Here’s How The Red Sea Conflict Is Impacting Global Trade

The Red Sea is a vital international trade route through which approximately 12% of global trade sails. Yemen-based Houthi militants have been attacking high-value cargo vessels en route to the trade route since November 2023. The attacks have prompted ships to re-route around the southern tip of Africa. The longer voyage has hiked the cargo cost.
Post the aftermath of the recent missile attack and attempted hijack of a Maersk ship, carriers have no choice but to temporarily suspend plans to re-start transits via the recently attacked sea. As a result, ocean freight rates are skyrocketing. As the rates have touched the sky, they are relatively lower than 2021’s pandemic level.

In this article, let’s have a look at how the ongoing crisis is impacting trade with special attention to the steel, agriculture, polymer, chemical, and coal sectors.

Steel

The growing uncertainty is reshaping the trade dynamics and posing significant challenges for Chinese suppliers, including those in India and other countries.

• The impact extends beyond immediate security concerns, affecting logistical efficiency and resulting in increased steel rates today. Some Chinese exporters are re-evaluating their sales strategies in the Middle East due to heightened expenses, prolonged transit times, and shipment delays.
• This situation has led to a rise in export prices, as seen in the Chinese SS400 3mm Hot-rolled Coil (HRC), which experienced a $15-20/ton increase to $615/ton CFR Dubai by the end of December 2023.
• The disruption in the sea route has compelled shipping companies to opt for longer routes around Africa, adding at least 15 days to voyages and significantly inflating shipping costs.
• This ripple effect is not limited to the affected region alone; trade routes with India are also witnessing a surge in costs. A Contingency Adjustment Charge (CAC) of $1,500/container has been implemented for shipments from India to the USA, particularly impacting the East Coast, Gulf Coast, and San Juan.
• Similarly, freight rates for Africa have increased, contributing to a global imbalance in trade. India imports chrome ore from South Africa which is likely to be affected in coming months.

Agriculture

Concerns are particularly high for agricultural commodities, as the affected sea route is crucial for transporting goods to Europe accounting for 40%-45% of the total trade volume.

• The impact on agricultural exports is of significant concern to India, directly affecting farm income. Disruptions at the trade route may particularly affect the exports of India’s premium quality basmati rice to Europe, Egypt, and parts of West Asia. If trade takes longer routes for exports, there could be a substantial 15%-20% increase in basmati rice shipment prices.
• The repercussions extend to other commodities, with leading shipping lines avoiding the Suez Canal route affecting sunflower oil imports from Russia and Ukraine. Freight charges to destinations such as Yemen have more than doubled, causing a ripple effect on prices and import timelines.
• Before the ongoing crisis, the freight charge to Yemen was $850 per container, but it has since increased significantly to $2,400. Similarly, the freight rate to Jeddah has experienced a substantial rise from $300 to $1,500 per container.
• Additionally, shipping companies transporting coffee have raised freight prices on some routes due to the recent attacks, affecting Southeast Asian and East African coffee en route to Europe.
• The overall impact on the coffee, cocoa, and cotton markets is notable, given that these agricultural commodities are commonly transported in containers.
• The sea route disruptions have introduced unintended consequences, including rising freight costs and extended transit times, affecting the supply chains of these commodities.

Polymers

In India, major polymer producers like RIL, OPAL, and HMEL have increased prices by an average of 1-3 rupees per kg, particularly for PP, PE, and PET. This price surge is linked to the latest attack, leading to increased crude oil and petrochemical prices.

• The attacks have significantly disrupted Saudi Arabian polymer exports, especially for producers along the Red Sea’s west coast. Affected producers, including Natpet, Yansab, Yanpet, and PetroRabigh, contribute 1.7 million tons/year of PP and 3.2 million tons/year of PE.
• The attacks have resulted in export halts, alternative shipping routes, increased costs, and challenges in container availability, impacting global freight rates and logistics.

Chemicals

The recent sea attack and shipment delays have impacted chemical prices, including IPA, toluene, Acetic acid, and methanol, mainly from Saudi Arabia.

• Despite falling prices elsewhere, overall costs have risen due to these disruptions. Buyers are increasingly concerned about shipment legalities, exacerbated by the absence of insurance options. With an average delay of 20-25 days, heightened demand at the port, low supply, and rising freight rates contribute to increased prices.
• Indian chemical companies face challenges, including potential production cuts and increased shipping expenses, prompting calls for government intervention.
• Key Indian chemical exporters, including major companies like Reliance Industries Limited, Aarti Industries, and Meghmani Finechem Limited, are seeking concessions from the government.
• They aim for tax exemptions, deferment of quality control orders, and security assurances for merchant vessels passing through the Suez Canal.

Coal

On the international front, the Australian premium hard-coking coal rates have increased by 2% every week. They stand at $330/ton as of 3 January 2024.

• This price hike can be because of the resurgence in Indian demand after the end of the holiday season, combined with the ongoing logistical challenges, hence, prompting a shift towards Australian sources.
• Apart from that, anticipated heavy rainfall in Australia can exert upward pressure on premium hard-coking coal (PHCC) rates.

Ripple Effect

The current crisis is impacting various sea trade aspects, including volatile crude oil prices, increased logistics costs, container shortages leading to higher prices, elevated freight expenses, delayed order deliveries, and extended transit times.

India’s Response

India, in response to the escalating attacks on cargo ships in the region, is considering various measures to mitigate the impact on its exports. Among these measures are potential subsidies for Indian exporters to counteract increased shipping costs and insurance premiums. The Indian government is also in communication with the US-led multi-nation coalition to ensure the safe passage of commercial vessels in the attacked sea.

End

In essence, the heightened tensions in the sea route are not only disrupting regional stability but also setting off a chain reaction that reverberates across international trade, leading to increased material costs and potential imbalances in global trade. This, in turn, has impacted the steel rate today along with other commodities across various sectors.

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