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Updated January 29th, 2024 at 14:49 IST

Global trade faces strain as Red Sea shipping disruptions ripple through supply chains

The economic think tank expressed concern over the impact on companies employing just-in-time manufacturing processes.

Reported by: Business Desk
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Global trade faces strain as Red Sea shipping disruptions ripple through supply chains | Image:Pexels
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GTRI warns of disruptions: In a recent statement, the Global Trade Research Initiative (GTRI) warned of prolonged disruptions at the vital Red Sea trade route, posing a threat to various sectors such as electronics, automobiles, chemicals, consumer goods, and machinery. The economic think tank expressed concern over the impact on companies employing just-in-time manufacturing processes, emphasising their vulnerability due to low inventory levels and reliance on timely component arrivals.

GTRI identified key industries, including electronics, automotive, machinery, chemicals, pharmaceuticals, plastics, textiles, and consumer goods, likely to experience production setbacks. The Suez Canal, a crucial passage for shipping components and finished products to global markets, faces potential delays, resulting in increased manufacturing costs.

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Vessels taking long routes

Attributed to attacks by Houthi rebels on commercial ships, disruptions in the Red Sea, the world's busiest shipping route, have led to global supply chain complications. Vessels are compelled to take longer routes for exports and imports, causing immediate effects such as rising freight costs, mandatory war risk insurance, and significant delays.

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GTRI co-founder Ajay Srivastava highlighted that if disruptions persist, the adverse impact could extend beyond trade to affect local production across industries relying on just-in-time procurement. He pointed out that average container spot rates have more than doubled since December 2023.

The consequences of the disruptions are already evident, with Basmati rice exporters experiencing a 233 per cent increase in freight costs per 20-tonne container. Other affected sectors include life-saving drugs, textiles, diesel, aviation turbine fuel (ATF), and steel.

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Expressing concerns over the potential continuation of the crisis, exporters fear a detrimental effect on the country's overall trade. Mumbai-based exporter SK Saraf suggested that India should consider establishing a significant domestic shipping company to reduce dependence on foreign shippers.

Companies ceased using European Strait

To avoid attacks, major shipping firms, including Maersk, MSC, Hapag-Lloyd, and CMA CGM, have ceased using the Bab al-Mandab straits for trade with Europe. Instead, ships bound for Europe will now navigate a longer route around the Cape of Good Hope, increasing voyage distances by 40 per cent and raising transportation costs.

The Bab-el-Mandeb Strait, often referred to as the 'Gate of Tears,' plays a pivotal role in connecting the Mediterranean Sea and the Indian Ocean. Recent attacks and disruptions have highlighted the strait's vulnerability, impacting 30 per cent of global container traffic.

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With the Red Sea route being the preferred choice for its shorter duration, the closure of this critical trade link poses a challenge for Indian ports like Mumbai, JNPT, and Chennai. India, heavily reliant on this route for trade and energy imports, now faces the imperative to diversify trade routes amid escalating tensions and disruptions.

(with PTI inputs)

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Published January 29th, 2024 at 14:49 IST

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