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

Sustained disruptions in the Red Sea route will raise freight costs by 25-30% for corporates in international trade, impacting various sectors of the Indian economy.

Sustained disruptions in the Red Sea route is likely to raise the freight and forwarding (F&F) cost by 25-30% for corporates largely dealing in international trade, a report by credit ratings agency Ind-Ra said on February 9. 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, report said.

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 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.

For medium-sized entities, he said, the challenge is two-fold, both cost and supply, and consequently on 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% in the past 45 days, the rating agency said. The route constituted 40% of the total oil imports and 24% of the total exports during 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.