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Disruptions in Red Sea route likely to raise freight and forwarding cost by 25-30 pc: Report

Sustained disruptions in the Red Sea route are likely to raise the freight and forwarding (F&F) cost by 25-30 percent for corporates largely dealing in international trade, a report said on Friday. Moreover, the working capital cycle is likely to aggravate by 15-20 days, and the impact could be higher for sectors such as agriculture and textiles, credit rating agency Ind-Ra said in its report.

The working capital cycle refers to the period between payments made to suppliers and revenue received from sales.

The report also said that pressures on cash flow, although moderate for large entities, will further increase borrowings, especially for sectors such as iron and steel, auto and auto ancillaries, chemicals and textiles, which have seen a year-on-year rise in net leverage in the first half of the current fiscal.

“The challenge is significant for the entities having low-value addition and therefore thin margins. Although large entities have adequate elbow room to accommodate such incremental cost, delays and disruptions in supply chains will be key factors to watch for,” said Soumyajit Niyogi, Director, Core Analytical Group, Ind-Ra.

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For medium-sized entities, he said, the challenge is two-fold, both cost and supply and consequently on the working capital cycle.

“These entities have not benefited much from the softening of commodity prices, as free cash flow has remained sluggish for most of them,” he stated.

The initial reaction can be seen in freight rates rising by 150 percent in the past 45 days, the rating agency said.

The route constituted 40 percent of the total oil imports and 24 percent of the total exports from April to October 2023, it said.

Major shipping lines have rerouted vessels around the Cape of Good Hope, which has increased time and costs, impacting both exports and imports, as per the report.

This detour adds 12-15 days to voyages on a business-as-usual basis; however, there could be a further delay owing to any sudden operational challenges, it said.

This detour is directly translating to a higher operational cost, along with freight and insurance and intermittent disruptions on account of ship size and cost dynamics. Although these disruptions have historically been short-lived, a swift resolution seems improbable given the geopolitical standing, Ind-Ra said.

As much as 20-25 percent of India’s foreign trade is routed through the Suez Canal, with key products such as crude oil, auto & auto ancillaries, chemicals, textiles, and iron & steel being affected. Indian exports are facing higher shipping costs due to rerouting, leading to reduced export volumes, and affecting small and medium-sized enterprises dealing with a high volume of low-value products.

On the import side, vital commodities such as crude oil, fertilizers, and electronic components face inflated costs due to the crisis, leading to higher landed prices and inflationary pressures, impacting various sectors of the Indian economy, the rating agency said.

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