In today’s interconnected world, trade routes play a pivotal role. However, recent incidents have brought to light the fragility of these paths, revealing how they can become potential flashpoints that disrupt global trade. This article delves into the recent disruptions and their potential impact.
- Drone Strike on MV Chem Pluto: December 23, 2023, witnessed a drone attack on MV Chem Pluto, a chemical tanker en route to India via the Red Sea. The strike occurred approximately 200 nautical miles off Gujarat’s coast, causing alarm among Indian oil importers and exporters dealing with commodities like tea and basmati.
- The Red Sea Crisis: The perpetrators behind the Red Sea attacks are the Houthi rebels, based in Yemen. Their objective is to protest against Israel’s military actions in Gaza. Despite the quick response from the US-led maritime security coalition, the problems in the Red Sea continue.
- Vulnerable Choke Points: Suez and Panama Canals: The global trade landscape faces a grave threat as the Suez and Panama Canals—two critical choke points—are at risk of disruption. These potential disruptions could impact over a third of global trade, especially considering the current slowdown in Western demand and China’s property crisis.
- Global Trade Forecast: These complications have prompted the World Trade Organization to lower its goods trade forecast by almost 50%. As a result, the global goods trade may experience a turbulent start to 2024.
Impact Of Maritime Disruptions On Global Trade
Maritime transport is the backbone of global trade, moving over 80% of goods worldwide. This figure increases for developing nations like India. Today, this system faces significant challenges due to blockages in two critical sea routes.
- The Red Sea and Panama Canal Cruises: The Bab-el-Mandeb Strait in the Red Sea links Asia and Europe, and the century-old Panama Canal connects the Atlantic and Pacific Oceans. Both are among the most frequented in the world. Any obstruction in these channels forces shipping lines to resort to lengthier alternative paths, leading to a surge in freight rates.
- Effects on Indian Agricultural Exports: The Red Sea route’s disruption could inflate the costs of Indian farm products by 10-20%. These goods have to divert their course via the Cape of Good Hope. The hike coincides with the West’s elevation of interest rates to stifle inflation. This could intensify demand worries for both global and Indian exporters.
Download The Kindle Ebook
Drought Impacts Panama Canal Trade
Trade through the Panama Canal has fallen significantly. A severe drought has caused a 50% decrease in shipping across the 51-mile stretch. The lack of water forces ships travelling from Asia to the US to divert via the Suez Canal.
- A Longer Route: With the Panama Canal infeasible for many, the Suez Canal has become the main alternate route. However, this detour adds an additional six days to the journey.
- Driest Rainy Season in Panama: The situation worsens as Panama endures its driest rainy season in decades. This has led to fears of persistent bottlenecks at the canal.
- LNG Vessels Participate in Auctions: According to S&P Global, LNG vessels are opting for expensive auctions to speed up their passage through the Panama Canal. One vessel even paid nearly $4 million to secure a slot in an early November auction.
- A Grim Forecast: S&P Global predicts that the number of Very Large Gas Carriers travelling through the Panama Canal will reduce by half by February 2024. There is further concern that the transits might cease entirely by January.
Red Sea Attacks And Global Oil Flow
Major global shipping entities like Maersk are avoiding the Red Sea route. This has led to a significant drop in global oil and petroleum product flows through this channel. There’s been an over 50 per cent decrease in December compared to the regular flow.
- India’s Immunity to the Disruption: Despite the turmoil, Russia’s oil exports to India aren’t affected. The common belief is that Iran backs Russia and the Houthi rebels. Therefore, Russia’s tankers continue their transit without disruption.
- Impact on Oil Prices: The price of Brent crude, a benchmark in the oil market, has surged. The attacks have pushed up the price by over 5 per cent, with it currently around the $80-per-barrel mark. Goldman Sachs, in a recent report, shared it doesn’t foresee these Red Sea disruptions to significantly affect international oil prices. They believe global oil production won’t be directly impacted.
Download The Kindle Ebook
The Impact Of Red Sea Attacks On Shipping Costs
In recent times, the Bab-el-Mandeb Strait has been the site of several attacks. These alarming incidents have made global shipping companies apply extra fees known as war risk surcharges to their standard freight rates. As a result, Indian exporters fear an increase of up to 25-30% in freight rates for shipments to Europe and Africa if the situation continues.
- The Effect on Indian Export Businesses: These rising costs pose a significant problem, as the European Union is one of India’s major export markets. Reduced demand from this region has already affected Indian industries that rely heavily on human labour, such as the textile and precious stones and jewellery sectors.
- Shipping Operations Amid Security Concerns: In response to the ongoing security situation, the shipping powerhouse Maersk announced its plans to resume Red Sea operations. This decision follows the deployment of a US-led coalition to address the security threats in the area. However, Maersk also stated its readiness to reroute its ships if safety conditions change.