Red Sea disruptions threaten competitiveness of Indian businesses

As the conflict in the Middle East escalates and widens, the Bab-el-Mandeb Strait has become a perilous maritime chokepoint. With increased attacks on merchant vessels, global trade is forced to reroute, dramatically impacting transit times, freight costs, and insurance premiums, affecting the competitiveness of Indian businesses.

Is there any way to circumvent the attacks and send cargo through the Red Sea? How safe are these methods? How much will it cost?

On October 19, 2023, exactly a year before, Iran-backed Yemeni rebels Houthis launched their first attack on Israel as a response to its war on Gaza following the Hamas-led attack of October 7, 2023.

Within a month Houthis turned their attention to the merchant vessels moving through the Red Sea. And on November 19, 2023, they seized the Israeli-owned, Japanese-operated roll-on/roll-off vehicle carrier Galaxy Leader near the Yemeni port city of Hodeida while it was travelling from Körfez in Turkey to Pipavav in India. They also took its 25 crew members hostage in Yemen.

According to the nonprofit organisation Armed Conflict Location and Event Data (ACLED), Houthis have carried out 132 attacks on vessels passing through the Bab-el-Mandeb Strait that connects the Red Sea to the Gulf of Aden, until October 10, 2024, disturbing the flow of international trade like never before.

Due to the persistent drone and missile attacks in the region, most international carriers have diverted their routes through the Cape of Good Hope. This alternative path adds more than two weeks to the voyage, delaying shipments and pushing up costs.

As a result, the movement of vessels through Bab el-Mandeb Strait dropped 64 percent Year-on-Year (YoY) to just 7863 ships (daily average of 27) between January 1, 2024, and October 15, 2024, compared to 21,641 vessels (daily average of 75) same period last year, according to the PortWatch platform of the International Monetary Fund (IMF).

In September 2024 alone the movement dropped 70 percent YoY to just 687 vessels (daily average of 23) from 2,288 (daily average of 76).

As the number says, there are still vessels moving through the Red Sea, even though in low numbers. But how do they make it safely through the rough seas? Experts note that certain carriers have negotiated agreements with the Houthis or secured naval escorts, while others rely on Middle Eastern flags for protection and avoid Israeli connections.

“Vessels are sending messages like "All Chinese crew" or "No contact with Israel" via AIS.”

For instance, Pramod Sant, Director General of the Federation of Freight Forwarders' Associations in India (FFFAI), noted that several carriers continue to operate through the Red Sea by resorting to Automatic Identification System (AIS) messages.

“Some vessels continue to transit the Red Sea, but many are turning off their AIS to avoid detection or reducing the risk of attacks by sending messages like "All Chinese crew" or "No contact with Israel" via AIS,” he said.

Sant is Former Vice President -Head Import Export Customs at Siemens.

According to the International Maritime Organization (IMO), AIS transponders are designed to provide information including position and identification of the ship to other ships and coastal authorities. IMO requires large ships, including many commercial fishing vessels, to broadcast their position with AIS to avoid collisions.

“Houthis indicated that ships without ties to Israel can operate safely.”

On the same line, Pushpank Kaushik, CEO & Head of Business Development (Subcontinent, Middle East and Southeast Asia) at Jassper Shipping, also informed something similar about the communication from Houthis.

“A message from the Houthis also indicated that ships without ties to Israel can operate safely and use their AIS devices. Carriers still navigating this region are implementing enhanced safety measures, such as increasing surveillance and re-routing vessels to avoid high-risk areas,” he noted.

“Shipping companies are relying on military escorts or coalition task forces for protection.”

Meanwhile, Karthi Baskar, Managing Director & CEO, FFAF Logistics, points out that carriers are making use of military escorts provided by different countries including the United States.

“To ensure the safety of vessels, many shipping companies are rerouting through safer waters, enhancing security measures, and relying on military escorts or coalition task forces for protection,” he said.

Due to the agreements and escorts, shippers sending their cargo through these high-risk regions face higher freight costs and substantially increased insurance premiums.

