Red Sea crisis to hit agri commodities, marine foods: Crisil

Textiles, chemicals and capital goods may not be immediately impacted because of their better ability to pass on higher costs, and a weaker trade cycle

Vaageesh Thirumalai
First Published25 Jan 2024, 03:51 PM IST
Cargo Ships are docked at the Mumbai Port in India, Sunday September 18, 2005. Indian ports need to double capacity within the next five years to cope with India's rising demand for raw materials while handling increased exports. Photographer: Amit Bhargava/Bloomberg News
Cargo Ships are docked at the Mumbai Port in India, Sunday September 18, 2005. Indian ports need to double capacity within the next five years to cope with India’s rising demand for raw materials while handling increased exports. Photographer: Amit Bhargava/Bloomberg News

The impact of the ongoing crisis around the Red Sea region in West Asia will vary depending on the industry, sector-specific and trade nuances, rating agency Crisil said in a report on Thursday.

While sectors such as agricultural commodities and marine foods could see a significant impact due to the perishable nature of their goods and lean margin profiles, sectors like textiles, chemicals and capital goods may not be immediately impacted because of their better ability to pass on higher costs, and a weaker trade cycle, the rating agency said.

“But a prolonged crisis over the next few quarters can make these sectors also vulnerable as working capital cycles would get stretched with orders put on hold,” it said.

“A few sectors, such as shipping, could benefit from rising freight rates. Lastly, players in pharmaceuticals, metals, and fertilisers to not be much impacted,” it added.

Indian companies use the Red Sea route through the Suez Canal to trade with Europe, North America, North Africa, Middle East, with these regions accounting for about 50% of India’s exports worth about 18 trillion and about 30% of imports worth about 17 trilion.

The ongoing attacks on vessels in the Red Sea by Houthi rebels are disrupting shipments of perishable items, especially food, potentially leading to higher prices and a rise in food inflation.

Increasing attacks on ships sailing in the Red Sea region since November 2023 have persuaded shippers to consider the alternative, longer route past the Cape of Good Hope, which has stretched delivery time and increased transit costs substantially.

“In fact, for agricultural commodities like Basmati rice (30-35% of production is shipped to these regions), exporters are feeling the pressure as rising freight cost has curbed exports and a part of their inventory is now being sold in the domestic market, leading to a moderation in realizations,” the report said.

“Marine foods (predominantly shrimp and prawn) could also see a significant impact as 80-90% of the production is exported, more than half of it through the Red Sea. Their perishable nature and lean margins make exporters vulnerable to rising freight costs and competitive pressure from Latin American suppliers,” it added.

The report said sectors like textiles may not be immediately impacted as buyers could absorb higher freight costs, capital goods sector (with exports and imports of over 2 trillion each) could be impacted by a sustained disruption in trade routes due to delay in deliveries, which can lead to inventory build-up and slowdown in order conversions for engineering, procurement, and construction companies.

“Other trade heavy sectors like pharmaceuticals and metals may also not be impacted because companies enjoy healthy profitability and will be able to absorb the higher freight cost,” it added.

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First Published:25 Jan 2024, 03:51 PM IST
HomeEconomyRed Sea crisis to hit agri commodities, marine foods: Crisil

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