asia and Europe.

In 2021, after super tanker Ever Given became wedged diagonally across the canal during a sandstorm, disrupting trade flows for nearly a week, the Suez Canal Authority had said that Egypt lost between $12 million and $15 million every day of the closure, while insurers estimated that global maritime trade suffered billions in lost revenue per day.

At the time, canal officials said that more than 420 ships had been waiting for the Panama-flagged, Japanese-owned ship to be freed so they could make the crossing.

Government confidence

Officials from the Ministry of Commerce and Industry and the Ministry of Ports, Shipping and Waterways told Moneycontrol that Indian EXIM is set to see little impact as the global economy remains stable, unlikely the past two years when the world dealing with COVID-19-related supply chain disruptions and simultaneous incidents like a cargo ship turning sideways in the Suez Canal.

"Given the timing of the disruption, EXIM volumes from India, especially exports, are unlikely to be impacted due to the developments in the Red Sea. Most exports to Europe for Christmas have been dispatched while exports meant for the new year are yet to be dispatched," a senior official from the Ministry of Ports, Shipping and Waterways told Moneycontrol.

Similarly, an official from the Ministry of Commerce and Industry said that the decision by shipping majors will not necessarily impact India but rather hit European countries, which import heavily.

"There is an abundance of ships and containers in the world at the moment and the is no immediate need for deliveries to be made with importing countries such as the EU & UK already showing subdued import numbers. Even if cargo deliveries are delayed, it should not be much of an issue. The shipping companies will plan accordingly- can send more ships than required to complete orders," the official said.

Also Read : Shipping firms to avoid Suez Canal as Red Sea attacks increase

Another official added that imports from Europe to India are also at a low in December due to an extended holiday period which causes lower manufacturing around Christmas and New Year.

"If you look at the historical data for Indian EXIM in December, the first half of the month accounts for around 70 percent of traffic, especially when talking about volumes to Europe and from Europe. We have entered the second half of December if things in the Suez Canal are not back to normal in a week, then the impact will have to be assessed," a third government official said.

International experts also echoed the comments of the Indian government.

“Shares of shipping lines have jumped (after they announced stoppage of operations around the Suez Canal) in anticipation of a post-COVID sort of disruption revival. We're not that pessimistic it will all depend on how quickly the world's navies take this up,” said Christian Roeloffs, co-founder and CEO of Container xChange.

He added that Egypt is also likely to take action to address the disruption soon as the country has a significant commercial interest in an ongoing function of the Suez Canal.

Industry concerns

While the Indian government is confident that the current uncertainty around the Suez Canal will be addressed come Christmas, the shipping industry and the EXIM trading industry is a lot more worried.

“Depending on how long it takes to reopen the Suez Canal, closure of the Suez Canal will lead to higher charter rates as ships traveling from Asia or Australia to Europe have to take a longer route, thereby reducing the capacity on these routes,” said Anand Sharma, Director at Mantrana Maritime Advisory Pvt Ltd.

He added that expectations are that the closure of the Suez Canal will lead to a backlog of ships as vessels are expected to wait for the canal to open up rather than promptly move around the African continent.

Also Read : Israel-Hamas war could lead to higher insurance premiums, shipping costs: GTRI

A Gujarat-based shipping company that has a fleet of around 20 ships said that while most major shipping companies have ordered their ships to travel around Africa, vessels are more likely to wait at the Port of Muscat or Jebel Ali for the Suez Canal and the Red Sea to be secured.

"It makes no sense for large vessels to travel for an extra week or so, spend more fuel, and travel around Africa. Most ships will seek refuge in nearby Ports like Salalah, Muscat, or Jebel Ali and return once operations restart in the Suez Canal," the Gujarat-based shipping company said.

Similarly, Ajay Sahai, director general, the Federation of Indian Export Organisations (FIEO).

"It may lead to a rise in freight also since the alternative is to sail around the Cape of Good Hope, which adds up to 10 days sailing time for ships from Asia to North Europe and East Mediterranean," he said. Sahai added that overall, there could be a 30-40 percent rise in costs.

The Baltic Dry Index, a key indicator of shipping rates, is an index of average prices paid for the transport of dry bulk materials across more than 20 routes. The index is often viewed as a leading indicator of economic activity because changes in the index reflect supply and demand for important materials used in manufacturing.

It has fallen as much as 30 percent since December 4, 2023, to $ 2,348 on December 15, 2023.

Further, as per trade think tank, Global Trade Research Initiative (GTRI), India continues to be heavily reliant on the Bab-el-Mandeb Strait, a crucial shipping route connecting the Mediterranean Sea to the Indian Ocean, for its Crude oil, LNG imports and trade with the Middle East, Africa, and Europe.

"Any disruption to shipping through the strait could have a significant impact on India's economy and security," a report by the think tank has said. Increased energy costs as India may have to use longer routes around the Cape of Good Hope, increased risk leading to higher insurance premiums and freight rates, impacting Indian traders along with increased security concerns which may lead India to deploy additional naval assets to the region may be some of the fallouts.

" If the strait is blocked, it could lead to disruptions in India's supply chains, which could hurt its economy," it added.

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Key trade partner

Trade between India and Israel was estimated at $12 billion in FY23. While India's merchandise exports stood at $8.4 billion, imports from Israel amounted to $2.3 billion.

Key exports from India to Israel include diesel, cut and unpolished diamonds, and electronics and telecom components. Most of India’s merchandise trade with Israel is routed through Eilat port.

Both nations are negotiating a free trade agreement. Indian companies including Sun Pharmaceutical Industries, Tata Consultancy Services, Wipro, Tech Mahindra, State Bank of India, Larsen & Toubro, and Infosys have a presence in Israel.

Data from Kpler showed a 9 percent rise in India's monthly intake of Russian oil in November from the previous month to 1.73 million barrels per day (bpd). The shipments are presently routed through the Suez Canal, and a wider conflict in the region that disrupts maritime trade may compel India to look at alternatives, another analyst pointed out.