Red Sea Trade Way Crisis:
According to a report by CRISIL, the ongoing crisis in the Middle East around the Red Sea is expected to have varying impacts across different industries and sectors, influenced by trade nuances. Sectors like agricultural commodities and marine foods may face significant challenges due to the perishable nature of their goods and thin profit margins, limiting their ability to absorb increased freight costs. Conversely, industries such as textiles, chemicals, and capital goods may not experience immediate effects due to their capacity to pass on higher costs or a weaker trade cycle. However, if the crisis persists, these sectors could become vulnerable as working capital cycles get extended with delayed orders. The report also suggests that certain sectors like shipping may benefit from rising freight rates, while pharmaceuticals, metals, and fertilizers are expected to be relatively unaffected by the crisis.
The ongoing crisis in the Red Sea is impacting various sectors in Pakistan, with perishables like fruits (such as mandarins) facing challenges due to a longer shipping route via the Cape of Good Hope, increasing travel distance by approximately 3,500 kilometers. This has led to concerns about the potential deterioration of fruit quality, with shipments experiencing a 66% increase in travel time. Additionally, the upcoming season for potatoes may see exporters reconsidering their decision to export if the crisis persists.
Beyond fruits, other sectors like textiles and rice are also feeling the effects. Rice exporters are facing losses as shipping companies have raised freight charges by 140%, from $750 to around $1,800, leading to increased stress on shipments of rice primarily destined for East Africa and Europe through the affected route.
Captain Asim Iqbal, a maritime trade expert, highlighted the significant impact of the ongoing Red Sea crisis on global ocean trade dynamics. The longer voyage routes, undertaken to reduce delays, have led to a substantial increase in fuel costs, costing tens of millions of dollars monthly. Drewry’s index indicates a more than 200% increase in rates on Asia-Europe and Asia-Mediterranean routes since mid-December when the Red Sea crisis escalated.
Delays in return voyages are expected to result in a shortfall of up to 780,000 twenty-foot equivalent units of equipment arriving in Asia, contributing to a surge in spot rates. The shortage of equipment is likely to extend rate pressures to all export trades originating from Asia, impacting global shipping beyond routes around Africa.
The ongoing Red Sea crisis is severely impacting Bangladesh, particularly its economy heavily reliant on the apparel sector, which generated $47 billion in revenue out of $55 billion in export earnings last year. Major shipping companies, fearing threats from the Houthis, are avoiding the Red Sea and imposing surcharges. Freight costs from Bangladesh to Europe and America have risen by 40%-50%, with potential further increases of 20%-25% if the crisis persists. This surge in costs, coupled with the rerouting of ships around Africa, adds 11-13 days to shipping times, raising concerns about losing future work orders.
Apparel manufacturers, already operating on thin margins following a 56% pay hike in January, may resort to expensive air shipments if products aren’t delivered within agreed timelines. Buyers have requested early shipping with a willingness to bear additional costs for existing orders, but concerns loom over future orders being diverted to competitors with faster delivery capabilities. The long-term impact on Bangladesh’s imports and exports could be significant, with buyers possibly turning to nearby sources if shipping costs continue to rise.
The escalating attacks on ships in the Red Sea have prompted Indian companies, which rely on the Suez Canal route for half of their exports and 30% of imports, to consider the longer Cape of Good Hope route. While delivery times have stretched by 15-20 days, not all sectors face equal impact. Agricultural commodities like Basmati rice and marine foods are feeling pressure due to rising freight costs. However, the textile and chemical sectors may not be immediately affected, with home textiles having margins to absorb higher freight rates. Capital goods, dependent on timely deliveries, and import-dependent players like non-urea fertilizers could face challenges.