The impact of the ongoing crisis around the Red Sea¹ in the Middle East is expected to vary depending on the industry and sector-specific and trade nuances.

On one hand, players operating in sectors such as agricultural commodities and marine foods could see a significant impact due to the perishable nature of their goods and/or lean margin profiles, which limit their ability to absorb the risks from rising freight cost.

On the other hand, players operating in sectors like textiles, chemicals and capital goods may not be immediately impacted because of better ability to pass on higher costs, or because of a weaker trade cycle. 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.

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

Indian companies use the Red Sea route through the Suez Canal to trade with Europe, north America, north Africa and part of the middle-east (ME)². These regions accounted for ~50% of India’s exports worth ~Rs 18 lakh crore and ~30% of imports worth ~Rs 17 lakh crore last fiscal (see annexure). India’s overall merchandise trade (exports and imports combined) last fiscal was Rs 94 lakh crore, with ~68% (in value terms) and ~95% (in volume terms) shipped through sea³.

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. This has not only stretched delivery time by 15-20 days, but also increased the transit cost substantially because of incremental freight rates⁴ and insurance premium.

That said, not all sectors are expected to be impacted to the same extent. 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. 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 cost and competitive pressure from Latin American suppliers.

On the other hand, firms operating in certain sectors like textiles may not be immediately impacted as buyers could absorb higher freight cost, which insulates their profitability. As for home textiles (75% of the production is exported, mainly to these regions), their mid-teen margins can absorb higher freight rates for some time. Similarly, in chemicals (25-30% of the revenue of agrochemicals and specialty chemicals makers comes from these regions), exports may be less affected given sufficient channel inventories and subdued near-term demand scenario. But a sustained disruption of trade channels could dent operating profits and crank up working capital needs.

Players in capital goods sector (with exports and imports of over Rs 2 lakh crore each) could be impacted by a sustained disruption in trade route due to delay in deliveries, which can lead to inventory build-up and slowdown in order conversions for engineering, procurement, and construction companies.

For certain import dependent players such as non-urea fertiliser makers which sources end-product and/or its key raw materials/intermediates⁵, the impact will be limited given the current lean consumption period and sufficient inventories, but a sustained increase in sourcing cost will have to be compensated through higher subsidy payment from the government. Crude oil may also be less impacted as only ~10% of the global oil trade is through the Red Sea route and the current disruptions have had a limited impact on prices⁶. Also, India sources a major part of its requirement from the Middle East and Russia, largely shipped via the Persian Gulf.

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 is not that the impact of the Red Sea crisis will be negative for all sectors. In fact, for some sectors, it will offer tailwinds. Shipping companies and freight forwarders should benefit from higher charter rates, after a year that saw steep falls due to slowing global trade.

While the immediate impact of the crisis would be low for most of India Inc., a prolonged strife can affect the profitability and working capital cycle of export-oriented industries. The extent of this will vary depending on sectoral nuances. Supply chain issues could also intensify, curbing trade volume and renewing inflationary pressures.

CRISIL Ratings will continue to monitor these developments, engage with firms and assess the impact on their credit quality on a case-by-case basis.

¹ Yemen-based Houthi rebels have engaged in frequent attacks on commercial shipping vessels plying through the Red Sea
² Includes Saudi Arabia, Israel, Jordan, Turkey, Syria and Lebanon
³ As per Ministry of Ports, Shipping and Waterways
⁴ Shanghai – Northern Europe container freight rates have risen by over 300% (to $6000-7000/TEU) since November 2023 on the more affected route like Asia to Europe
⁵ ~30% of DAP is imported from Saudi Arabia. ~60% of rock phosphate is imported from Jordan and Egypt, ~30% of phosphoric acid from Jordan
⁶ Oil prices rose 5-7% to ~$80 per barrel in mid-December 2023 following an escalation of the crisis; Prices have since settled in the $77-80 per barrel range.