Freight rates could surge 25-30% if trouble along Red Sea route continues

A majority of the insurance companies have refused to cover shipments crossing the Red Sea after Yemen-based Houthi militants hit a Liberian-flagged ship Palatium III with an anti-ship ballistic missile, with some insurers starting to levying a $5,200 war risk surcharge over and above the freight charges.

“This is developing into a serious concern as the Bab-el-Mandeb Strait trade route is the crucial route for many countries. If the ships have to go through the Cape of Good Hope, there will be a sharp jump in cost. Insurance companies are either not ready to cover shipments on the route or are imposing an additional $5,200 war risk surcharge to the freight charges,” Ajay Sahai, Director General and Chief Executive Officer of the Federation of Indian Export Organisations (FIEO) said.

“If the situation sustains, freight rates could jump 25-30 per cent that will seriously affect Indian exporters. However, if the United States (US) and other countries, including France start patrolling the area, then the risk would come down,” Sahai added.
The US on Tuesday announced the launch of a multinational force that will see 10 countries, including Bahrain, Canada, France and Italy, coming together to protect trade in the Red Sea.

India is heavily reliant on the Bab-el-Mandeb Strait for its crude oil, LNG imports and trade with parts of West Asia, Africa, and Europe and any disruption to shipping through the strait could have a significant impact on India’s economy and security, Global Trade Research Initiative (GTRI), a think tank, had said in a report. The current security concern has raised fears of increased energy costs as India may have to use longer routes around the Cape of Good Hope. Increased risk could also lead to higher insurance premiums and freight rates, impacting Indian traders, the report added. After one of worst escalation in years, large shipping firms include the Danish firm Maersk and Swiss-Italian Mediterranean Shipping Company, German Hapag-Lloyd, and French CMA CGM (Compagnie Maritime d’Affrètement – Compagnie Générale Maritime) stopped plying ships though the region.

“Major shipments are at risk, including basmati rice, as major global shipping lines such as Maersk have stopped going to the Strait. It is not only a problem for India but also for global trade as the route is of crucial importance,” Raajesh Bhojwani, CEO & MD, RBB Ship Chartering Pte Ltd Singapore said.

“The strait is only about 29 miles wide at its narrowest point, making it easy to block or disrupt shipping. Situated in a volatile area, the strait’s security is constantly under threat from regional conflicts,” GTRI had said.

Notably, the crucial trade route has not faced a security threat for the first time. In October 2023, Houthi rebels in Yemen launched an attack on a Saudi oil tanker in the Red Sea near the Bab-el-Mandeb Strait.

Earlier this year the United Arab Emirates (UAE) had announced building a new military base on the island of Perim, which is located at the entrance to the Bab-el-Mandeb Strait. The United States and its allies had also conducted a joint naval exercise in the Red Sea near the Bab-el-Mandeb Strait.

India’s merchandise exports fell back into the negative territory in November after registering an uptick during the previous month. India’s goods exports grew only for the second time during the ongoing financial year in October.