Agricultural commodities may be significantly impacted by Red Sea crisis

The Red Sea crisis has led to a 122% rise in freight costs in the last few months, according to ICRA

Due to their perishable nature and lean margins, the agricultural commodities industry may be significantly impacted by the Red Sea crisis, rating agency CRISIL said on Thursday. It added that the marine goods industry is also likely to be highly impacted.

In a recent report, another agency ICRA, said that the conflict in the region has led to a 122 per cent increase in the freight cost in the last few months.

“While a gradual rise in freight rates would have been easier to pass on to the buyers, the recent spike may negatively impact profitability,” it said adding that now traders are using the Cape of Good Hope route via South Africa. This is increasing the transit time as well as cost. 

Indian companies use the Red Sea route through the Suez Canal to trade with Europe, North America, north Africa and part of West Asia. Last year, these regions accounted for around half of India’s exports worth Rs 18 trillion and around 30 per cent of imports worth Rs 17 trillion.

Yemen-based Houthi rebels have engaged in frequent attacks on commercial shipping vessels plying through the Red Sea for the last few months, leading to tensions.

Also Read: Red Sea disruptions likely to dent India's growth forecast, says Fitch

According to the CRISIL, agricultural commodities and marine goods industries have leaner margins as compared to others like textiles and chemicals, which limits their ability to absorb high freight costs.

Moreover, India faces tough competition in the quality of these commodities from South American countries.

ICRA added that the exports of grapes, which have a large dependence on Europe, may face a higher risk of disruption.

Some of the industries may not be immediately impacted but if the crisis persists, they may also face a rise in costs. These include textiles, chemicals, capital goods, metals and pharmaceuticals.

CRISIL added that for some sectors, the Red Sea crisis may be a positive development.

"Shipping companies and freight forwarders should benefit from higher charter rates, after a year that saw steep falls due to slowing global trade," it said.