Global Supply Chains Under Stress: Understanding the Current Status of the Red Sea Shipping Disruption
The Suez Canal, a linchpin in global trade, is facing significant disruption due to attacks by Iran-backed Houthi militants in the Red Sea. This has compelled major container shipping companies to suspend or pause services in the region, prompting over 100 container ships to reroute around southern Africa, bypassing the Suez Canal. This disruption, as of December 15, 2023, is having profound implications on global trade, leading to increased costs, potential shortages, and longer transit times. The fluid situation necessitates urgent international efforts to safeguard commercial vessels and mitigate broader economic impacts.
The Red Sea conflict is triggering a reshaping of global shipping routes, including the exploration of a new Middle East land corridor as an alternative to the traditional Bab-El-Mandeb–Red Sea route. According to a report on February 8, 2024, by India Briefing, the Commerce Secretary is actively reviewing the situation and engaging with different ministries to assess the impact on imports. While traders are grappling with increased freight costs and delays due to the longer routes required to avoid the Red Sea, there aren’t major concerns in other areas. However, the bottom lines of exporters are being impacted, raising worries.
The government is taking steps to address some aspects of the crisis. Although it has limited control over the escalation in shipping costs, mainly controlled by the private sector, efforts are being made to ease insurance availability. The Export Credit Guarantee Corporation (ECGC) has been directed not to increase export credit interest rates. The ECGC, a state-owned export promotion organization, aims to enhance the competitiveness of Indian exports by providing credit insurance coverage.
The crisis is creating adverse supply shocks, lengthening supplier delivery times, and leading to approximately 30% increases in transit times. This translates to an estimated 9% reduction in effective global container shipping capacity. Industries, particularly the auto sector, are feeling the impact, with Europe-based plants announcing temporary shutdowns due to delays in obtaining components from Asia. The crisis is testing the resilience of the auto supply chain, especially for new-energy vehicles (NEVs), a crucial component of China-Europe trade. China’s NEV exports to Europe, typically transported by sea, are particularly affected.
The longer the disruptions persist, the more likely shipping rates will stay elevated, if not increase further. One potential relief is the excess supply of container ships globally, many of which were ordered during the pandemic and are still entering service. Consequently, there is a possibility that shipping rates could lower fairly quickly once the disruptions are resolved. Amid these challenges, Minister of State for Commerce and Industry Anupriya Patel assured the Parliament on February 2 that the Red Sea crisis has not significantly affected container availability for traders, and the government is closely monitoring the situation as it unfolds.