Prolonged security worries on the key trading route could hurt firms’ profitability, raise fertiliser subsidy bill and reignite inflation pressures, CRISIL cautions

FILE PHOTO: A container ship is seen near Suez Canal Bridge which is known as the “Peace Bridge” following a Suez Canal tugboat sinking yesterday after colliding with a Hong Kong-flagged LPG tanker in the waterway of the Suez Canal, Egypt, August 6, 2023. Suez Canal Authority/Handout via REUTERS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY/File Photo | Photo Credit: Suez Canal Authority

Indian exporters of rice and marine products are most adversely affected by the strife in the Red Sea, while a prolonged crisis on the key shipping route can affect the profitability and working capital cycle of export-oriented industries and trigger supply chain issues that could renew inflationary pressures, CRISIL Ratings has said.

Companies typically use the Red Sea route through the Suez Canal to trade with Europe, North America, North Africa and part of the middle-east–regions that accounted for almost half of India’s exports and 30% of imports in 2022-23. Around 95% of India’s goods trade volumes are shipped through sea.

Increasing attacks on ships sailing in the Red Sea region since November 2023 have persuaded shippers to consider the alternative, longer route past the Cape of Good Hope, which has not only stretched delivery time by 15-20 days, but also led to a substantial hike in transit costs with higher insurance premia.

In a credit alert issued on Thursday, the rating firm said Basmati rice exporters, who ship a third of India’s produce to these regions, are feeling the pressure and are selling part of their inventory in the domestic market, while marine foods like shrimp and prawn could see a significant impact as 80%-90% of the production is exported, over half of which flows through the Red Sea.

While sectors like textiles, chemicals may not be severely impacted yet, a sustained disruption of trade channels could crank up working capital needs and dent operating profits for them as well as capital goods players, CRISIL warned.

On the import front, the impact is expected to be limited for import-dependent sectors like non-urea fertilisers at this point due to a lean consumption period, but a sustained uptick in sourcing costs would need higher subsidy payments from the government, the firm noted.

“While the immediate impact of the crisis would be low for most of India Inc., a prolonged strife can affect the profitability and working capital cycle of export-oriented industries. The extent of this will vary depending on sectoral nuances. Supply chain issues could also intensify, curbing trade volume and renewing inflationary pressures,” it concluded.

Published Date: January 25, 2024