The region consisting of the Suez Canal, Red Sea, and Bab el-Mandeb Strait is one of the most important global choke points and maritime waterways. It enables the passage of energy, commodities, consumer goods and components to and from the Indian Ocean and to the Mediterranean and the Atlantic. In 2023, 22 percent of global seaborne container trade is estimated to have transited through the Canal, according to the United Nations Trade and Development (UNCTAD). The disruptions in the Red Sea have caused a significant impact on businesses and economics.

"Exporters have diverted to the domestic market as profitability in exports has taken a hit."

For instance, India's merchandise exports in value dropped 9 percent YoY in August 2024 to $34.71 billion from $38.28 billion in August 2023.

FIEO President Ashwani Kumar attributed the sharp decline to the "continuous global economic uncertainties coupled with the drop in commodity prices and logistical challenges."

"Some of the exporters have diverted to the domestic market as profitability in exports has taken a hit with the sharp rise in international freight (both ship and air)," he added.

“In June and July, not a single Indian fuel tanker took the Red Sea route.”

Kaushik also emphasised that the Red Sea is vital for India’s trade with Europe, accounting for about 80 percent of it.

For example, he reported, “Due to disruptions in the region, India has seen a dip in seafood exports.”

The exports increased by 3 percent in quantity. However, there is a decline in value by 5 percent in ₹ terms and by 9 percent in $ terms, according to the Marine Products Export Development Authority (MPEDA) data for the financial year 2023-24.

He added, “In June and July, not a single Indian fuel tanker took the Red Sea route; instead, ships are rerouting via the Cape of Good Hope, adding 15-20 days to transit times. Consequently, petroleum exports to Europe have decreased from 425,000 barrels per day in December 2023 to about 250,000-300,000 barrels per day.”

“Higher operational costs are squeezing margins and weakening competitiveness”

The impact on exports also affects the competitiveness of Indian goods. However different industries are affected differently. Smitha Shetty, Regional Director - APAC of supply chain risk and performance management company Achilles Information, noted that the financial repercussions are particularly severe for industries dependent on timely cargo deliveries.

She added, “Higher operational costs are squeezing margins, weakening competitiveness, and causing significant delays in supply chains. These disruptions are not just localized but have a ripple effect on global trade, with economies across Asia, Europe, and key markets like India feeling the impact.”

“The re-routing has also created an extra 10 percent demand for containership capacity.”

The biggest impact on businesses is in the form of freight rates and there are several factors affecting it. Stephen Gordon, Managing Director, Clarksons Research pointed out that the extra distance involved in re-routing has increased freight due to the extra fuel costs and time taken.

“But,” he also said, “more significantly the re-routing and extra distance has also created an extra 10 percent demand for containership capacity resulting in increased freight rate globally for container shipping.”

He also noted that the industry has seen an increase in the volume of container trade this year (+5 percent), an earlier “peak season” and some congestion that has also increased freight rates, particularly in the early summer.

“Container freight rates reached the highest levels on record outside of the Covid-19 pandemic period in the wake of Red Sea disruption earlier in the year, with the overall Shanghai Containerized Freight Index (SCFI) index standing at 3,734 points by early July, ~3.4x the mid-Dec level and within 27 percent of the all-time high seen during the Covid period,” he added.

Talking about the impact on Indian businesses, Sant called it the worst period for the shipping insurance industry, also considering the Baltimore Bridge disaster

He also spoke about the difference in business impact on importers and exporters.

“For importers, it is additional cost, more transit time, higher inventory and delays. Whereas for exporters it is far more critical, like cancellation of orders, reduction in margins and sometimes executing orders at a loss,” he said.

The Red Sea region, a crucial gateway for Indian trade with Europe, has become a flashpoint, challenging global supply chains and increasing operational costs for carriers. With heightened risks, rerouting, capacity constraints and increased freight rates causing order cancellations, margin reductions and decreased competitiveness, the question remains: How long can Indian businesses sustain the impact of these ongoing disruptions?