Due to the Houthi attacks, shipping lines have reduced their movement through the Red Sea and are taking the longer route via the Cape of Good Hope, encircling the African continent. The trade route of Bab-el-Mandeb Strait, the Suez Canal and the Red Sea is shorter and faster than the Cape of Good Hope route, making it the preferred option for most shipping companies.

The route starts from major Indian ports like Mumbai, Jawaharlal Nehru Port Trust at Nava Sheva, or Chennai, heads westward through the Arabian Sea, enters the Red Sea and navigates through the Suez Canal into the Mediterranean Sea. From there, ships can reach various European ports, depending on their destination.

The Cape of Good Hope route is longer and slower, but it avoids the potential for delays or disruptions at the Suez Canal. It is typically used for bulk cargo shipments, where time is less critical or when political instability in the Middle East raises concerns about using the Suez Canal. The route starts from the same Indian ports, heads southward across the Indian Ocean, rounds the Cape of Good Hope at the southern tip of Africa, and then sails northward along the west coast of Africa before entering the Mediterranean Sea and reaching European ports.

Diverting vessels to China

Chinese producers, facing a slowdown in domestic consumer demand, have cut prices to boost exports and better utilise idle capacities. Additionally, apprehensions about higher US tariffs on Chinese-origin goods from next month have led to increased exports from China. Many Chinese producers are also setting up manufacturing facilities in Latin America, particularly Mexico, to bypass potential US restrictions.

Consequently, the demand for shipping services from China has surged, pushing freight rates to five figures for Europe and America-bound shipments. Even container leasing rates in China have skyrocketed.

Sensing opportunity, shipping lines have diverted vessels to China, cancelling several scheduled sailings from India and other Asian countries. This diversion has increased freight rates from these regions by about half of what the Chinese pay. Container supplies are also strained, causing congestion at ports, especially trans-shipment hubs like Singapore, Jebel Ali and Colombo.

Vessels now wait longer at anchorage, sometimes for 8-9 days, increasing costs that shipping lines pass on to shippers. Even at Indian ports like Nhava Sheva and Mundra, ships face longer wait times. Some shipping lines have even stopped accepting bookings due to the severity of the situation.

Long-term solutions

The Federation of Indian Export Organisations (FIEO) suggests that the government should develop an Indian shipping line of global repute to reduce outward remittances on transport services, which are bound to increase with rising exports. While India has the government-owned Shipping Corporation of India (SCI), expanding its fleet to become a global player seems unlikely, given India’s small share in global merchandise trade (only 1.5 per cent). Shipping volumes from India are much lower compared to East Asia, and the government as of now is expected to let the SCI decide on its global ambitions based on commercial judgment.

The current chaos in the shipping industry is expected to persist until the peak season ends in September. Improvement is unlikely until demand for Asian merchandise in Europe and North America moderates. Till then exporters will have to bear with the fact that the rise in freight rates is a global issue, with the situation being much worse in East Asia.

The global shipping chaos, driven by re-routed vessels, increased Chinese exports, and strained container supplies, is likely to continue until demand moderates. Experts believe that exporters should brace for ongoing disruptions and rising costs, understanding that these challenges are part of a broader, global issue.

Ceramic units face heat

But that is not the end of the story. Rising freight costs and a paucity of shipping lines have had their impact across the board – and with devastating effect. For instance, it has forced close to 250 export-oriented ceramic units in Morbi to temporarily down their shutters.

“We export Rs20,000 crore of ceramic products annually. But exports have fallen by 35-40 per cent in the first three months of this financial year. In August alone, exports dropped by 50 per cent due largely to rising freight costs and non-availability of containers for export,” says Mukesh Kundariya, president, Morbi Ceramics Manufacturers’ Association. 

“Currently, about 250 units in Morbi have shut down. We do not see the situation improving soon. September and October are expected to remain unfavourable as far as ceramic exports are concerned,” he adds. 

Ceramic manufacturers in Morbi point out that freight costs have risen five times in the last three months, which has discouraged overseas importers. “The freight costs have risen five times on account of which demand has fallen. Apart from freight costs, there is a paucity of vessels. The problem is with shipping lines. A number of them have been diverted towards China, disturbing the routes. This time the issue has persisted for four months,” said Bhavesh Varmora, chairman, Varmora Granito Pvt Ltd.

“Of the 800 exporting units, 250-300 units have shut down. These units were exporting 50-70 per cent of their production. They have felt the immediate impact,” he added. 

Varmora Granito operates 15 ceramic plants in Morbi, with a manufacturing capacity of 58 million square meters per annum. Asked if his units were also hit by declining exports this year, Varmora said, “None of our plants have been impacted as we largely focus on meeting domestic demand. Only 20 per cent of our sales are exports. Even if we have suffered a 5-7 per cent impact, we do not have to close down the plant. Currently, capacity utilisation is at 90 per cent.”

