Global supply chains face threats amid Red Sea trade route disruptions

Red Sea trade routes: The ongoing disruptions at the crucial Red Sea trade route have raised concerns about potential manufacturing setbacks for various sectors, including electronics, automobiles, chemicals, consumer goods, and machinery, according to the Global Trade Research Initiative (GTRI). Companies relying on just-in-time manufacturing processes, with low inventory levels and a dependence on timely component arrivals, are particularly vulnerable.

GTRI pointed out that disruptions in global value chains might impact industries such as electronics, automotive, machinery, chemicals, pharmaceuticals, plastics, textiles, and consumer goods. Components and finished products often travel through the Suez Canal, and delays in manufacturing and increased costs could occur due to disruptions in this key shipping route.

Trade disruptions

The attacks by Houthi rebels on commercial ships have led to significant disruptions in the world's busiest shipping route, causing vessels to take longer routes for exports and imports. Immediate effects include increased freight costs, mandatory war risk insurance, and substantial delays due to rerouting.

GTRI co-founder Ajay Srivastava emphasised that the adverse impact could multiply if the disruption continues for an extended period. Average container spot rates have more than doubled since early December 2023, and certain sectors, including basmati rice, are experiencing a notable increase in freight costs.

Exporters in various sectors, including life-saving drugs, textiles, diesel, ATF, and steel, have faced challenges, and concerns are rising about the potential impact on the overall trade. Mumbai-based exporter SK Saraf suggested that the government should consider establishing a large domestic shipping company to reduce dependence on foreign shippers.

The Strait's closure forces ships travelling to Europe to take a much longer route around the Cape of Good Hope, increasing voyage distances by 40 per cent, along with rising transportation time and costs. The government's dependence on the Red Sea route for crude oil, LNG imports, and trade with the Middle East, Africa, and Europe adds to the complexity of the situation.

(with PTI inputs)