Red Sea crisis may nudge US buyers to source goods from East Asia

Last week, the United Nations Security Council called for cessation of attacks on commercial vessels in the Red Sea. Within hours, the American and British forces launched aerial attacks on the military positions of the Houthi rebels in Yemen. It is far from clear whether these developments will quickly lead to restoring normalcy in the Red Sea.

What is clear, however, is that the disruption of traffic through the Suez Canal has resulted in increase of freight rates by at least $1,500 per container and longer transit times by 12-15 days for cargo going from India to Europe and America, as the major shipping lines are routing their vessels to go around the African continent. There is a very strong perception among shippers that the shipping lines are exploiting the situation.

Indian exporters apprehend that unless the hostilities in the Red Sea end quickly, the buyers in the United States (US) will prefer East Asian sources because transit through the Pacific Sea remains unaffected and even goods that land in the US West Coast can be moved to the US East Coast through rail within a week. Thus, the transportation costs and transit time from East Asia to the US are now lesser than those from India. Exporters of some high value items like pharmaceuticals are trying to send their goods by air but the airlines have also raised the freight rates.
 

For supplies to Europe and other countries to the west of Suez Canal in North Africa, the shippers from India and East Asia face the same problems of higher transportation costs and longer transit time. Indian exporters of plastic, engineering and electronic components are unlikely to lose out in the near term, as new vendor development is a tedious process for their buyers in US and Europe. The importers in India sourcing goods, especially capital goods, from Europe or US are also facing higher costs but mostly, the raw materials and intermediates are sourced from East Asia, where there is no disruption of supply chains.

In the last few years, many large companies, especially in the developed countries, have been trying to develop suppliers from friendly or nearby countries. The disruption of supply chains of the sort witnessed during the pandemic accelerated that trend. Last year, a big cargo vessel ran aground in the Suez Canal blocking the movement of vessels from Asia to Europe for a week. The Red Sea crisis has already lasted more than four weeks. In the medium term, such disruptions may encourage sourcing from vendors located nearby. Thus, the US buyers are likely to develop vendors from their southern neighbours and the European buyers from their eastern neighbours.

The Red Sea crisis comes at a time when the Panama Canal is unable to deal with the transit of larger vessels due to low water levels in its reservoirs. It also threatens to push up prices and consequently the interest rates in Europe. In turn, that could lead to lower demand that may adversely affect our exporters. Our commerce ministry has scheduled a meeting this week with top officials from the defence, external affairs, shipping and finance ministries to discuss the fall out of the supply chain disruptions and remedial measures to be taken. Hopefully, something useful will emerge from the meeting.

Email : tncrajagopalan@gmail.com