The Indian ceramic industry had a size of Rs62,000 crore in 2023-24. Gujarat accounts for 90-95 per cent of the production, with exports standing at Rs20,000 crore. Ceramics from India are exported to the US, Saudi Arabia, the UAE, Nepal, Mexico and others.

“As an industry, exports have grown from Rs8,000 crore four years ago to Rs20,000 crore now,” said Varmora. The Morbi ceramic manufacturers largely use Mundra port for exports, while a small per cent of coastal cargo to states like Kerala go through Pipavav port.

 Textiles too

Countries exporting garments and textiles, including those in Asia, are also facing an additional hurdle of higher freight charges due to the recent Red Sea-Suez Canal crisis. Indian garment and textile exporters have expressed concerns over negotiating with their buyers to adjust the higher freight charges for FOB consignments. They are worried about new orders and the pricing of goods.

An exporter from Punjab commented that the market condition remains bearish, meaning buyers may not be willing to accept higher prices amid increasing freight charges, while exporters are not in a position to accept more pressure on their margins due to stable prices of goods.

The Red Sea crisis and sluggish overseas demand have also dented India’s seafood exports in value terms in 2023-24, witnessing a 5.39 per cent decline in rupee terms and an 8.80 per cent decline in dollar terms.

Bigger shipping line

It is against this backdrop that the proposal to have a bigger shipping line makes imminent sense. About 90 per cent of global trade is dependent on shipping. This gives shipping companies an enormous hold over global trade. When they raise prices, manufacturers and traders have little option but to pay up. This makes goods costlier. For companies in India – which is looking to become a manufacturing hub and a prominent exporter – the inability to price goods competitively in the global market can be a major dampener. This would blunt initiatives such as ‘Make in India’ or ‘Make for the World’.

Ajay Sahai, DG & CEO, FIEO, argues that, if India has a shipping line, manufacturers here would never have to rely on other carriers. This can help make Indian goods more competitive. Also, the shipping line can transport for other countries and make more money for the country.

All that is required is probably tweaking some tax structure and maybe some fiscal support. Since the SCI is being disinvested, we hope that some of the large private sector players enter this field and help the country develop capabilities in the shipping sector and make it Atma Nirbhar,” he says.

The case for a shipping company of the order of Maersk with operations that include shipping, port operation, supply chain management and warehousing is strong. But is the government listening?

Who are the Houthis?

The Houthis are an armed political and religious group which champions Yemen’s Shia Muslim minority, the Zaidis. They declare themselves to be part of the Iranian-led ‘axis of resistance’ against Israel, the US and the wider West – along with armed groups such as Hamas and Lebanon’s Hezbollah movement.

Formally known as the Ansar Allah (Partisans of God), the group emerged in the 1990s and takes its name from the movement’s late founder, Hussein al-Houthi. The current leader is his brother, Abdul Malik al-Houthi. In the early 2000s, the Houthis fought a series of rebellions against Yemen’s long-time authoritarian president, Ali Abdullah Saleh. They wanted greater autonomy for the group’s homeland in the north of Yemen.

In response to the war in the Gaza Strip, the Houthis started firing drones and missiles towards Israel. Most have been intercepted. On 19 November, the Houthis hijacked a commercial ship in the Red Sea. They have since launched dozens of missile and drone attacks on commercial ships. Of these, many have resulted in reported damage to vessels.

In a globalised world, no country is immune from such geopolitical incidents, no matter how distant they might be. India in particular has been directly impacted by the attacks, forcing it to increase its maritime presence in the region – while refraining from joining the US-led coalition, Operation Prosperity Guardian, to aid the safe movement of ships in the Red Sea. About 20 countries reportedly joined the Operation, some of which are not ‘willing to publicly declare themselves as partners’. 

At the international level, while India refrained from joining the multinational Operation Prosperity Guardian, in a recent visit to Tehran, India’s External Affairs Minister S. Jaishankar raised the issue of the attacks with his Iranian counterpart, highlighting how the ‘situation’ is ‘not to the benefit of any party’. 

According to a press release from the US Department of State, before the visit, Jaishankar had a talk with US Secretary of State Antony Blinken, where both sides expressed ‘shared concerns over the reckless Houthi attacks in the southern Red Sea and Gulf of Aden’. Such diplomacy is characteristic of New Delhi’s tightrope balance between Iran and the US. 

In the light of India’s seemingly pro-Israel posture as the crisis in Gaza intensifies, some see New Delhi as getting enmeshed into the ‘US-led security ecosystem’ in a move away from its traditionally non-aligned position. However, the Red Sea crisis comes as a stark reminder that pragmatic flexibility can be dicey, as India navigates its policy approach to the Middle East.